Updated: Aug 20, 2019
No time to read? Listen instead!
In the recent Democratic debate we were able to hear presidential candidate Andrew Yang's plan for a "Freedom Dividend," or otherwise known as "Universal Basic Income(UBI)." This is not a new idea. In fact, even one of my favorite economists, Milton Friedman, was in support of a UBI as a replacement for the current welfare system.
Yang's proposal would give a direct payment of $1,000 per month to every American above the age of 18. Rich, poor, white, black- it doesn't matter. Everyone above the age of 18 will receive this "Freedom Dividend."
The US Government currently spends $668 billion per year on welfare programs. Remember, "welfare" is just one portion of the social safety net. That number also does not take into account what state's spend on welfare; another portion of the equation that is likely to change under a UBI system.
The most recent count on the amount of adults in the US above the age of 18, has the number at 247 million. A $1,000 payment to each of them would cost 247 billion per month. That's 2.9 trillion per year to fund the "Freedom Dividend," without the administrative overhead costs.
Andrew Yang's UBI is proposed to be covered by a Value-Added Tax (VAT) of 10%. A VAT would be paid by business owners in the production phases of their products. Currently, the US does not have a VAT system in place. To re-phrase the VAT- A tax will be put on business at production, to be given to the people for consumption of their products.
The idea that this would not raise prices completely contradicts all logical understanding of basic economics.
Yang's own website says "It is likely that some companies will increase their prices in response to people having more buying power.."
If you remove almost $3 trillion from businesses to fund this plan, and in-turn give that to consumers to spend on their products, how can you not assume that prices would rise to match the new buying power? If almost $3 trillion is removed from the producers in our economy, do you assume that they will all just accept that they now make $3 trillion less dollars? It's rarely noted, but it deserves to be said, the average net profit of a Fortune 500 company is only 8%. They aren't just going to take this one on the chin.
On his website, Yang argues that a UBI is not likely to affect the workforce, pointing to a study conducted by MIT that found this very conclusion. In the study, it was found that those on welfare were likely to maintain a job to continue receiving benefits, but also would keep most income off the books, or work a low amount of hours- to continue receiving benefits. So to get that straight, the study showed that people on welfare were barely working while on welfare, and their work habits were not changed by a transition to UBI.
In addition to the information about workforce participation, Yang’s site mentions on the last line that businesses are likely to pay higher wages because of the UBI. This is Basic Economics 101. If you are offering a part-time job at $15 an hour, an employee working 20 hours per week would have a take-home pay of about $1,000 per month. Why then, would that employee that was already working this job to receive the $1,000- choose to work for the same rate now that they are already getting a monthly payment from the government? Businesses that want to entice workers will have to raise wages. While that sounds like a good thing, don't forget that the average net profit for a Fortune 500 company is 8% (Walmart’s is 2%). Businesses will raise prices to meet the new expenses, leading to direct inflation in the prices paid by consumers.
Now for the title of this article
I've recently ran into so-called "libertarians" that support Yang's plan for a UBI. Often, they have sited Milton Friedman's support for such a plan.
First off, a libertarian believes that "taxation is theft." I'll write more articles explaining the principles behind those beliefs, but in short we'll just say that you "Don't hurt people, and Don't Take Their Stuff." That's a pretty good principle to live by.
I will agree with Friedman on the notion that a UBI is preferable to our current welfare system. This however, is not support for the idea that a UBI would be a positive for liberty. Those are two very different things. A more preferable system would be none at all, but that's just my opinion on the matter.
A UBI is still wealth redistribution. It's still taxation. Actually, as I write this article I've realized that it's not even "wealth" redistribution, since it's a tax on the production end of our economy, before any profit has been made. It would be better stated as "investment redistribution." It taxes a business owner before they've been able to make their product and take it to market, which would arguably slow down the production side of our economy.
For those that invoke Friedman to support Yang’s proposal let me say this. Milton Friedman would most definitely not support Andrew Yang’s plan.
There’s a difference between the funding needed to support the two supposedly similar plans. Yang’s proposal is paid for using a Value-Added Tax, whereas Friedman was suggesting that a UBI would be the best use for our current system.
When VAT rates are increased, it looks like another increment of inflation to the unaware consumer. Milton Friedman said it best: "That VAT is the most efficient way to raise revenue for the government. It is also the most effective way to increase the size of government."
As stated earlier, a VAT is a tax before a product has ever been made. It’s a sales-tax on the wholesale price of goods used by businesses to create their products. It’s not a good system for those looking to increase productive activities. As flawed and immoral as it is, at least our current system waits to see if you’ve made a sale before piling on the taxes.
But what about Alaska’s dividend?
Im glad you asked. Alaska is a terrible example to use for a UBI system that’s working for its citizens. First off, their dividend is once again from profit taken in from state held oil companies. A VAT, is not taken from profit, and the US is not in the same economic situation currently seen in Alaska. Alaskans are also cut off from the rest of the world, leaving them unable to drive across state lines for more competitive goods. In addition, the entire state has the population of the city of Nashville, TN. Plans are often easier to implement on smaller scales.
Andrew Yang seems to be a very sincere person. From what I've seen, he's forthright, charismatic, and intelligent. This does not mean that he believes in liberty, or a limited form of Federal Government. He’s still just another person who thinks the government should be left to organize the economy in whatever way they see fit.
Stay principled, and always remember - “Taxation is Theft.”