UBI and Rent: a simplistic financing model

Universal Basic Income, UBI, aims to provide to every person in a country the pecuniary means needed to live decently. This idea is backed by strong ethical arguments, and has proven in numerous experiments to have very positive consequences for society and the economy. My point here is not to go back on them but to discuss a possible way of financing it and to provide a possible model.

The money from UBI allows people to buy basic necessities, starting with food and shelter. It stands to reason that the money to make it possible should in part come from taxes on people who profit from selling these basic necessities at a premium. Furthermore, since UBI is the counterpart of a private ownership regime, it should be financed by taxes on ownership, including a Land Value Tax. I have the intuition that this logical and just choice would also lead to something that is economically efficient.

Housing counts as a significant part of our basic necessities, and it involves well-defined and identified actors, so it is a good test-case to try to figure out how it will work.

Level 0 of modelisation goes: people get a sum from UBI for housing, they pay rent with it, their landlord pays the same amount in taxes: it all balances. But it makes it unprofitable to be a landlord: that does not work.

What saves the system is that most people people live in places better than basic. Universal Basic Income pays for basic housing, probably something like a tiny private space at commuting distance of where our interests are, with a tiny rent. Most people prefer a higher standard of housing, and will get it if they can afford it. Can the difference be enough to make UBI possible while keeping owning homes profitable?

To try to answer that question, I have built a very simple model.

I had to make a few simplifying hypotheses:

Everybody is a tenant who pays rent. People who own their home are just paying rent to themselves.

Everybody lives alone. People who live together are considered having each their home and paying part of the rend. It cannot really work because if the tax rate is not constant, it would cause the total taxes on the home to depend on how many people live in it.

The result is this:

How to read this graph?

The x axis is the value of the home, expressed as a rent. The y axis has the same scale.

The red line is identity, the rent itself. The green line, constant, is UBI, the part of it meant for housing. The blue curve is taxes.

The red hatches, between rent and taxes, show the profitability of owning a home.

The green area shows the cost of UBI. The blue area shows the total tax revenues. The cyan area is where the green and blue area overlap.

The intensity of the color encodes the frequency distribution of home values.

What we need is that the total amount of blue be equal to the total amount of green. So we need the blue triangle on the right, the high taxes on high-class homes, to be equal to the

I have chosen a normal distribution (truncated at 0) for home values.

The tax rate is described by the formula kr²/(b²+r²), where k is the asymptotic tax rate, the rate you would pay for Versailles, and b is a parameter to make tax progressive: below b, the tax rate is less than half k, above it is more; if b=0, the tax rate is flat. Note that the exact shape of the curve does not matter much.

For a given distribution of home values, we can still how progressive the tax rate is, up to the point where the asymptotic tax rate needs to be 100%. It is even possible to go further if we accept confiscatory tax rates on mansions, which is not absurd politically.

This model shows that even if people live in homes that are on average only 33% better than basic, it is possible to finance UBI like that with taxes that are very high but not absurdly so.

With a larger difference, it becomes easier. As more people live in good homes, it becomes cheaper to provide at least basic housing to everybody.

Note that in this model, people are allowed to live in homes cheaper than basic, if they want to save money for other things. Also note that a home cheaper than basic can just mean not living alone and sharing the rent with a partner or partners, as UBI needs to give individual freedom.

Finally, here is the tool I made to explore this model (works at least with Firefox):