On merging the UBI and VAT schemes

The main idea: a VAT-financed UBI scheme allows for the market to pick those in need as well as those who can afford to pay.  

0. Posts on this blog are ranked in decreasing order of likeability to myself. This entry was originally posted on 10.05.2022, and the current version may have been updated several times from its original form.

 

1.1 The simplicity of the Universal Basic Income scheme is seductive to many but opens the plan to critiques from those who dislike the idea of wasting money on people who are in no need of it.

1.2 Which charge is true only trivially, but can be easily shot down when remembering that an UBI scheme must somehow be paid for (technological plenty does not automatically translate into an UBI, you still have to tax people).

1.3 Applying any taxation scheme such as to fund an UBI would create, once the UBI and tax net out, some who receive net payments, and others who provide net payments, despite the UBI leg itself only providing uniform payments to all.

1.4 Ideally, being taxed 5000 a month and getting no UBI, and getting an UBI of 2000 matched by being taxed 7000 should make no difference at all.

1.5 Now, of all tax schemes, I make no secret of my undying love for the Value Added Tax, the premier consumption tax so far thought of. Matching the VAT and UBI creates an especially efficient compound, where VAT taxes consumption, which the UBI subsidizes.

1.6 The same netting dance between VAT and UBI would apply to such a compound plan, but now we are leaving the setting of “winners” and “losers” to the market, instead of to legislative fiat as we would have to if relying on income tax where graduations have to be set manually.

1.61 Worth noting that the mix would go a long way towards assuaging the fears of those who dislike the VAT on account of its alleged regressiveness (alleged since the market decides who pays the VAT, so no way to know if regressive, progressive or what). The mix of UBI and VAT would almost surely be progressive.

1.7 An ideally no-gap VAT would only require the setting of the tax rate, and would otherwise call upon the market to allocate taxing burden as prices shift in response. And if you adopt a VAT to fund your UBI, you know exactly how much the VAT should raise, hence your tax rate has been set for you. You only have to set the UBI payment, and the rest is determined.

1.8 So here’s what the VAT-funded UBI does for you: creates a system that automatically taxes those who can afford it, to provide direct payments to those who need it. I hear the Marxist echo there, all involuntary of course.

1.81 A similar idea to the above was proposed by commenter vince on Scott Sumner's blog, again aiming to curb the VAT's alleged regressive nature, whereby a "prebate" would be issued to all families, equal to the product of the assessed poverty line and the VAT rate, in theory compensating the poorest for having to pay any VAT at all. The only difference between such a prebate and a full UBI would be that the later would attempt to fully compensate for the poverty level, not just the VAT paid on the poverty level. On the other hand, you can apply a prebate design today, without having to wait for the technological singularity which the UBI postulates.