The Democratic Debate Dilemma

Right before last week’s Democratic debate, Elizabeth Warren revealed her plan to greatly expand Social Security.

And then, during opening remarks, Andrew Yang said he wanted to pay 10 Americans “freedom dividends” worth $1,000 a month as a way of demonstrating his larger plan to do the same thing for everyone in the country.

Now, both of these proposals are attempts to create larger social safety nets.

Both are also attempts to buy votes.

And both, in my opinion, miss the mark.

Let’s start with Elizabeth Warren.

The Headline Promise

Warren wants to pay all current and future Social Security recipients an extra $200 a month.

Promising seniors, the group of Americans who always vote come rain or shine, an extra $2,400 a year in Social Security benefits is a pretty good way to garner their support.

In addition, her plan:

  • Changes the measure of inflation used for Social Security adjustments to make it more tailored to what seniors experience
  • Provides Social Security credits to non-earning caregivers
  • Allows disabled widows and widowers to claim survivor benefits earlier
  • Creates special minimum benefit rules that would guarantee checks worth 125% of the federal poverty line
  • Finally, it allows public sector employees to avoid negative adjustments for various pension benefits

Warren would pay for all of these changes with two new taxes:

  1. A 14.8% combined payroll tax on all wages above $250,000
  1. A 14.8% net investment income tax for individual filers making $250,000+ and joint filers making $400,000+. (This is in addition to an existing 2.9% net investment income tax.)

For the vast majority of Americans, this tradeoff sounds pretty good – higher Social Security checks, a better safety net for some, and all the costs being paid by the highest 2% of earners.

Personally, the individual line items sound like a mixed bag to me.

But there are really two big objections to be considered here:

A Philosophical Shift

Social Security was never intended to be an overtly progressive program. So this proposal would represent a marked philosophical shift.

When Social Security was first instituted, it covered about half of the population. Many teachers, nurses, librarians, and other workers were excluded from coverage.

Today, Social Security covers virtually everyone and the average American is living to age 76. Other features like disability insurance have also been added to the equation as well.

To accommodate this widening gap of money coming in and money going out, the initial payroll tax rate of 2 percent — which was and still is split between employer and employee — has already risen to a combined 12.4 percent.

But the idea was always providing a basic retirement benefit for all Americans … funded by their own contributions over time … with well-defined parameters on the top end (both maximum benefits and maximum contributions).

Warren’s plan is substantially different in spirit.

It places a lot more financial burden on a lot less people at the top of the income scale.

Whether you agree with her assessment that those people should bear the cost is up to you. That brings us to the second objection.

The Math Is Against Her.

It’s quite likely that Warren’s math wouldn’t pencil out in reality.

According to an analysis by Mark Zandi of Moody’s Analytics, Warren’s proposal would pay for itself and extend Social Security’s solvency out another 19 years.

Of course, one of the big assumptions is that wealthier Americans will take zero action to avoid the new taxes that Warren is proposing.

Newsflash: They will take actions to avoid the new taxes that Warren is proposing.

I have no idea to what extent or how, obviously.

But it’s foolish to think that America’s richest citizens won’t reconfigure their businesses … shift income sources … go through various legal restructurings … or use many other tactics to minimize the impact of these new policies.

Therefore, we can’t take any analysis at face value.

What About Yang’s Plan?

For someone who touts his ability at math, Yang’s proposal looks pretty ridiculous once you dig a little deeper.

I really like Yang. He’s funny. He’s intelligent. He also seems fairly reasonable.

I also thought his “freedom dividend” idea was somewhat palatable – or at least more palatable than Warren’s Social Security plan – until I read the fine print.

Okay, so one of Yang’s biggest ideas is a universal basic income program for all Americans.

Here’s the explanation from his website:

“Andrew would implement the Freedom Dividend, a universal basic income of $1,000 a month, $12,000 a year, for every American adult over the age of 18. This is independent of one’s work status or any other factor. This would enable all Americans to pay their bills, educate themselves, start businesses, be more creative, stay healthy, relocate for work, spend time with their children, take care of loved ones, and have a real stake in the future.

