Financing a BI with a VAT solves.

One way to pay for BIG is to institute a new tax to cover it. The proposal would work for a new income tax as well, but I will explore the idea of what is known as a “value-added tax” (VAT) to pay for BIG.

[Table 2.1 omitted]

A VAT of 14 percent would generate sufficient money to pay for a $10,000 BIG policy. The proposed VAT would apply to absolutely all final goods and services. So, there would be a 14 percent tax on food, haircuts, books, medical services, nuclear missiles, and so on. However, consider those trying to live on $10,000 a year when the new VAT is introduced. Suddenly, their money would not go nearly as far. Imagine they spend $200 a month on food. After the 14 percent VAT is introduced, the same groceries would cost $228 a month. Their share of rent would increase from $300 to $342 a month. To have the same purchasing power as before the new tax, those living on $10,000 a year would need another $1,400 to pay for the VAT. So this is what I propose: increase BIG to $11,400. As should be clear, this will not make those living solely on BIG any better off, for although they have 14 percent more money, everything will cost 14 percent more because of the VAT. In other words, although recipients will receive more than $10,000, it will get reduced to $10,000 after paying VAT.

We calculated the cost of BIG at approximately 1.9 trillion without catering for the new tax. The higher BIG payment to offset the increased living costs due to VAT requires funding in the order of 2.2 trillion. As noted above, the gross domestic product of the United States (in 2014) was about 17.5 trillion dollars. A 14 percent tax on this value would yield 2.5 trillion in revenue to fund BIG (2.2 trillion) and also leave a small surplus (300 billion). 10

One of the more controversial part of this proposal is applying VAT to all final goods and services in the economy. Generally, countries allow exemptions or reduced rates of VAT such that, for example, a 10 percent VAT might typically bring in about 4 percent revenue as a ratio of GDP. 11 This is referred to as a yield ratio, and for many nations the yield ratio is between 0.3 and 0.4, with Mexico marking out one end of the range at 0.28 yield ratio and New Zealand the other end, with 0.69. What this means is that if the 14 percent VAT is applied in a typical fashion, it would yield far less than is calculated. Even if New Zealand’s high yield could be achieved, it would mean that a 14 percent VAT would fall short of the target 2.2 trillion by about half a trillion dollars. A VAT of about 18 percent would then be necessary to make up the shortfall.

The primary reason for applying a single rate of VAT across all sectors of the economy is to collect as much tax as possible. Inevitably, if countries decide to levy VAT at full rate to only some items and at a lesser rate on others, the tax base shrinks.

So, why do countries allow exemptions and reduce VAT on certain items? The answer is that there is a concern that VAT applied at an even rate across all goods makes it a very regressive tax. That is, unlike income tax, which tends to have a progressively higher rate for larger incomes, VAT is a flat tax, which tends to hurt the poor more. The objection, then, is that though it may make sense to have a VAT on luxury items, taxing basic necessities will hurt the poor. In other words, to help the poor, it is better to have a high VAT on yachts and a low or no VAT on food.

The counterpoint to VAT as a regressive tax is that the BIG dividend more than makes up for this for most people. In other words, most people will pay far less than $950 in VAT each month but will receive a $950 dividend check each month to make up for cost increase due to VAT. Focusing on the idea that the tax is regressive fails to take into account both sides of the equation: the tax debt and the BIG dividend. So it is possible to keep a large tax base and avoid the regressive tax criticism simply by topping up BIG to account for VAT for the poorest.

One area of this proposal that is particularly controversial is that VAT should apply to government purchases. Typically, governments excuse themselves from any kind of VAT. If the government buys a nuclear missile, for example, such a purchase would be classified as a final good or service, but it would be exempt from VAT. Government expenditures account for approximately 15 percent of the GDP, which works out to approximately $2.6 trillion. 12 This means that VAT on government expenditure works out to about $370 billion. These additional funds could be raised by either cutting many of the existing welfare programs, which will become redundant with BIG anyway (see below), or cutting the bloated military budget. If we did both, we would actually have a budget surplus (see below).

You Should (Probably) Love a New Tax

Of course, a new tax will raise additional worries. Who would want to pay an additional 14 percent tax on top of existing taxes? However, this question is misleading. The question, at least in self-interested terms, should be, “how much do I net?” rather than “how much do I pay?” I claimed earlier that most people would net more on this proposal; it is time to see this in more detail.

Suppose your salary is $50,000 per annum. A new tax of 14 percent would mean $6,100 in additional taxes. Yes, that is a lot out of a salary of $50,000. But remember too that you receive $11,400 in yearly BIG payments. So, under the proposal, your new total income is $61,400 (your $50,000 salary plus your $11,400 BIG payment). If you consider your total income, your contribution to VAT would be $7,540, meaning that you would be actually earning $53.859, or nearly $4,000 more, on this proposal. The following graph illustrates the relationship between income, VAT, and BIG ( figure 2.1 ).

It may help to walk through some of the information in the graph. The lighter dashed line represents the proposed BIG payment. It is constant for everyone: this is the by-now familiar point that BIG is exactly the same for everyone: from the homeless veteran, to Bill Gates. The darker dashed line represents VAT, which everyone pays. The smallest contribution to VAT is $1,400, which a person living solely on BIG would pay. Unlike the current income tax system, the proposed VAT is a “flat tax,” meaning that the same percentage is paid no matter what a person’s income. Someone making $10,000 a year pays 14 percent, as does a person making $100,000 a year, or even $100 million per year. The darker solid line represents a person’s income in the present system. The lighter solid line represents the change in income (after paying VAT). In other words, the red line represents present income plus the BIG payment of $11,400 minus a 14 percent VAT.

The vast majority would do better under this proposal even though it includes a large new tax: anyone making between 0 and $81,000 a year would be monetarily better-off. Over 90 percent of the population has a net personal income that falls below the crossover point. 13

[Figure 2.1 omitted]

As noted, it is a very simple formula to illustrate that most would do better under BIG and that a 14 percent tax is hardly draconian. The top income tax rate for high income earners at present is 39.6 percent. So, the maximum that a higher income earner would pay under this proposal is 53.6 percent (39.6 percent income tax plus 14 percent VAT).