A VAT-financed UBI is progressive.

In a recent letter, Timothy Roscoe Carter correctly notes that a universal basic income (UBI) financed by increasing progressive income tax rates would not subsidize the wealthy.1 Unfortunately, Carter incorrectly asserts that the “claim that UBI subsidizes the wealthy is valid” if the UBI is financed by a VAT, “at least for those wealthy enough to save a significant fraction of their incomes.”

In reality, a UBI is a highly progressive policy, even if funded by a regressive tax such as a VAT. A VAT-financed UBI would still impose net burdens on the wealthy (and would still provide net benefits to low-income households), although not to the same extent as an income-tax-financed UBI. Carter’s error reflects common misperceptions about the progressivity of taxes and spending.

Although the wealthy would receive UBI benefits, their benefits would be far outweighed by the taxes they would pay to finance the UBI. Carter recognizes that point for the income-tax-financed UBI, noting that “Jeff Bezos would be paying millions of dollars more each year in exchange for his UBI.” However, it is easy to see that Bezos’s VAT payments would also far exceed his UBI benefits, although by a lesser amount.

A budget-neutral combination of a tax and a government benefit payment imposes a net burden on wealthy households so long as their share of the total tax burden exceeds their share of the total benefit payments. That property holds for both an income-tax-financed UBI and a VAT-financed UBI. The top 1 percent would bear 37 percent of the total tax burden under an across-the-board scaling up of the individual income tax2 and approximately 14 percent of the total tax burden under a VAT.3 In each case, the top 1 percent would receive only 1 percent of the UBI’s total benefits. They would therefore bear a sizeable net burden in both cases, although more so under the income tax than under the VAT.

Also, under either tax, low-income households would receive net benefits from the UBI. The bottom 20 percent would bear negative 2 percent of the tax burden under an income-tax-financed UBI (as refundable credits were scaled up with the rest of the individual income tax system)4 and 3 percent under a VAT-financed UBI.5 They would receive 20 percent of the total UBI benefit, yielding a large net gain in each case, although more so under the income tax than under the VAT.

William G. Gale of the Urban-Brookings Tax Policy Center recently estimated significant redistributive effects of a VAT-financed UBI.6 The TPC has obtained similar results for a VAT-financed UBI accompanied by an expansion of the earned income tax credit.7

Benefit payments financed by a regressive tax (one in which high-income households pay a smaller share of their income) still reduce inequality, if the benefits are sufficiently progressive to offset the tax’s regressivity. Benefits are progressive if they are a smaller share of income for high-income households. A UBI that provides equal dollar benefits to all households is extremely progressive because the benefits are vastly smaller shares of income for households with very high incomes than for households with moderate incomes. The extreme progressivity of the UBI far outweighs the VAT’s mild regressivity. Indeed, the UBI would reduce inequality even when financed by a tax that was more regressive than the VAT, provided that the tax was less regressive than a head tax.

The extreme progressivity of the UBI and similar benefit programs is often overlooked because of the misconception that a benefit program is progressive only if the dollar benefits are smaller for high-income households than for low-income households, a criterion that the UBI does not satisfy. As we have previously noted,8 however, the correct analysis treats taxes and benefit payments symmetrically, always evaluating progressivity based on shares of income rather than dollar amounts. As the late Edward D. Kleinbard noted, “Government spending invariably is very progressive: Lower-income Americans get disproportionately more value from government spending relative to their incomes.”9 Even a benefit program that, unlike the UBI, provided larger dollar benefits to higher-income households would be progressive, provided that the benefits rose less than proportionately to income.