“Other than regular increases to keep up the cost of living, any change to the Freedom Dividend would require a constitutional amendment.

“It will be illegal to lend or borrow against one’s Dividend.”

How would we pay for this?

This is the answer from Yang’s website:

“Andrew proposes funding the Freedom Dividend by consolidating some welfare programs and implementing a Value Added Tax of 10 percent. Current welfare and social program beneficiaries would be given a choice between their current benefits or $1,000 cash unconditionally – most would prefer cash with no restriction.

“A Value Added Tax (VAT) is a tax on the production of goods or services a business produces. It is a fair tax and it makes it much harder for large corporations, who are experts at hiding profits and income, to avoid paying their fair share. A VAT is nothing new. 160 out of 193 countries in the world already have a Value Added Tax or something similar, including all of Europe which has an average VAT of 20 percent.

“The means to pay for the basic income will come from four sources:

“1. Current spending: We currently spend between $500 and $600 billion a year on welfare programs, food stamps, disability and the like. This reduces the cost of the Freedom Dividend because people already receiving benefits would have a choice between keeping their current benefits and the $1,000, and would not receive both.

“Additionally, we currently spend over 1 trillion dollars on health care, incarceration, homelessness services and the like. We would save $100 – 200+ billion as people would be able to take better care of themselves and avoid the emergency room, jail, and the street and would generally be more functional. The Freedom Dividend would pay for itself by helping people avoid our institutions, which is when our costs shoot up. Some studies have shown that $1 to a poor parent will result in as much as $7 in cost-savings and economic growth.

“2. A VAT: Our economy is now incredibly vast at $19 trillion, up $4 trillion in the last 10 years alone. A VAT at half the European level would generate $800 billion in new revenue A VAT will become more and more important as technology improves because you cannot collect income tax from robots or software.

“3. New revenue: Putting money into the hands of American consumers would grow the economy. The Roosevelt Institute projected that the economy will grow by approximately $2.5 trillion and create 4.6 million new jobs. This would generate approximately $800 – 900 billion in new revenue from economic growth.

“4. Taxes on top earners and pollution: By removing the Social Security cap, implementing a financial transactions tax, and ending the favorable tax treatment for capital gains/carried interest, we can decrease financial speculation while also funding the Freedom Dividend. We can add to that a carbon fee that will be partially dedicated to funding the Freedom Dividend, making up the remaining balance required to cover the cost of this program.”

So, a little wordy but, here’s the thing.

I’m the last person who wants to support another tax. But I could have at least argued that a VAT affects people who spend money rather than people who earn money.

Moreover, if the proceeds were going to be redistributed to all Americans on an equal basis and regardless of their income or net worth, then “freedom dividends” are certainly a lot more fair than Warren’s proposal.

The real problem is that, based on Yang’s numbers, a 10% VAT would only produce $3,200 a year for every American adult. Which leaves about $8,800 unaccounted for.

I repeat: We would all pay an extra 10% on most of the purchases we make, and yet that would only cover a bit more than one-quarter of the income Yang wants to give back to us.

That’s why he’s also going to completely remove the cap on payroll taxes – a far worse blow to higher-earning Americans (particularly those earning between $140,000 and $250,000) than what Warren proposes.

There’s also another tax on financial transactions …

He would end a tax break on capital gains and carried interest …

Another tax – okay, a carbon fee – on some undefined people or entities …

Plus, all this nebulous stuff that essentially amounts to back-of-the-envelope guesswork. Streamlining existing welfare programs? Sure…

But the other claims of economic growth and institutional avoidance can’t be proven out until we’re years into the experiment.

So, math… Sure.

Heck, the very way Yang counts the things it will take to produce $12,000 a year for every adult American is a lot more than four sources.

At the end of the day, I don’t really like either of the two proposals we covered today.

But as much as I wanted to support Yang’s more than Warren’s, at least hers somewhat adds up.

To a richer life,

Nilus Mattive

Nilus Mattive

The Daily Reckoning