$1,000 per month for life may sound more like a scratch-off lottery ticket prize, but it is the seminal pillar of Andrew Yang's campaign.
Yang is a Democratic presidential candidate who does not have a prior political background. Instead his experience is in the business world. The $1,000 per month proposal, called the “Freedom Dividend,” would provide $1,000 per month to every U.S. citizen over the age of 18. It is designed as a form of “universal basic income.”
Universal Basic Income is a concept with a relatively long history. Some economists recently seized on it as a potential mechanism to address job loss from automation and globalization. The argument is that it will reduce unemployment, crime, and other drags on the economy by providing a safety net that encourages entrepreneurship and facilitates job training or retraining. Proponents also argue that it will reduce health care costs. But even if the Freedom Dividend or another version of Universal Basic Income can mitigate these problems, the concept inarguably comes with a very large sticker price.
How Much Would the Freedom Dividend Cost?
We recently analyzed the $4.75 trillion dollar federal budget, including perspectives on the manner in which the federal government spends that vast sum of money. But even the single largest line item in the federal budget—Social Security at $1.1 trillion—pales in comparison to the $2.5 trillion cost estimate for the Freedom Dividend. Yang proposes to pay for this with additional taxes, including a Value Added Tax (VAT), a carbon tax, and a financial transaction tax. Some of these revenue-raising ideas have been proposed by other candidates as well. While Yang is not the only candidate to propose these and other new taxes, his proposal also assumes that a portion of the Freedom Dividend will be financed through economic growth. This is likely to revitalize contentious rhetoric on the appropriateness of such an assumption, or whether there is sufficient economic growth to meaningfully increase federal tax revenue.
Could the U.S. Afford the Freedom Dividend?
Measured by gross domestic product (GDP), the U.S. economy is the largest in the world at about $19.39 trillion (for 2017). In that same year, federal income tax revenue was 9.67% of GDP, raising $1.875 trillion. To put Yang’s financing proposals in perspective, assume for argument’s sake that the new taxes proposed by Yang will raise $1.5 trillion, leaving $1 trillion to be funded by increased income tax collections as a result of economic growth. This is a purely speculative estimate, but it can serve as a starting point for determining how much growth is necessary to generate an extra trillion dollars in tax revenue.
The tax law known as the Tax Cuts and Jobs Act (TCJA) touted similar accretive measures to the economy as a means to offset part of the cost of the TCJA’s tax cuts. In the case of the Freedom Dividend and this hypothetical $1 trillion estimate, over 50% GDP growth is necessary to raise an additional $1 trillion of income tax revenue.
A 50% increase in GDP is likely an unrealistic goal for economic growth. In general for a developed economy, 3% growth is a standard target. If GDP growth exceeds 3%, it is usually considered a very robust year for the economy. In fact, Yang’s proposal reveals that a 12.89% GDP increase is assumed to result in a $2.5 trillion addition to GDP. This equates to an additional $241 billion in income tax revenue, assuming that income taxes remain at 9.67% of GDP. Yang’s campaign estimates that the additional $2.5 trillion in GDP would actually generate an additional $800 to $900 billion in tax revenue, but it is not clear whether this revenue is only income tax revenue. In any case, this is still a massive increase.
So, the argument then shifts to whether a $2.5 trillion wealth transfer from wealthy individuals and corporations to the lower and middle classes can generate this growth. This is an entirely different question that falls within the realm of economists and politicians. But the gist of these financial implications is that significant increases to income tax revenue require even larger increases in economic growth. This makes it difficult for policymakers to rely on growth as a mechanism to meaningfully increase tax revenue. And as noted previously, such “dynamic scoring” has always been fraught with political discord.
At this early stage in the 2020 presidential race, the fate of Yang’s proposal ultimately lies in other factors that will emerge and dictate the fortunes of each candidate’s aspirations. For more information about the tax changes that could affect you, please contact your local CBIZ tax professional.
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