The case for a basic income guarantee
America’s welfare state is broken. A basic income guarantee could fix it.
Imagine you’re a single mother with one child, making around $10,000 per year. It’s just barely enough to get by — that is, if you’re willing to eat nothing but beans the last week of every month. Even then, something as simple as a flat tire can threaten your ability to keep the electricity on, because fixing means spending$100 you don’t have, and you need the car to get to work.
For people who’ve never been in that situation, the solution might seem obvious: work longer hours, or try to find a better-paying job. But will it be worth it? Not necessarily.
If you look just at federal income and payroll taxes, it might look like a single mother in the situation I’ve described should be able to keep over 90% of whatever additional money she earns. Someone making that little usually won’t have to pay any income tax, and will only pay 7.65% in payroll taxes. (Payroll taxes are what pay for Social Security and Medicare.)
But there’s a problem. A single mother making $10,000 per year is likely receiving a number of government benefits, such as SNAP. (SNAP is what used to be known as food stamps.) These benefits are usually means-tested, and phased out gradually. That means the more a person earns, the less they receive in benefits.
Phase-outs are, in effect, a type of hidden tax. In fact, economists regularly talk about the “effective tax rate” that phase-outs impose. SNAP benefits, for example, are reduced by 30 cents for every dollar in income, so receiving SNAP benefits adds 30% to a person’s effective tax rate.
Because of this, it’s quite easy for a part-time worker who earns an additional $10 by working an extra hour to end up keeping only $4 of that money. And a worker just above the poverty line can end up keeping as little as 50 cents out of every $10 of additional income.
Also, notice that when talking about tax rates, there are two different things we might want to know:
- How much of what you earn goes to taxes?
- If your income goes up, how much of that extra money will go to taxes?
Economists call the second question your marginal tax rate. A single mother working part time might pay a very low overall tax rate, but face very high effective marginal tax rate. And the effective marginal tax rate is what matters if she’s deciding whether to take on more hours. If her effective marginal tax rate is 95%, and she’d need to find someone else to take care of her children for those additional hours, it probably won’t be worth it.
When people see no reason to work harder, or try to move to a better-paying job, they wind up trapped in poverty. Here’s another example: imagine you’re disabled and receiving Social Security Disability Insurance (SSDI). Then, one day a friend tells you he thinks he can get you a job where your disability won’t matter. Unfortunately, the job only pays slightly better than SSDI, and you’ll lose your entire SSDI benefit if you take it. Doesn’t seem like a good deal, does it?
There’s another way America’s welfare state is broken: being poor means politicians will try to micromanage your life. My favorite example of this problem is this: it’s legal to use SNAP benefits to buy rice. But it’s illegal to use them to buy a rice cooker. To see how bad this problem is, let’s talk a little more about how the SNAP program works.
SNAP is designed to guarantee every American the ability to eat a balanced diet. The USDA estimates the minimum cost of a balanced diet at around $5–6 per person per day. So that’s what the maximum SNAP benefit is. (It varies based on family size. But “$5–6 per person per day” is close enough for our purposes.)
If you’ve ever been a broke college student, you probably know that you can eat for less than five or six dollars a day. At least, you can if you’re not so worried about nutrition. A day’s worth of ramen noodles is $2 or so. For many people on SNAP, veggies are not their first priority. Avoiding eviction, keeping the electricity on, and getting their car fixed so that they can keep going to work and not get fired can all take priority.
So if you’re on SNAP and you’re suddenly $40 short for anything but food, you might end up finding a store clerk willing to break the law, charge your benefits card for $100 of food you aren’t buying and get $40 in cash in return. The government considers this fraud, and it’s an outrage. But the outrage is not what people receiving SNAP are doing, nor even that the store clerks are ripping them off. It’s that the government designed the program so badly in the first place.
Politicians like to say they support helping the poor, but only the deserving, and only for things they really need. Whatever you think of that in theory, in practice, the government is bad at telling who’s deserving. It’s also bad at telling what people really need. All that happens is that we make the lives of the people we’re trying to help worse, with nothing to show for it.
So the problem is twofold: our welfare state traps people in poverty, and then micromanages their lives. These problems are related — if Congress passes a law saying that a particular program will only go to people who really need it, people will end up feeling punished when they work their way to a place where they don’t need it.
