How to do a guaranteed basic income properly

I’ve seen a lot of talk recently in the media about the pros and cons of a universal basic income payment (UBI) but not much on implementation details. This isn’t just a legislative afterthought. If done incorrectly, it could end up bankrupting the state, lead to a rise in joblessness or stoke anti-immigrant sentiment. Assuming a UBI is a done deal and the people have spoken, this article lays out how to do it properly without screwing up your country. Consider it an instruction manual for aspiring benevolent dictators.

Embracing Universal Welfare

It seems like every 30 years the topic of a state provided universal guaranteed basic income (UBI) steals the public’s attentions as the perfect social welfare compromise. It satisfies those on the right because it doesn’t actively provide perverse incentives to say, have more children or feign disability the way programs specifically targeting social symptoms might. If you’re into the nanny state, it nurtures your fantasies of cradle to grave care by the state; if you’re libertarian it strikes at the heart of top heavy welfare state bureaucracy by cutting out the middle civil servant and it respects the consumption choices of the individual; if you’re on the left, it achieves in practice what the laws of economics prevent the minimum wage from attempting to achieve: a floor on living standards; even the more eccentric amongst you who cast your dreams into the bottomless wishing well of the resource based economy can appreciate that a guaranteed basic income would loosen the “shackles of capitalism.” I think that no matter what ideological background you come from, we all recognize that while a guaranteed basic income doesn’t go any distance in achieving our versions of utopia, it strikes a damn good compromise with everyone we disagree with and it’s certainly better than the status quo.

Basic income: it’s not just a yes or no

Now that we’ve decided we want a basic income, we have a bunch of things to consider. How much should it be? Does the amount fluctuate with time? Is the policy permanent or is there a sunset clause? Does it replace existing state welfare or complement it? Should a special tax be levied to pay for it or should spending on other things shrink? Do all other laws stay the same? What does universal mean? Is it only for citizens, adults, men, christians, the educated, the uneducated, minorities, women, the cisgendered, the transgendered, the physically disabled, the elderly, the strong and mighty (is this sparta?), the intellectually disabled? So many things to consider. Imagine all the political wrangling and the back and forth campaigning by special interests. Passing this into law would be a democratic nightmare and the final thing might be a terrible compromise that nobody wants. A UBI might be the perfect political compromise in theory but in any modern democracy, passing it will be legislative hell.

Do dictators dream of perfect sheep?

Forget the preamble about political compromise you just read. For now pretend that you’re dictator for the day and your one goal is to create the perfect universal basic income (UBI). Let’s suppose just for simplification that you’re a benevolent dictator (yes, they do exist) and that you want to solve as many social and economic problems as you can while attempting to minimize the negative unintended consequences such a policy shift might cause. How would you structure the UBI? What laws and taxes would you change to make it work? What would you do on your day of legislative omnipotence? Here’s what I would do:

Tax

We a want to maximize total income in the economy. It doesn’t matter too much about the income inequality we end up with because the UBI will smooth inequity out. So we can discard notions of tax fairness such as wealth taxes and instead structure things to maximize economic growth so that we have a nice big economic pie to redistribute in the form of a UBI.

Firstly, we need to radically simplify taxes. The modern phenomenon of having hundreds and sometimes thousands of different taxes and fees to comply with stifles economic freedom and does little to raise actual revenue over and above the paperwork and manpower needed to administer them. So scrap all import duties, fuel levies and any other time wasting taxes. We also want to scrap taxes which interfere with capital accumulation such as capital gains and inheritance tax. We only need 2 revenue streams for the state: one to pay for the UBI and one to pay for the rest of state expenditure. Since we don’t have to worry about correcting income inequality using specially designed taxes anymore, let’s keep them nice and simple. First, the tax that pays for general state expenditure: either a simple property tax or a sales tax. I prefer the property tax because it doesn’t require the state to monitor business activity. A tax on the size of the property rather than value is even better because then the state doesn’t have to dedicate resources to studying the property market. Next we need a tax to fund the UBI. Since the universal basic income is meant to partly correct income inequality, let’s implement a flat income tax on everyone in the workforce (both immigrant and citizen). Fear not comrades, a flat tax combined with a UBI is still a progressive tax (ie. the rich pay more as a share of their income than the poor). To illustrate why, consider this simple numerical example:

The monthly salaries of Al, Rachel and Vimesh are $100, $2000 and $10 000 respectively. The flat income tax rate is 15% which means they pay $15, $300 and $1500 in tax. The universal basic income is $200 per person. This means that after receiving their UBI payment, the net tax each person pays is actually -$175, $100 and $1300 respectively. The true tax rate after adjusting for the UBI is:

Al: -175/100 = -175%*

Rachel: 100/2000 = 5%

Vimesh: 1300/10 000 = 13%

*A negative income tax rate just means you’re getting more from the state than you put in.

Government Spending

So income tax is paying exclusively for the UBI and property tax is paying exclusively for all other functions of the state. Clearly existing state spending will have to fall. This can be phased in over 10 years to ease the adjustment process but essentially, we need to confine all state spending to whatever the property tax raises. To not drive an entire population into homelessness, it would be wise to not levy too large a property tax but rather to cut spending until it fits into the property revenue. No deficit spending. Great tomes can have been written on the perils of deficit spending so I’ll leave it to a future article to explain why. For now, lets just keep it simple and make the wildly unrealistic assumption that this government has to live within its means. Not all government spending is the same though. Some of it can be changed quickly (eg. military spending) while a great deal is tied up in future promises such as social security. Because the UBI has arrived to alleviate all social ills, we can scrap all other welfare payments and promises. No more medicare and medicaid, no social security and veterans benefits. If you’re from my country, no more child and disability grants. If you’re from Europe, no more unemployment payments. The entire welfare system has to be scrapped to make room for as generous a UBI as possible.

