The Real Cost of Universal Basic Income

This post assumes you’re at least passingly familiar with Universal Basic Income and how it solves the welfare trap (and other unintended consequences) plaguing our current welfare system. (If you’re not, go read up, get convinced it has merit, and come back!) Instead it’s about the real-world financial costs of UBI, and why it’s not just a libertarian pipe-dream but a financially and political practical improvement over our current welfare system.

When I discuss UBI people’s #1 concern is “yeah, but how much is it going to cost?” UBI is dead politically if it’s another giant social program spend. I personally believe it will usher in a new era of economic growth, but those promises have come before without meaningful results. To convince the American public these days, I believe that’s a losing argument. Rather, let’s explore a “worst case” scenario that none of the social benefits come to pass, and show a version of UBI that won’t cost a penny. Worst case it’s revenue neutral.

And not just revenue neutral for the government. To make UBI a political success, it needs to be revenue neutral for everyone. We need to be able to honestly say “no taxpayer will see an even $1 tax increase”.

In 2015 the United States spent over $469 billion in social welfare programs labeled “Other Welfare” (meaning other than Social Security, Medicare and Medicaid). We’re eliminating this welfare, so this is how much we have to spend. So… Can we create a meaningful UBI with (only)$469 billion that doesn’t raise a single person’s taxes?

I’ve argued many times “yeah, probably”. But I’ve never run hard numbers, nor have a seen anyone else. So I sat down with LibreOffice, downloaded some data and tried to figure out how much UBI we can afford under these criteria, and would it be a financially meaningful number? It turns out… yes, we can! (Heh, sorry, had to…)

The magic number: $4,632 per year, per person.

So every adult under the age of 65, working or not working, would get an instant annual benefit of $4,632 annually, or $386/month, tax free.

If you work, that is taxed as it normally is, plus a new “UBI Tax”. This UBI tax is special in that it is capped at the UBI benefit. So if you’re rich, you get nothing and are taxed nothing, because your benefit equals your tax. But if you’re poor, you’re always incentive to work, because your benefits fall off gradually (instead of the moment you get any job). The rate is 9% (capped at $4632/year).

If we do this, NO ONE gets a tax increase. And the government saves $103 million every year. Want proof? Here’s the data:

The Real Cost of Universal Basic Income
A breakdown of the real-world costs and benefits of UBI, by income brackets of $2,500.
Summary:
UBI Benefit (per Person):           $4,632
UBI Tax Rate: 9.00% of earned income
capped at $4,632/year.
UBI Cost (Total): $469,196,607,000
Current Welfare Cost(*): $469,300,000,000
Net Taxpayer Cost: -$103,393,000
People Benefiting (K): 158,951
(*) This does NOT include SS, Medicare or Medicaid.

The benefit and rate numbers are adjustable of course. I encourage you to do so in the spreadsheet to see the resulting costs. A lower rate costs more and spreads out the benefit over a larger group of people. But no matter the rate, it’s capped at the benefit level. I chose 9% because it means benefits are effectively gone by the time you’ve hit $50k/year in non-UBI income, which seems fair to me. And $772/month for a two-person household seems, while obviously not a luxury life, at least sustainable. And those two people are not hampered with economic reality that work no longer comes with a potentially >100% tax. (If your job pays less than your current welfare benefits.)

TODO: Could this work per state? Could (for instance) NH pull this off internally with block grants to prove the concept?

FAQ

Q: I don’t agree with UBI because [reason].
A: The goal of this wasn’t to convince you of the social utility of UBI. (There is plenty of that around.) The goal is after you’ve been convinced on the principles of UBI, to convince you of the financial and political viability. (Which I’ve found none of, and is the harder of the two arguments, from my experience.)

Q: If you’re going to cut [Social Security, Medicare, Medicaid] to do this, it’ll be political suicide, or why don’t you use that money for [other thing] instead?
A: This does not cut or use money from Social Security, Medicare or Medicaid. Each of those needs reform IMO, but they’re not part of this proposal and are left as-is.

Q: Why starting at 18? Why not give money to children too?
A: I’m sympathetic to it, and I think it’s an idea worth exploring, but I see several potential pitfalls, and I wanted to keep this simple and on-message. (That UBI isn’t some libertarian pipe-dream.)

Q: $386/m (or $772/m for a joint household) isn’t enough.
A: I couldn’t find good nationwide info on how much people typically got on welfare, so I didn’t try to compare. But anecdotally I saw typical numbers of around $400/m in benefits, with a max of $900/m (max required 4 kids). So it’s at least in the ballpark of what people are currently getting. Besides, the point isn’t to have a comfortably livable wage. The point is the have a wage that can marginally sustain you but not take away your incentive to work. (Nor incentivise you not to work, as our current welfare system does.)

Q: UBI isn’t a libertarian idea, why are you referring to it as such?
A: Yes it is.