Universal Basic Income

The official poverty rate in the US was 14.8% in 2015, meaning that 14.8% of all individuals were in households below the official poverty line. The rate for children under 18 was 19.7%, so basically 1 of every 5 children lives below the official poverty line in the richest and most powerful country in history. The rates are much higher among Black/African American and American Indian populations, hovering around 40% for several decades for Black children. 40%!!! Can we fix this? The answer is yes, if we are willing.

Would you be willing to pay an additional 10% in federal taxes if it could completely and immediately eradicate poverty — bringing the level to zero? Before you give me the standard reasons for saying no, what if we all agreed to pay that tax and live in a country with zero poverty, then received a reimbursement that, for everyone except the richest 15% or so of households, was worth more than what you had to pay? For example, if you were a middle class family of four making a healthy $150,000 a year, you would pay an additional $15,000 in taxes, but then you would get a $24,000 check (equal to the poverty level for a family of four) making you $9000 richer than before. If you believe in rational economics, 85% of you should absolutely say yes and in a democracy we would pass such a policy with little opposition and much rejoicing. If you’re still not convinced because you don’t like government programs or are wary of taxing the rich, what if I told you we could institute this program and reduce or eliminate many social welfare programs like SNAP, WIC, TANF, housing assistance, etc. while simplifying the tax code and providing benefits to low-income individuals that allow them to allocate resources based on free market considerations instead of government direction? Hopefully you’d at least be willing to listen. The numbers in this example are rough estimates, but not fanciful. The basic construct of this program is realistic and I will show you the numbers below. We could institute a 10% tax on everyone (let’s just call it an income tax to keep it simple), then give everyone a check equal to the federal poverty level for their household size regardless of private income — meaning that no one would be below the poverty line because by definition everyone would have an income at or above it. For about 85% of households, this would be a net gain, but for the richest 15% it would be a net loss. If we all voted according to our interests, or more accurately if our representatives voted in our interests, this would be a quite popular policy.

Such a program is a variant of the idea of universal basic income (check out wikipedia or BEIN for a primer or 538 for a good history/analysis). This idea has gotten a lot of attention lately and finds supporters from various ideologies, though people’s ideas of what the program should look like vary with their ideology. Those on the left might love the idea of Switzerland’s referendum, though it failed, to guarantee a substantial income to every adult, while those on the right might be supportive of the FAIR tax which proposes completely replacing income taxes with a 30% sales tax and giving every citizen a “prebate” regardless of income. I don’t think the FAIR tax is really a universal income policy and am not a fan of it because I believe it is more regressive than our current tax code, but I think it is appealing to many people who like the idea of taking care of the poor while allowing them to make market-based decisions without so much government oversight and perverse incentives. I find the idea of universal income interesting because it can appeal to different ideologies, and might be a way to solve social problems outside the traditional ways of thinking.

Before you argue that universal incomes is not so simple (you’re right) or call me a populist or socialist, let me get into the details and discuss the potential drawbacks. First, I owe you some caveats on my attention grabbing line about poverty rates in the US. These numbers are relative, not absolute, poverty. $11,000 a year makes you below the poverty line in America, but among the rich in some other countries. Poverty is whatever we define it as in this country. These numbers are based on the federal poverty levels which vary by household size. I am happy to use these numbers as a baseline because they reflect how much income is necessary to secure basic needs like housing and food, but other reference points could be established. Second, some would argue that the official poverty rate overestimates because it doesn’t take into account many non-cash benefits people with low-incomes are receiving. However, even with the lowest estimates, there are unarguably millions of people in this country that struggle to secure basic needs.

So now on to the numbers. I will use very rough estimates just to keep it simple. The US GDP, which is essentially the combined income of every individual, is about $17 trillion. The chart below shows the latest population data I could find on the number of households, combined with the federal poverty levels, to determine that it would cost about $2.2 trillion a year to provide every household with an income equal to the poverty level. This is about 13% of the GDP, slightly above my 10% number, meaning we would have to institute a universal tax of 13% to come up with that money (as a reference, current federal spending, including discretionary and mandatory, is about 22% of gdp, funded by a variety of taxes and debt).

