When Is It Right To Implement Universal Basic Income?
In most developed countries in the world, the income and wealth disparity continues to widen. Many politicians, authors, and researchers have proposed myriads of different options such as increasing the minimum wage and investing in public education. While each idea has its respective merits, there is a recent surge for the implementation of a universal basic income (UBI), the concept where the government provides each person with a minimum monthly sum regardless of circumstances or need. The premise of a UBI is very attractive to many people; it addresses poverty and is an extra source of income, who would not wish for that? However, as the saying goes, “when something seems too good to be true, it often is.” How would each country procure enough funds to give to the entire populace on a consistent basis and is it truly an effective means of helping global poverty? The stance of many proponents lies in that it is a practical way of bridging income disparity, however, I argue that the execution of a UBI is ineffective in addressing this issue because there is no practical method to generate enough funds to implement a UBI without incurring severe repercussions on the economy.
A large array of countries across the world, underdeveloped and developed, have attempted to integrate a UBI but many ventures proved to be unsuccessful and short-lived. Many countries have funded smaller-scale UBI experiments by allocating government resources away from other avenues such as infrastructure; other countries were funded through private donors. Regardless of how these experiments were funded, the potential economic consequences of consistently upholding and expanding a UBI acted as a deterrent to shut down these experiments in many countries. For example. although the United States boasts the highest GDP and a relatively high GDP per capita, indicators of general economic growth, it still remains difficult to integrate a UBI in the face of such a large population. According to Milton Ezrati, chief economist for the NY-based communications firm, Vested, it would cost the federal government “between $2 and 4 trillion a year, amounting to a 50% increase in current federal outlays or more than 10% of last year’s GDP.” In other words, the integration of a UBI would cost an astronomical portion of the income that the United States generates per year. 10% of the GDP is a significant amount of money allocated towards a UBI and results in a higher taxpayer burden, increasing government debt, as well as attention away from other priorities such as infrastructure refurbishment. It should be no surprise that it is unfeasible for the government to implement a UBI with such economic consequences. The implications of these effects result in a general decrease in productive incentives that lower the productivity of the economy in both the private and public sectors. Even in the face of these issues, for the purposes of exploration, how would we gain enough money to fund a UBI for such a large nation?
Proponents who push for the implementation of a UBI in the United States say to create a wealth tax, or “tax the rich,” to fund the program. If a wealth tax was an adequate way of generating funds why has it been abandoned by so many countries that once tried to levy them? Senator Elizabeth Warren says that the wealth tax in Spain from 2000 to 2012 caused “the exodus of 42,000 millionaires along with many other issues.” This is not something seen in just France, many other countries that have once adopted a wealth tax have abandoned it. Wealth taxes are not an effective way to raise revenue, mainly due to the implications on the behavior of the upper class.
All taxes alter people’s behavior, and the distortions they create can be harmful as the capital does not go toward its more productive uses; and distorting the returns from risk often yields unintended consequences. Wealth taxes are considered to introduce more distortions than any others and even at low rates, they discourage saving and investment because they lower the return on these activities. Think about a 2% tax on the rich, it does not sound that large right? Senator Elizabeth Warren points out that it is only 2 cents on every dollar of wealth. But since it will be levied each year, it is comparable to a tax on capital income. So 2% has the capacity to be enormous. For example, “if your assets return 4%, a 2% wealth tax is equivalent to a 50% tax on capital income!”(Warren). Therefore, it is not surprising that wealth taxes increase the incentive to move assets abroad, as many European countries have experienced during the European Debt Crisis. And when this happens, the economy of that particular country that levies a wealth tax, will be affected negatively, as there will be a lower amount of businesses occupying that country that generate cash flow.
An annual tax would create more distortions that could even worsen inequality as quantifying wealth is extremely difficult. A wealth tax creates an incentive to keep companies private and not sell shares on the stock market, because that makes wealth easier to underreport, which lowers the tax burden. There are numerous examples of private wealth being unreliable and difficult to value. One example was the publicity around the report that Kylie Jenner, a reality show and makeup mogul, was a billionaire and appeared on the Forbes list. Later it was revealed that she was indeed very wealthy but not a billionaire. Her case demonstrates how easy it is to manipulate the quantification of wealth when a company’s shares are not sold on the open market. A wealth tax creates an incentive for entrepreneurs not to take their companies public and in turn means that the American public cannot share in the growth of the most productive firms, reducing wealth creation within the broader economy. The phrase, “tax the rich” has become very popular, hence, it may seem at first glance that we should redistribute wealth among all citizens by taking more from the elite; however, it has underlying effects and practicality issues that make it very difficult to do so. Cumulatively, all of these issues of a wealth tax relate back to how the stance of proponents using a wealth tax to fund a UBI is inefficient.
Some may bring up current, successful UBI ventures such as Iran and question the reasoning as to how an underdeveloped, relatively large country is able to fund a UBI, but the United States, which boasts the highest GDP is unable to do so. This is because the circumstance of Iran is especially unique and its model cannot be extrapolated onto other countries to implement a UBI. Iran is a major producer and exporter of oil. The oil sector is nationalized and the entire proceeds from exports and domestic sales go to the government. For decades Iranians have benefited from this natural wealth in two main ways: public expenditures by the government, and implicit subsidies on fuel products whose domestic prices were kept extremely low. Low fuel prices bred a culture of excessive consumption, inefficient production, waste, pollution, smuggling to neighboring countries, as well as inequality as the bulk of the subsidies went to the better-off sections of the population who consumed more. The solution of the government was the replacement of price subsidies by a cash subsidy program. This was accomplished on an extremely large scope that has placed Iran in the forefront of all countries in advancing towards a nationwide basic income. The fact that this development has taken place first in a developing, Middle Eastern, Islamic state, rather than in a developed European country, as widely presumed, underlines the relevance of the basic income concept for a broad range of countries. In view of the great diversity across countries, issues concerning the relationship of basic income with the stage of development and cultural differences deserve detailed study, in particular the extent to which arguing for basic income may have to contend with the variety of prevailing conditions and circumstances. Thus, as I mentioned earlier, the extrapolation of the Iran model in terms of developing a UBI cannot be projected onto another country. It is in large part the combined availability of domestic fuel resources, distorted pricing policy, and political circumstances that made it possible for basic income to emerge as part of the solution.
With growing inequality gaps across the world, it is becoming ever more important to combat this issue. While I can see how a UBI would be effective in theory, it is extremely difficult to apply this in reality with exception of special circumstances like in Iran. We should first look at other avenues to bridge the disparity between the rich and poor before the integration of a UB such as increasing the minimum wage or the creation of more jobs. Other means include funding education to allow more people to gain skills that acquire them higher-paying jobs. There is a direct correlation between the level of education and the generation of income and wealth. Overall, allocating resources to pursue these other avenues to solve wealth inequality and poverty is more practical than using it to create a wealth tax.
