Costs and Consequences of Different Redistribution Schemes
National Universal Basic Income has been touted by rich entrepreneurs and technology enthusiasts, as well as one of the underdog candidates for the 2020 presidential election. The proposal has been studied for years, but it has been almost always been represented in one fallible way; $1,000 a month for any working-age adult. There are some potential issues with this system, and this article will discuss them and provide a few solutions.
The original system is as follows: any individual aged 18 to 64 receives $1,000 a month, with no other eligibility requirements. This will cost roughly $2.5 trillion in fiscal year 2022, providing at least 205 million Americans with $12,000 a year in supplemental income. According to presidential candidate Andrew Yang, an individual would have a choice between the ‘Freedom Dividend’ or their existing welfare benefits, presumably choosing the larger of the two, which will be the basic income for the vast majority of Americans.
I would argue that millions of teenagers are going to find it more enticing to rake in N.E.E.T. bucks, paying their parents minor rents so that they may stick around and live a comfortable life without any hint of labor. The economy can only work through cooperation, and providing people a living unconditionally could be very damaging to economic cooperation, as millions choose to live off their fellow citizen’s labor and expertise.
Whether this will be the case is unknown. It is also unclear as to how increasing national consumption expenditures will affect prices. It is possible that there will be temporarily heightened inflation, although likely accompanied by real GDP growth. There could, on the other hand, be a drop off in productivity and hours worked. I have a couple solutions.
We could implement a phase-in for UBI benefits, with the benefit increasing anywhere from a few cents to a dollar for every dollar earned independently. For example, a maximum $12,000 supplemental income phasing in 33¢ for every dollar earned would cost significantly less, with a cost in fiscal year 2022 hanging at $1.6 trillion, as opposed to $2.5 trillion for Yang’s UBI.
This would not just eliminate the incentive to not work, but would bolster the incentive to work, by increasing benefits with income. Here is a chart of how benefits would phase in with income:
The cost in fiscal year 2022 would be $1.60 trillion with a 0.33 phasein rate, $1.78 trillion with a 0.5 phasein rate, and $1.93 trillion with a 1.0 phasein rate. Like all economic policy, UBI’s affect should be measured empirically. I would reason that higher the phasein rate must be high enough for it to increase aggregate demand and significantly reduce current public assistance expenditures, but not so high that people choose to work less or work in low-paying fields.
For my cost figures, I use the Open Source Policy Center’s TaxBrain simulator, which uses fiscal models and tax data to estimate the impact of customized tax reform, including the modification of tax credits, deductions, brackets, rates, exemptions, and more.
Ultimately, the goal of this redistribution program is to distort the economy in a way that creates full employment, leads to productivity growth, and helps the financially and materially desperate achieve relative self-sustenance.
None of these systems will be perfect. If we introduce a phasein system, many millions of people will receive greater assistance from traditional welfare programs, defeating the fiscal advantages of a universal basic income. Realistically, it may be best to lower the basic income, cut business taxes, and make federalized investments in transportation, energy, and infrastructure. Perhaps we could phaseout UBI benefits very slowly as income grows to save money without damaging positive incentives or punishing the middle class.
I have no doubt that I will come back to examine and propose ways of implementing a national income, but I certainly argue that at this point in time, it is by no-means a necessity. Labor participation is where it was in 1977, when personal computers didn’t exist and neither did advanced robotics, artificial intelligence, or self driving cars. The unemployment rate sits in the same place today as it was when men walked the moon for the first time, nearly a half-century ago.
I dearly hope that you have been blessed with some insight or differing perspective on universal basic income, and I look forward to writing on the topic in the coming months of the contentious 2020 presidential campaign season.
Authors Note: The cost estimates may be off thanks to the TaxBrain simulator not providing a simultaneous option both an age requirement and the credit being individual based as opposed to filer-based. The last issue is that TaxBrain is likely counting Social Security as regular income, giving the credit to people receiving Social Security. In real life, the cost would be even lower thanks to a smaller pool of eligible beneficiaries.