So I’m a huge fan of Andrew Yang, Democratic Presidential candidate, just in case you guys didn’t know yet. One of his biggest platforms is Universal Basic Income or as he calls it, the Freedom Dividend. In my previous blog post I went over why UBI is becoming more and more relevant in this day and age of rapid technology growth. In this one I’m going to go over how we’re going to pay for it.
One of the biggest objections to a Universal Basic Income that people have is “how are we going to pay for it.” And to that most Yang Gang (what Yang’s supporters call themselves) would reply, we are going to implement a Value Added Tax. The argument is that a Value Added Tax would close a lot of the tax loopholes that allow big corporations like Amazon, General Motors, and IBM to pay $0 in taxes despite their billion dollar earnings.
While a magic tax that makes big corporations fork up their earnings in order to pay for a stimulus package for the average American sounds like an absolute dream, to be frank I still am not sure what a Value Added Tax is or it works. Which is why I figured I should do some research and write it out for everyone else who is still on the skeptic side.
So what is a Value Added Tax?
A Value Added Tax, or VAT for short, is a type of tax that affects the supply chain. This tax is put on the value generated at every point in the supply chain. ← That’s the technical explanation I see everywhere, and I honestly find it kind of confusing. Basically what I understand is that wherever goods/services are exchanged for money, you have to pay the VAT.
Here’s an example I made of me purchasing a surfboard in a scenario where the VAT is 10%. The simplified supply chain includes the factory that makes the raw material, the shaper who makes the surfboard, the retail store that distributes the surfboard, and me who is the end consumer.
The important thing to note is that the VAT (in green) is paid to the government at every stage of the supply chain ($5, $45, $50). The other thing to note is that the final price of the surfboard $1100 includes the price of the total VAT paid ($100), and is ultimately borne by me the end consumer. The businesses themselves recoup their VAT cost by passing it down the supply chain.
So how’s the VAT different from a sales tax?
In terms of the final retail cost, the VAT is pretty much the same as a sales tax. A 10% VAT and a 10% sales tax will result in the same retail cost for the consumer. However, the difference is in the way that the tax is collected. VAT is collected at every point during the supply chain (from raw material, to shaper, to retailer) in contrast to the sales tax which is only collected when I make the final purchase (retailers do not pay tax when they buy wholesale for resale). VAT is distributed along the supply chain, allowing the government to collect money in a steady stream, and is said to hold everyone more accountable for what they owe the government.
Another thing is that sales tax rules differ from state to state. In some states services are not subject to sales tax. So with the VAT the government can cash in on things like expensive enterprise software that companies spend a lot on.
Wait so how do we make money, if we replace the sales tax with VAT?
In the EU (which is the most prevalent example), the VAT replaces sales tax. In what Yang is proposing, the VAT is in addition to the sales tax (which is state and not federal revenue anyway). Since at the end of the day the VAT cost is still passed onto the consumer, many people argue that the VAT would just result in higher costs for the average person. This argument actually makes a fair bit of sense, so let's try to figure this out together…
How do we lower the burden of VAT on the average person?
So one way to distribute the VAT more equitably is by having low to no VAT on essentials like food, clothes, and baby stuffs, while having a higher VAT on luxury goods like Teslas, helicopters, and private jets; things that average people are not purchasing. Yang plans on implementing this weighted VAT, though I am a little skeptical about the amount the rich are spending on luxury goods vs. the amount of money that they’re sitting on in investments.
Another argument for the VAT funding UBI is that the average person’s net gain from the UBI ($1000) would greatly offset the increase in price of consumer goods. I’ve created a graph to illustrate this point.
On an average month I spend on a range of about $1200~$3000. This means that with a 10% VAT (which is what Andrew is proposing) that my adjusted Freedom Dividend (UBI) would be from about an additional $700~$880 into my pocket per month. Not bad.
However, according to the Tax Foundation, Andrew’s current plan for funding the Freedom Dividend (listed below) would put the U.S. government into a 1.5 trillion deficit each year. Which is not preferable.
Andrew’s current plan on paying for a $1000/month Freedom Dividend
- 10%VAT
- A tax on financial transaction
- Taxing capital gains and carried interest at ordinary income rates
- Removing the wage cap on the Social Security payroll tax
- $40 per metric ton carbon tax
They instead suggest an revenue neutral alternative to Andrew’s plan which is a Freedom Dividend of $750/month with a VAT of 22%. That scenario would pan out to look more like this:
In this alternative scenario (where my monthly spending is still between $1200~$3000) my adjusted Freedom Dividend (UBI) would be about $90~$486 into my pocket per month. While that’s significantly less than the original $1000, it’s still giving me an extra $1000~$5500 a year, which I’m not going to turn down if anyone decides to hand me it.
So my calculations in this section are probably way over simplified. For example, not everything you purchase would be subject to a VAT, earlier I mentioned foods and other necessities being VAT exempt. I also believe that the UK doesn’t collect VAT on non-commercial properties (so your rent won’t be subject to VAT). Which means that my adjusted Freedom Dividend is higher than what I calculated.
So in conclusion…
I am reasonably convinced that a UBI + VAT combination would result in more money in the hands of average Americans, though albeit not as much as Andrew is proposing. But even a reduced Freedom Dividend would make a difference in many people’s lives, especially for those living from paycheck to paycheck.
The additional money that people are spending can potentially grow the American economy; and there are still many more benefits of a UBI (like reducing poverty, increasing quality of life, and added freedom) that are maybe worth spending on, even if Andrew’s current plan doesn’t pay for everything.
And while the Freedom Dividend is the main platform Yang is running on, there are many many more reasons why I really like Andrew. Here are some of my favorites:
Human Centered Capitalism - Lets not measure our Nation's growth based solely on GDP but on other issues like health, education, and standard of living.
Democracy Dollars - Give every American $100 a year to be spent on political donations. This way we flush out lobbyist money and have our politicians work for us and not big corporations.
Promoting Vocational Education - How many of us are in thousands of dollars in debt working jobs that are unrelated to what we studied in college? We need to deemphasize college as a set path for everyone, and get people into vocational paths that are less likely to disappear from automation.