What should we do instead? One approach that would solve both of the problems I just described is a basic income guarantee. Basic income is the policy of guaranteeing everyone a minimum income, with no strings attached. To many, this sounds like an impossible dream. But here I’m going to sketch out a specific proposal that could:
- Guarantee that no American married couples and no American seniors live in poverty.
- Make it easy for younger, single Americans to avoid poverty through work.
- Guarantee low taxes for non-citizen workers.
- Cut taxes for most middle-class workers.
- Do all this without adding to the deficit.
Here’s how it would work: expand Social Security so that every American gets either their current benefit or a new minimum benefit. “Current benefit” here means not just Social Security’s old-age insurance program, but also the disability insurance program and the survivor’s benefit. (These programs are collectively known as OASDI.)
The minimum benefit would be linked to inflation, and would increase with age. In order to meet the goal of eliminating poverty for all married couples and seniors, here’s what the benefit levels would have looked like in 2016:
- $4,140 per year for people below the age of 18
- $8,010 per year for people aged 18 to 64
- $11,880 per year for people aged 65 or older
In the interest of fairness to seniors who continue to work after 65, or who receive benefits like food stamps, we might want a higher minimum benefit for people 65 and older—which would probably not increase the cost of the program very much, as I’ll explain below.
So that most people don’t have to keep track of two paychecks, workers would get their benefit added to their paycheck, first as a tax credit, then as a wage subsidy. Non-citizens subject to U.S. federal taxes would instead receive a non-refundable tax credit equal to the lesser of the benefit for citizens or 80% of their federal income tax burden.
This policy could replace much of the current over-complicated mess of policies America uses to try to fight poverty and help families with children. In particular, it would replace SNAP (food stamps), the standard deduction, the personal exemption, the child tax credit, and the earned income tax credit.
A key difference between a basic income and many of these existing programs is that how much or little money you’re making has no effect on what you receive from the basic income program. That means you are never punished for working more or getting promoted. Critics of basic income often claim it will “take people out of the workforce”, but the truth is that it’s our current anti-poverty programs that take people out of the workforce by punishing hard work.
All this could be paid for mainly by replacing all federal personal income taxes and employee-side payroll taxes with a 33% flat tax. Additional funding could come from a carbon tax and corporate tax reform. A 33% flat tax might look high — but appearances can be deceiving. For most people, the tax increase would be more than offset by the basic income. Furthermore, in terms of marginal effective tax rate, which determines people’s incentives to work, 33% is about what most people face, if they’re lucky. A typical middle-class family, for example, might have a 25% marginal income tax rate, plus an additional 7.65% in payroll taxes.
In fact, under this proposal, individuals making up to $80,000 per year would get a tax cut. A married couple with no children could make up to $160,000 per year and get a tax cut. Families with children would need even higher incomes before their taxes would go up under this plan. Even for relatively affluent families, in most cases the tax increase would be small. Because of the non-refundable tax credit described above, low-income non-citizens would effectively pay a 6.6% tax rate.
The main people who would end up paying more are rich people whose income is mostly investment income. Right now, investment income is taxed at a much lower rate than earned income. The above plan would change that. As a side-effect, hedge fund managers and other top corporate executives would no longer be able to avoid taxes by claiming their compensation packages as “investment income” (something current tax law makes much too easy).
That might seem too easy, but I was actually being pessimistic when I suggested the basic income guarantee I’ve sketched might require a 33% flat tax. A lower rate of say, 30%—or maybe even lower—might be enough.
When Congress is debating any budget proposal, it’s traditional for the Congressional Budget Office to produce a rigorous estimate of how the proposal will affect the budget over 10 years. (The CBO is a federal agency tasked with giving Congress nonpartisan analysis of budget and economic issues.) While I’m currently running for US Senate, I don’t yet have a staff of government number-crunchers working for me. Nor do I have access to detailed data on existing government tax and spending.
So I’m going to have to settle for something much simpler: if Congress had passed the proposal above in 2015, would it add to the deficit in 2016? It appears the answer is “no”. The calculations below require some simplifying assumptions, but I’ve tried to always make the least-convenient simplifying assumption from the point of view of arguing a basic income is affordable.