Existing Laws

Many paternalistic laws exist to protect the poor. I’ll leave it to the reader to investigate which of these actually help the poor but regardless of your understanding of economics, even the intent of these laws is made redundant by a UBI. At the top of the list of laws to repeal is the minimum wage. The stated intent of the law is to protect workers from exploitation and provide a minimum basic living standard. The UBI presumably goes a long way in achieving this. No matter how poorly paid a worker is, the wage will be in addition the UBI. By allowing employers and workers to negotiate their own wage agreements, the lowest skilled worker can get her foot in the employment door and accumulate vital job experience, rather than be forced to wallow at the edges of the economy for the rest of her adult life by a supposedly well intentioned minimum wage. Regulations on hiring and firing also need to be scrapped since a UBI base level will give even the poorest workers the ability to shop for employers who aren’t arbitrary in their management practices. The next thing I’d do is remove all barriers to immigration with one exception: only citizens can claim the UBI. Since immigrant workers are taxed at 15% but cannot claim the UBI, their income tax directly increases the UBI payments to citizens. Consider it compensation payment for the stated inconveniences of mass immigration such as cultural dilution, crowding and welfare window shopping, to name a few grievances.

The Actual UBI

The universal basic income will be calculated as follows:

the total revenue collected from income taxes divided by the adult population of resident citizens.

The amount will vary from year to year as the ratio of working adults to retired and unemployed adults fluctuates. It will also fluctuate with economic output. While a fixed UBI payment of say $1000 would be more desirable from an individual perspective for the purposes of planning, it is far less fiscally sustainable. To be safe, the state would have to make a guaranteed fixed amount only some fraction of the income tax received so that the the treasury has a buffer against recessions and other tax downturns. Rather set it at 100% of income tax and let it fluctuate.

Incentives maketh a nation

Ok so now that I’ve laid it all out, let me explain some of what it achieves:

1. Immigration: By preventing immigrants from claiming the UBI, the first concern of open borders (that immigrants will flood into the country to shop for state welfare) is eliminated. They might be enticed by the idea of a UBI but they will have to work for about 4 or 5 years before they can enjoy it. That means they have to make themselves economically useful in the meantime. For local residents, the fear of armies of low wage workers flooding the country can be turned on its head into greed. For every working immigrant, the UBI payment increases. In the extreme, citizens could live entirely off the labour of immigrants. This isn’t all horrible exploitation, mind you. For the immigrants, many are fleeing failed states and actively relish the chance to work without the need for visas and other encumbrances that used to doom them to poverty merely for being born in the wrong country. A well designed UBI is actually a practical way of returning to a world of open borders where everyone wins, even those who would ordinarily view immigrants as job stealers.
2. Unemployment: Another great fear of a universal basic income and one that I haven’t addressed until now is that most people will turn into lazy layabouts who wear dressing gowns during the day and only a small productive minority will continue to toil away, keeping the economy going. As people exit the labour force to live on the dole, the income tax receipts will decline which means the UBI payment will decline as well. At some point the UBI will be low enough to entice people back into the workforce. Yes, there will always be some people who would choose to subsist on the UBI alone but most people tend to prefer to reach for the good life. For many others, they might choose to work only half weeks and dedicate the other half to hobbies and private pursuits. Perhaps some will use this time to start businesses. But at any point if too many people begin to slack off, the UBI payment will fall until productivity picks up again.
3. Family Planning: A UBI can allow parents to cut back on work and focus on child rearing. Since the UBI is paid to adults only, the payments have to be spread amongst the entire household. Therefore at all times, fewer children is more affordable than more. While it doesn’t prevent poor family planning choices, the UBI doesn’t actively encourage people to breed beyond their means (as a google exercise, look up the rising phenomenon of low income single parent households in the US and how this is tied to perverse state welfare incentives).
4. Progress: Many on the left make the case that moving to freer markets sacrifices equality for the sake of efficiency. Libertarians would argue that the tradeoff doesn’t exist and that more equality of liberty promotes both efficiency and equality of income. A UBI provides an opportunity to pause this endless debate: the more efficient the economy, the bigger the UBI. In a way, the welfare state moves from being the enemy of the free market to being the bribe libertarians have to pay to keep the market free. The UBI is compensation to socialists for having to tolerate capitalism.

TL;DR

So to wrap up, a UBI might be a great political compromise but it has to satisfy 3 conditions to have a hope of working in the long run. If you’re an aspiring politician ignore these points at your own peril:

1. Fiscally sustainable. The UBI can’t be a fixed numerical amount. It has to be proportional to tax receipts. No compromises on this point.
2. Free markets. Many of the laws protecting the poor are made redundant by a floor on poverty. In addition, the more vibrant the economy, the larger the UBI. This shouldn’t be just another welfare payment.
3. Citizens only: Open immigration benefits host country citizens enormously by boosting productivity and growth while doing more to alleviate global poverty than any other policy measure but these effects are difficult to observe and link to immigration for the layperson. A UBI directly compensates host country citizens for tolerating immigration and in fact incentivizes them to accommodate and tolerate as many immigrants as they can. To use the economics lingo, it internalizes positive immigration externalities.

I’ve provided examples of how to satisfy these 3 criteria but my way isn’t the only way, of course. What matters is that policy makers heed these caveats because a UBI offers a very reachable opportunity for a much better, more humane economy than the version of state corporatism most of us live under currently. Let’s not screw this one up.