Democratic presidential candidate Andrew Yang’s campaign slogan is “Humanity First,” reflecting his dedication to fighting inequality in America. Photo courtesy of Forbes
A common critique of presidential candidate Andrew Yang’s proposed universal basic income, also known as the Freedom Dividend, is his use of a value-added tax to fund the proposal. Critics call the tax regressive, arguing that it is a Trojan horse — a toxin to America’s poorest citizens disguised as a socioeconomic equalizer. However, I believe that Mr. Yang’s universal basic income is, in fact, progressive, and that it will work to raise the floor in America’s economy, lessening socioeconomic inequality.
A value-added tax, or VAT, is commonly defined as a consumption tax levied at every point in the supply chain when the value of a product increases. However, the consumer is commonly the one who pays the VAT on a product, as buyers and sellers in the earlier production stages are reimbursed for the VAT they previously paid.
Companies at each point in the supply chain of a product are encouraged to collect the VAT, as it is the only way to ensure that they are credited for paying it. This discourages tax evasion, eliminating the opportunity for large corporations to avoid paying taxes.
The largest problem that many critics of a VAT have is that unlike a progressive income tax, in which wealthier people pay more than less wealthy people, a VAT would fall more heavily on poorer Americans, as they tend to spend larger percentages of their income. This is why Yang’s proposal is sometimes viewed as a Trojan horse. It promises the poor free cash, before hitting them with the regressive nature of a VAT.
The one key problem with this argument is that it fails to acknowledge that the VAT doesn’t exist in a vacuum. By itself, a VAT is regressive, but when a $1,000 a month universal basic income comes with it, it’s not. Even if the consumer bears the full cost of the VAT, he would have to spend $10,000 or more every month to not see a net benefit, which is nearly impossible for the Americans whom the universal basic income will benefit the most. Additionally, Yang’s VAT excludes necessities: clothes, food, and other items that less wealthy Americans spend the most on.
Another common criticism of the Freedom Dividend is that it doesn’t stack up with most welfare, forcing the poorest Americans to choose between the universal basic income and their current welfare. Those already receiving more than $12,000 a year in welfare would be at a net loss, right? Well, yes, but welfare is a system with many institutional flaws, and the vast majority of those on welfare do not actually receive $12,000 a year in benefits. In fact, the welfare programs that one would have to opt out of to receive welfare benefits, on average, combine to provide less than $1,000.
The Freedom Dividend wouldn’t discourage poorer people from getting better paying jobs or accumulating assets, as it’s permanent and doesn’t discriminate by income, unlike welfare. For instance, if I receive $500 a month in welfare and find a job that pays me $2,000 a month, thus losing my welfare benefits, my net income increases by $1,500. However, if I receive the Freedom Dividend of $1,000 a month, and find the same job, my net income would increase by $2,000, giving me a greater incentive to work.
Additionally, Yang’s universal basic income is unconditional, as opposed to the highly conditional welfare programs in America, which come with numerous strings attached. For instance, many welfare programs block recipients from buying certain food products. Many of the poorest Americans struggle to navigate the bureaucracy of welfare — more than a quarter of people living under the poverty line, or thirteen million Americans, are completely disconnected from the federal government’s social safety net.
While Yang’s universal basic income isn’t flawless, and I myself question some of his assertions about the macroeconomic effects of his proposal, it is undeniable that it would decrease inequality in America by unprecedented amounts, giving more Americans a fighting chance in our competitive economy. The universal basic income would diminish the need for conditional and often dehumanizing welfare programs, and increase the incentive to work. With so much potential to fix many of the economic problems in our nation, I hope that Yang’s proposal will be discussed more in the mainstream.