However, we could reduce expenditures in several areas if suddenly no one was below the poverty line. This is where the estimates get really rough because every social welfare program is different. Some pay benefits to those with incomes up to four times the poverty level while some are only for those below the poverty line and all have different time horizons. It is also surprisingly difficult to find a nice summary of up-to-date spending levels on each program, but I’ve compiled some estimates from various sources (mostly this unofficial but fairly accurate site) on how much is spent. There are a few other welfare programs related to health care which is another story, and some that are not directly intended for low-income households, so I left them out. Assuming we cut most of these programs because no one is under the poverty line, we would save about $280 billion. I would like to make two points about these numbers. First, you may be surprised to notice that we don’t have a federal program that is anything like what opponents of welfare spending portray — nothing that gives people a “welfare check” every month forever. TANF is the closest thing to the traditional idea of welfare, but it is limited to 5 years and sometimes less (notice “temporary” is the first word in the program). Second, total spending on these programs is about 1.5% of our GDP, meaning we spend only 1.5% of our total income helping the poor (at least with these federal programs), which is probably much less than you thought if you listen to certain anti-welfare advocates. This is also why just cutting our social welfare spending alone without an additional source of income will not be able to provide a meaningful universal income or adequately provide for low-income individuals, something I think the FAIR tax overlooks.

But there is even a larger chunk of money that we would save with universal income. The federal government already provides various forms of income to millions of people. It spends $40 billion a year on unemployment benefits. There are about 60 million people receiving social security benefits, around two million receiving a government pension, and every parent or guardian of the 74 million children in the US gets a $1000 tax credit every year — that’s $74 billion. These programs may pay out incomes higher than the poverty line and/or are earned through previous contributions or commitments, so I would not advocate cancelling them. However, I think it would be reasonable to withhold or reduce the new universal income to those already receiving government income from other sources. For example, if I am receiving a government pension above the poverty line, I would not receive an additional universal income check (except some compensation for the new tax). If I was receiving a social security income of $6,000 a year in a single person household, I would receive an additional $6,000+ to bring me up to the poverty level and a corresponding reduction in SSI if I was receiving it, but not the full $12,000. A family of 4 receiving $2000 a year in child tax credits would have that subtracted from the $24,000+ basic income check. In total, this would reduce the cost of the universal income program by at least $500 billion (most of that from the 60 million social security beneficiaries that receive on average $14,000 a year already). So now the total price tag for universal income drops from $2.2 trillion to $1.7 trillion, right at or below 10% of total income. In addition we save $200+ billion (1%) on social programs even if we don’t cut them all. This is all just federal spending, states would also save billions more since they provide most of the unemployment insurance and many welfare and education benefits which could all be reduced without negative impact.

But nothing this good is free, so who pays for all this? We all would pay an additional 10% in taxes, but as mentioned above most of us would receive more than that in return. Since we’re using the nice round number of 10%, only those 10 times above the poverty line would pay more than they receive. It’s difficult to put an exact number on who wins and who loses because it is based on household size, but every individual or household below $120,000 would stand to gain, and that much income would put them in the top 18% of all household incomes, or top 4% of individual earners. A family of four would have more money in their pocket with this program unless they made over $240,000 a year, putting them in the top 4% of all household incomes, and the cost to them would proportionally increase with income above that number. The 15% estimate I gave in the beginning is probably too large, in reality this program would probably be funded by the richest 5–10% of households paying an additional 10% tax on income that is above 10 times the poverty level. How can so few people do so much? The incredible income inequality in our country means that small changes at the top can have dramatic impacts on the rest.

But now the downsides. Two pitfalls might be apparent to you already. First, you might believe that increasing taxes on the richest 5–10% of Americans will have negative effects on the overall economy. Second, you might be very worried that giving everyone in the country an unconditional check for doing nothing is a bad idea for several reasons, the most practical and obvious of which is that it will reduce the incentive to work. You might be right on both accounts, but I will present some arguments that we might not have as much to worry about as you think. First, the idea that increasing taxes on the rich reduces overall income is a long-held tradition of the right that I can find no empirical evidence for. This is the foundational idea behind Reaganomics, trickle-down economics, and similar theories that just don’t hold up to reality — even for extremely pro-business, free-market supporters like me. There is some loose economic theory that underpins the idea, but much more solid theory and evidence that debunks it — at least at the tax levels we currently have. Yes, increasing taxes from 40% to 100% would reduce the incentive to innovate, but do we really think that someone who is making millions of dollars will stop trying to make as much money as possible because they have to pay an additional 10% of their profits in taxes while keeping the rest? There are much more sophisticated arguments than that, but in general there is certainly not much evidence that a 10% increase in taxes on the wealthy will have major negative effects on the economy, though I believe there could be some marginal decline. However, I also believe that the long-term economic benefits of eradicating poverty will more than make up for any loss. Canada actually experimented with universal income in one city, and found that health improved, high school graduation rates increased, and adolescent birth decreased. When people are not constantly focused on meeting basic subsistence needs, we should easily expect education outcomes and productivity to improve. Giving a broader base of people access to a higher standard of living and better education can lead to dramatic improvements in the overall economy as the middle class market expands, a lesson I think is obvious in the huge increase in college graduation post-WWII thanks to the GI bill and the subsequent decades of economic growth. If you just disagree with any effort to raise taxes on the wealthy based on philosophical, moral, or ideological arguments against redistribution, I probably won’t convince you, but I’ll try with this companion article I wrote from a philosophical/religious perspective.