The cost of increasing the minimum Social Security benefit for seniors is small, relative to the increase for people under the age of 65. The CBO has estimated the cost of a more generous proposal than what I described above—$14,640 per recipient per year in 2016—at around 0.2% of GDP per year. Let’s say the cost is $37 billion in 2016.
If no one under the age of 65 received OASDI, then calculating the cost of the new benefits would be a simple matter of multiplying the number of minors in America by $4,140, and multiplying the number of adults by $8,010. America has 324 million people, plus perhaps 8 million living abroad and the most recent estimates indicate 22.9% are minors and 62.2% are adults below 65. So the cost is:
332 million * (22.9% * $4,140 + 62.2% * $8,010) ~= $1968 billion in 2016
I’ve ignored the fact that not everyone living in the US is a citizen, and not all guest workers make enough to qualify for the full benefit. But this simplification works against me, so I won’t worry about it.
I haven’t currently been able to find up-to-date data on survivor’s benefits paid out by OASDI, so I’ll ignore it. As for disability, we’ll assume 7 million people receive disability benefits in excess of $8,010 per year. That will make the proposal about $56 billion cheaper in 2016.
SNAP benefit payouts have been declining as the economy has recovered from the Great Recession. In 2016, total spending on SNAP was a little over $70 billion.
So my current best-guess estimate for the one-year cost of the program in 2016 is $1879 billion. This is probably a slight over-estimate, but only slightly.
Figuring out how to fund the program is complicated by the fact that the current US tax code is very complicated. We’ll start with a very simple model, and then talk about how to account for complications.
Annualized, second-quarter personal income in the US was $15,893.2 billion. Factor out the effect of transfer programs (which we’re overhauling), and that’s $13,930.9 billion.
Estimated federal receipts for 2016 include $1.46 trillion in income taxes and $986 billion in payroll taxes. Half of payroll taxes are paid by employees, so that’s $493 billion in employee-side payroll taxes, or $1953 billion in revenue that we want to replace. Add that to the cost of the new benefits, and we have $3,832 billion the flat tax will need to raise.
So perhaps surprisingly, we only need about a 27.5% flat tax to fund the basic income described, while making the plan deficit-neutral.
But this is only if we get rid of all the credits and deductions in the tax code. There’s one deduction that I do think is a good idea: tax deferred savings accounts like IRAs. I’ve assumed we’re eliminating the distinction between how we tax investment income, and how we tax personal income. Currently, investment income is taxed at a lower rate, which is often justified as a way of incentivizing savings and investment. To compensate, let’s expand tax deferred savings accounts so that all savings are tax deferred. (This is arguably overkill, but I’m trying to make the least-convenient simplifying assumption.) The American savings rate is around 5.7%, so we’re shrinking our tax base to $13,136.8 billion.
The tax code also includes a subsidy for child care. I think this is a good idea. People should be able to be stay at home parents if they want to be, but they also shouldn’t be deterred from pursuing careers by the cost of child care. Let’s assume that under this plan, we’ll subsidize child care to the tune of $50 billion per year.
With these assumptions, our flat tax now needs to be around 29.5%. Even this, though, assumes we’re going to eliminate a number of deductions that, while they make little policy sense, might be politically difficult to get rid of. To be on the safe side, I’ve suggested a flat tax of 33%, based on the assumption that we won’t be able to totally eliminate all popular deductions. But even with a 33% tax rate, most Americans would be winners under this plan.
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1. I say “mother” because I’m going to describe a problem that disproportionately affects women. However, many men find themselves in the same situation. See: https://nwlc.org/resources/nwlc-analysis-2014-census-poverty-data/
3. What this will mean depends on your disability. Maybe you never went to college, threw out your back working a blue-collar job, and this is your first opportunity for a sit-down job. Or maybe you have a chronic illness that makes you unable to work one or two days per month, but your friend tells you his boss won’t care.
4. The policy of taxing investment income at a lower rate than earned income is sometimes defended on the grounds of encouraging savings and investment. There’s nothing wrong with trying to encourage investment, but our current approach makes gaming the tax code much too easy. A better approach would be to expand IRA-type savings vehicles.