Ben Erwin

December 17, 2019

See also:

• The Freedom Dividend vs $15/hour minimum wage
• The Freedom Dividend and other cash programs

Introduction

Alexandria Ocasio-Cortez recently stated that Andrew Yang's Freedom Dividend plan is "regressive". This article will examine whether that is really true. (For her other claim that his Freedom Dividend is a trojan horse to kill the safety net, see this article. Also see this article on the $15/hour minimum wage vs the Freedom Dividend).

What does Regressive mean?

"Regressive", in economics terms, means that as someone's income increases, their burden decreases. The US income tax, for example, is progressive. The tax brackets for low incomes are lower than those for higher incomes. Sales tax, on the other hand, is regressive. Let's say that a person with a low income and a person with a high income both buy a television for $500 and pay a 5% sales tax of $25. Even though the sales tax rate is the same for both people, that $25 represents a greater percentage of the take home pay of the person with the lower income. Let's say that the lower-income person's take-home pay is $1,000 a month and the other person takes home $10,000 a month. $25/$1,000 = 2.5% and $25/$10,000 = 0.25%. For this one television, the sales tax affects the lower-income person ten times as much, in terms of percentage of take-home pay. Does that mean that sales tax is regressive by a factor of 10 overall? No. Why? Because although both people might buy the same television in a given month, the person with the higher income will also buy lots of other stuff and spend a lot more in sales tax. In fact, the people with the highest incomes will generate most of the sales tax revenue for the state, in terms of dollars, even though sales tax is lower when seen as a percentage of their take home pay.

What is a VAT?

Andrew Yang is proposing funding the Freedom Dividend program primarily through a Value Added Tax, or VAT. VAT is a tax that businesses (over a certain minimum size) pay on business transactions. Many countries have a VAT because it is much harder for a company to get out of paying it then regular corporate tax. With regular corporate tax, a company can hide revenue through offshore shell companies, or offset revenue through expenses. In Europe, the VAT levels are around 20% for goods and services with certain items exempt (fruit and vegetables, for example).

Is a VAT regressive?

A VAT by itself is regressive. How regressive? A person in the bottom 20% of income thresholds will pay roughly roughly 1% more of their take home pay in VAT than their high-income counterpart at the top of the scale.

The Tax Policy Center has done an analysis of what percentage of take-home pay we would pay if there were a 5% VAT on all goods ("Broad base"), or a 5% VAT on only some goods ("Narrow base", e.g. with food and other basic needs exempt).

This 1% difference is not very regressive. Compare this 1% to the difference between the lowest and highest income tax rate bracket differences of 10% vs 37%, a 27% difference.

• VAT: 1% difference (regressive)
• Income tax: 27% difference (progressive)

Source: https://www.taxpolicycenter.org/briefing-book/who-would-bear-burden-vat

Another thing to note is that a VAT is even less regressive when viewed over a lifetime. This is because people that save money tend to spend it later on. The image below is taken from the National Tax Journal and shows that the VAT is less than 0.5% regressive between the lowest and highest income decile when viewed over a lifetime.

Source: https://www.ntanet.org/NTJ/47/4/ntj-v47n04p731-46-value-added-tax-regressive.pdf

The Freedom Dividend's Regressiveness

Max Ghenis of the UBI Center has done an amazing job performing a distributional analysis of the Freedom Dividend using the Census Current Population Survey (CPS) data (a spreadsheet that is almost 1 million rows long containing tax data). Max didn't create a chart showing the effect of the VAT by itself, but he did model all of Yang's funding sources together (VAT, financial transaction tax, treating capital gains as income, carbon tax, and lifting the social security cap).

Source: https://medium.com/ubicenter/distributional-analysis-of-andrew-yangs-freedom-dividend-d8dab818bf1b

As you can see in the chart above, all of the new taxes added together mean an effective increase of around 7% for most people and almost 12% for the top 10%. This chart shows that the Freedom Dividend is not funded by a regressive tax program. But wait, there's more. When you take all of the money generated by the new taxes and give it back to the people in increments of $1,000/month each, the amount that a low-income earner gains is proportionally much higher. This is like the television example in reverse. $1,000/month to someone with a low-income is much more significant, as a percentage of income, than it is to a high-income earner. In fact the difference is close to 120%. (image below from the same UBI Center article)

But what about those that did not opt-in to the Freedom Dividend because their current assistance is above $1,000/month? Won't the new taxes put them net negative by 7% of take-home pay? Yang answered this question on the Pod Save America podcast and said that he has a "do no harm" policy. This means that people in that situation would get some sort of rebate to counter-balance the new taxes and increased prices.

Conclusion

A VAT on its own is regressive to a small degree. Collectively, the funding sources of the Freedom Dividend are not regressive. With the Freedom Dividend in place, the overall program is extremely progressive.