The concern that universal income will reduce the incentive to work or increase negative behaviors among its beneficiaries is probably the strongest argument against this policy, and one I take seriously. I have a few counterarguments though. It seems obvious that people will still have an incentive to work to improve their condition in any way they can. The desire to make more money doesn’t really dissipate because you already have some. The universal income would be provided on top of and without regard to any privately earned income, so there is no disincentive to work, just the opportunity to hover at the poverty line without working — something I don’t believe has mass appeal. Any disincentives to work that might exist under our existing welfare policy would diminish, and people would probably be much more likely, in general, to make choices that increase productivity even if there was a small, temporary increase in unemployment. People would perhaps be able to find the job they want and are good at instead of the one they need to live and they would be more likely to make an investment in education, training, or an entrepreneurial effort knowing they can provide basic necessities during that time of investment. I think we can trust that very few people will be content with an income just at the poverty line when improvement is more attainable than it is under our current system. Crime and other negative behaviors are likely to decrease, as they typically do anytime socioeconomic conditions and opportunities improve. Also, let’s not forget that the largest welfare/redistribution program in US history (Social Security) did not lead to massive declines in output as opponents predicted, but rather was the most successful poverty alleviation program in our history and remains widely popular despite easily resolvable problems with its long-term solvency. In addition, the limited evidence we have on universal income in other places does not show any decrease in work force participation or increase in negative behaviors. Unconditional cash transfers have been utilized as a poverty reduction program in several countries, and these programs have been evaluated under rigorous standards. They have been shown to improve several positive outcomes with no increase in negative behaviors, and such programs have perhaps the most effective and promising results of any development efforts. Give Directly has run some of these programs and analyses and is attempting to run a massive experiment in Kenya providing unconditional incomes to dozens of entire villages. We don’t have enough evidence to make strong conclusions about how unconditional income will effect behaviors, especially in the developed world, but all the evidence we currently have seems to indicate a massive potential for improving social welfare with limited negative consequences.

Maybe you, like me, are optimistic about the potential of universal basic income, but hesitant to make the leap. I would propose two ways to move forward carefully. First, we could try it on a scale that is limited, but sufficient to establish conclusive results. This means randomized trials in the United States similar to Give Directly’s experiment where the program is established in several randomly chosen towns. This seems politically improbable, but a few other countries are trying to do similar things and like always, we could do it if we were willing. The second approach is a universal but incremental one. For instance, the tax could gradually increase by 1 or 2% a year over 5–10 years while the distribution of cash also incrementally increases in proportion, so I would pay 2% in taxes and receive 20% of the poverty line as a distribution for a year or two, then gradually increase to the full amount once the full consequences of the policy are evident. Social welfare spending on other programs would gradually decrease as more and more people were pushed above the poverty line with the new source of income. Eventually, the programs targeted at those below the poverty line could be completely phased out and minimum wage requirements could be lowered to stimulate business growth since a living wage was guaranteed from another source. This could be appealing to both sides of the aisle.

Though I have given a dramatic oversimplification of this program, I think the basic construct is sound and achievable. Further, I believe it could have profound effects across our society. Perhaps most important would be the effect on racial inequality. The empirical reality that a Black child is so much more likely to be born into poverty than a White child is the root cause of many enduring racial inequalities in our country. As I have argued before, race will continue to be a divisive issue in this country until we resolve the disparity in economic outcomes, and a universal basic income that ensures no child is born into poverty would be the best foundation for achieving that goal. I also believe it would lead to the educational improvements and lifetime learning possibilities that are necessary for America to be competitive in the global economy. Many proponents of universal income feel it a necessity in an increasingly automated world where it is progressively more difficult to provide for a family with a traditional blue collar job. In fact, I think this relatively straightforward policy is perhaps the most effective way to affect real positive change in our society and provide economic security in an unpredictable and likely tumultuous future. I hope any political movement that arises from the rubble of 2016 takes this idea seriously.

Originally published at The Road Well Traveled.