A Liberal Case Against Universal Basic Income

The latest policy darling of the technocratic consensus is Universal Basic Income (UBI). Under a basic income system, the government guarantees a minimum income through an unconditional payment to every citizen. Theoretically, a basic income could instantly eliminate poverty through a transfer set above the poverty line. Additionally, if predictions for automation prove true, millions will need to find new income source or face destitution. Endemic poverty, current industrial job loss to automation, and future service job loss as cognitive technology develops are all serious issues for society. However, basic income is no panacea.

The conservative case against basic income argues that an income guarantees eliminates the incentive to work. First, eliminating work incentives will lead to a decline in economic activity and thus, aggregate output and income. Second, a lack of work incentives erodes society and drives individuals into dependency on the government. Yet, this argument is both economically and morally dubious.

Per the empirical evidence, although labour supply decreases, the effect is small. Additionally, other research suggests earnings subsidy programs increase labour market attachment. Theoretically, a basic income program improves upon an equivalent means-tested welfare program, which imposes high implicit marginal tax rates through benefit phase-outs, so per-dollar incentives would improve.

The underlying moral premise of this conservative argument is that poor people need incentives to force them to take the jobs offered. Yet the word ‘incentives’ obscures the brutality of this argument: conservatives hang the threat of starvation and homelessness over people’s heads to force them to work. If the only way to get someone to take a job at the offered wage for that job is threatening to starve them and their family, then the offered wage may undervalue their time and contribution. At the extreme, a job only filled at gunpoint may not be necessary at all.

Thus, the conservative case against a basic income fails on multiple fronts. However, there is a viable liberal case against basic income on both moral and economic grounds.

First, as a moral axiom, I believe that a policy that ceteris paribus gives $1 to a poor person is strictly preferable to a policy that gives $1 to a wealthy person. In technical terms, I assert a diminishing marginal utility of income across individuals, a more restrictive condition than the typical assumption within economics of diminishing marginal utility for a specific individual.

Thus, on moral grounds, policies that involve greater redistribution are ceteris paribus preferable to those with less redistribution. For example, a policy that distributes $10,000 to a poor individual and nothing to a wealthy individual is better than a policy that distributes $5,000 to each. After removing the $5,000 that the poor individual receives under both policies, the choice simplifies to $5,000 to the poor person or $5,000 to the rich person.

However, this ceteris paribus assumption is critical. If a less redistributive policy has significant and positive second-order effects that make it more viable and effective than greater redistribution, then the morally-right choice is less redistribution. For example, consumption taxes, such as the Canadian GST/HST, are more regressive than income taxes because poor households spend a greater percentage of their income on consumption goods than rich households.

Nevertheless, the government may have several reasons to desire a consumption tax: income taxes act as a disincentive on labour compared to raising the equivalent amount of tax from non-income taxation, taxing certain forms of consumption, such as cigarettes or alcohol, creates health benefits for the population, and the government may benefit from having diverse sources of revenue. These second-order effects justify raising tax revenue through a consumption tax, despite its distributional effect.

This exemption is still narrow. To be consistent with the moral axiom, these second-order effects must make the less redistributive policy better for the poor than more redistribution, not just better in aggregate. If the beneficiaries of a diversified tax revenue base are predominantly wealthy, then this reason cannot justify the consumption tax’s regressive nature. This Rawlsian criterion limits exceptions to cases where an inequality helps the worse-off.

Per this moral argument, traditional welfare programs are superior to basic income programs, which involve less redistribution, unless basic income has sufficiently beneficial second-order effects for the poor. Essays supporting basic income cite potential second-order effects that could make a basic income system preferable to traditional welfare. I outline several of these effects below.

First, a guaranteed income would reduce the threat of hunger and homelessness that might tie some workers to jobs they hate. By permitting them to take greater time looking for the ideal job, a basic income could improve labour market matching and the overall efficiency of the workforce.

Second, unlike income-contingent welfare payments that disincentivize labour, basic income reduces effective marginal tax rates. The increased work incentives could spur greater labour force participation and high economic output, leading to higher incomes for households and higher tax revenues for the government.

Third, voters may prefer a universal program to one that only serves the poor. If the basic income becomes perceived as a universal right, not a selective benefit, it could become politically unassailable, similar to the sacrosanct Social Security and Medicare programs.

Fourth, consolidating existing welfare programs under a single basic income program that does not require income and employment-testing would reduce the cost of administering these programs. These savings could be repurposed to increase the size of the basic income benefitting all recipients.

These second-order effects lead to the economic case against basic income. Economist Kevin Milligan notes a trilemma facing all basic income programs, they can offer at most two of the following: a large basic income payment, improved work incentives through low phase-out rates, or a similar cost to the existing welfare system.

In simple terms, basic income programs can be broad, deep, or affordable, but not all three.

