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Exploring Universal Basic Income

[inlinetweet prefix=”” tweeter=”” suffix=””]Up-and-coming Democratic presidential nominee Andrew Yang has captured the internet’s collective imagination with his unorthodox campaign strategy and raison d’être: universal basic income. [/inlinetweet]‍

This policy serves as the differentiator between him and other presidential hopefuls, but what effect would $1000 a month for every American, between the ages of 18 and 64, have on your business? Spoiler Alert: a big one.

Breaking down universal basic income

To pay for his proposed universal basic income, Yang — who began his bid in 2017 — has proposed a 10 percent consumption tax on goods and services known as a value-added tax. A VAT is a bit complicated to understand, but essentially, it is a system where taxes levied on products at every point of sale from raw materials and production costs to the final retail price at the end of the consumer supply chain.

For example, if raw materials traditionally cost $100 the company would pay $110 with the additional $10 going toward the government. While production costs may have been $500 prior, now it would cost $550 and the final product being sold for $1000 would now cost consumers $1100. Theoretically, Yang’s UBI plan is designed to help alleviate some of the economic hardships that areexpected to result from increasingly automated industries and technological advances.

His plan would essentially make it more expensive to purchase consumer products in the U.S. by forcing corporations to increase the cost of the final product in order to compensate for the increase in production costs. This necessitates a change in supply that either requires consumers to pay more for goods and services or forces them to find less expensive substitutes, causing a revenue decrease for highly competitive markets. Smaller markets and niche companies will see the benefit of a VAT as they can increase their prices confidently compared to their larger, more expansive corporate counterparts.

Why UBI is detrimental for consumers in the current business climate

Traffic and in-store purchasing has been on asteady decline for years with June showing a 5.8 percent decrease from last year, according to Coresight Research’s retail metrics. It’s even worse for apparel retailers, where sales are at a historic low, rivaling sale metrics during the Great Recession. Adding additional costs could prove detrimental to the profit margins of businesses that are already experiencing record decline. Retailers are vying for the attention of consumers; a demand curve increase of 10 percent could spell the difference between consumer behavior regarding purchasing practices.

Aside from the impact of a regressive tax on businesses, Yang’s plan disproportionately affects consumers. VATs have found success in other countries, because of the way it works as a kind of tax enforcer. For instance, in less developed countries where work is more informal, tax evasion is much more common compared to industrialized nations.

The VAT serves as a makeshift income tax by being placed on goods and services assuming people with more disposable income will buy more. While understandable, data actually shows socio-economically disadvantaged people end up paying more, comparatively, because consumer products account for a higher proportion of their gross income.

The fallacy of the ‘Freedom Dividend’

Economists argue in data published by the National Bureau of Economic Research, that increases in value-added taxes cause prices to respond positively (in this instance “positive” means to increase as opposed to decrease) but a decrease or elimination of a VAT does not result in the inverse. Haphazardly implementing a VAT would cause prices to increase accordingly; however, any potential decrease in that VAT would not see a proportional decrease in pricing. Businesses lose it on consumers and customers are forced to spend additional money they may not have.

To be clear, the implementation of a UBI is not the issue in this case, but the fact that Yang’s idea is based on the free-market economist Milton Friedman’s plan to shift the burden on to businesses, which would disproportionately affect low-income consumers. This should trouble all retailers that make it a point to foster positive, transparent relationships between themselves and their consumers. While Yang touts this as a “Freedom Dividend,” there’s little self-determination and equity present in the implementation of his plan.