A simple change that would make a basic income work
The idea of a universal basic income has been gaining a lot of traction lately. Liberals like it. Socialists like it. Silicon Valley likes it. Hell, even libertarians are starting to endorse it.
Just last week, a team of top economists released a study suggesting that a $1,000 per month basic income could grow the U.S. economy by $2.5 trillion- and now even pro-business publications like Forbes and the Wall Street Journal are warming up to the idea.
But the basic income still faces a few major objections. Most notably:
Depending on how much it paid, it could give people a disincentive to work, sharply and permanently reducing the workforce participation rate.
It would cost a tremendous amount of money, potentially leading to unprecedented budget deficits, and ultimately maybe even bankruptcy.
Those are both extremely serious problems, and should give anyone pause in recommending that we start spending trillions of dollars a year on a basic income.
And yet, there is a simple fix. One change to the way the basic income is administered could address both of those issues. First, let’s look at how the basic income is usually envisioned.
Most proposals envision the basic income as paying out a fixed amount- a thousand dollars a month, for instance. This is how most government aid programs work, after all.
Under these proposals, the basic income could very well provide a strong disincentive to work- what if it pays too much relative to how much people earn working at a job? Why work your butt off for slightly more than you’d make doing nothing?
And under any of these proposals, the basic income could easily end up eating the federal budget. Demographic trends may shrink the tax-paying base, such that we have more children and elderly collecting basic income and fewer workers paying for it.
Worst of all, those two issues could combine to send the economy into a death spiral. If more people stop working, tax revenue goes down. If we then responded to that by raising taxes to balance the budget, even more people would stop working, creating an even bigger budget shortfall- and so on, until we become a country in which hardly anyone works, paying ourselves by printing money.
But there is a better way. Variable payouts can solve both of these problems.
Imagine if, instead of paying the same amount every month, the basic income instead payed a percentage of income tax revenues. Here’s how that would work:
Every month, the government adds up its income and payroll tax revenue from the previous month. A certain percentage of that revenue- let’s say 40%- is earmarked for the basic income. We’ll call this amount of money the basic income poll.
The government then takes that basic income pool and divides it by the number of people who receive the basic income. That amount is how much the basic income pays out that month.
This offers at least two major advantages.
First, it won’t break the bank. We would have to raise taxes to pay for it initially, but once implemented, the basic income would always cost a fixed percentage of income and payroll tax revenue*. Costs would, indeed could not accelerate, and the basic income would pose no threat of bankrupting this country.
Personal income and payroll tax combined account for 80% of federal revenue.
Second, while it would create some disincentive to work, as any basic income would, that effect would be self-balancing. If more people stopped working, the payouts would go down, driving more people back into the workforce. If more people started working and paying more taxes, the payouts would go up- potentially limiting labor participation, but also creating market pressure for companies to pay competitive wages.
This proposal doesn’t solve all of the problems with the basic income- it would still cost a massive amount of money, and we would still have to fight over how much it would pay, or in this case what percentage of revenue would fund it. This proposal would also require the IRS to collect and record taxes automatically, on a continual basis- something which has been possible for years, and which several members of congress are already pushing for.
What this proposal would do is eliminate the biggest risks of a basic income. There would be no skyrocketing budget deficits, and no chance of accelerating costs bankrupting the government. Any disincentive to work would be strictly limited. There would be no chance of a death spiral- instead, work force participation and basic income payouts would reach a natural balancing point.
With this change, a universal basic income could actually work- probably better than the welfare and economic stimulus programs we currently use. Now it just becomes a matter of finding the money.
John Fawkes normally writes about fitness and self-improvement at JohnFawkes.com. He thinks about economics in his spare time.
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