First, basic income programs are expensive. A benefit of $1000 per month to each American over 18, approximately 240 million people, would cost $240 billion per month or $2.88 trillion per year. By comparison, total consolidated (federal, state, and local) American welfare spending is $2.7 trillion per year, including all Social Security, Medicare, Medicaid, family and child support, unemployment insurance, and housing support. Therefore, even if the government eliminated all other welfare spending, it would need to raise new taxes or cut non-welfare spending to pay $1000 per month.

This expenditure would help beneficiaries, but less than basic income’s proponents claim. Per the Bureau of Labor Statistics, average monthly household expenditures on shelter are $840, comprising rent payments and mortgage payments, but excluding utilities. Thus, the complete elimination of every other form of welfare would suffice to cover each adult’s housing costs. Even accounting for shared housing among families, covering housing and utilities alone would still cost $1.7 trillion.

Thus, the first beneficial effect falls victim to the trilemma: unless workers could cover their basic living expenses through the basic income, it would be at most an income supplement, not an income replacement. If the average adult needed $20,000 per year to subsist on the basic income, the basic income would require $4.8 trillion in annual spending, higher than the federal government’s $4.1 trillion total annual expenditures. At this point, the basic income would be 29% of American GDP.

Proponents of basic income would likely respond that I am confusing the gross cost of a basic income, the total spending on the program, with the net cost of a basic income, total payments less incremental taxes. Yet the second and third components of the trilemma pose a challenge to this argument. For the program’s net cost to remain the same as the existing welfare system, marginal tax rates must increase, particularly on higher incomes.

This solution merely substitutes one form of phase-out rates for another. There is no mathematical difference between a means-tested benefit with a phase-out rate of x% and a marginal tax rate of y%, and a universal benefit with no phase-out rate and a marginal tax rate of (x+y)%. If the net costs remain similar to the existing system, all the government will have accomplished is renaming the welfare system without underlying changes. If the net costs or the distribution of costs change, then this change is identical to raising or lowering taxes to achieve a different degree of redistribution.

Thus, basic income programs have no unique ability to improve work incentives relative to traditional welfare programs. If the government believed that reduced effective marginal tax rates on certain earners would stimulate economic activity, they could reduce tax rates or slow benefit phase-out rates without adopting a basic income system.

Yet this choice faces political constraints; basic income will face the same. Claiming that the benefit will be politically unassailable, just like Social Security or Medicare, misses the forest for the trees. The benefit itself may be sacrosanct, but the higher and more redistributive tax rates to pay for it will not.

The ruthless logic of arithmetic states that if some people are net beneficiaries of the basic income program, then others must be net contributors. This logic is the fundamental political challenge of any redistributive program: some people must be made worse off if others are better off.

Per public choice economics, a small group of people, each receiving a large benefit or facing a large cost, will be more motivated to advocate for themselves than a large group of people, each receiving a small benefit or facing a small cost. Since the idea behind a basic income program is that there are more net beneficiaries than net contributors, unlike traditional welfare programs, the net contributors may be highly motivated to oppose steep tax increases to fund the program.

Additionally, these net contributors will be those with disproportionate power and social influence in society, who will use that power to fight their tax burden. Many are advocates for basic income. Despite the great enthusiasm for basic income among tech moguls, their advocacy is not credible. For example, Marc Andreessen is one of Silicon Valley’s major basic income advocates. His firm is also a major investor in Lyft, which settled a lawsuit with its drivers for $27 million for short-changing them up to $126 million by classifying them as independent contractors.

Whether it is Uber and Lyft avoiding paying their drivers as employees, Apple outsourcing manufacturing to China, or Google diverting profits through Dutch and Irish subsidiaries, technology companies are among the most eager to minimize their contribution to society. Considering these actions, their advocacy for basic income appears more like a mechanism to offload the burden of paying their employees to the government. Their ideal society appears to be one where nearly-unpaid ‘contractors’ subsist on the government’s largesse, while they hoard their wealth in tax havens out of the reach of the tax collector.

Techno-utopian proponents of basic income are not credible.

Other proponents of basic income suggest implementing a wealth tax to fund a ‘citizen’s dividend.’ However, wealth taxes are even more unpopular than income taxes. Even estate taxes, which literally take an individual’s wealth “out of their cold dead hands” are reviled.

Since basic income fails to deliver on the first three potential benefits, the one remaining saving grace might be administrative cost savings. These claims are approximately as credible as conservatives’ promises to fix the deficit by cutting fraud and waste. Medicare spends approximately 2% of total expenditures on administration, while Social Security spends under 1% of total expenditures.

Under the extremely generous assumptions that current administrative costs average 5% of welfare expenditures and that consolidation would reduce this cost to 1% of expenditures, consolidation would only free up $100 billion. This is not a small amount, but it only represents $400 per adult per year, hardly enough to fund an expansive basic income.

Based on this economic analysis, a strong, well-funded welfare program could match every proposed benefit of a universal basic income. On moral and economic grounds, the government should focus on providing high-quality public goods, health care, education, housing, and income support to those who need it, not fritter away their efforts on a dystopian dream. Basic income just has marketing hype; building and defending a robust welfare system is a much better use of time and energy.