Pretty much all current public programs to assist households with low incomes suffer from the same seemingly unavoidable problem: As the household\’s income rises, the amount of assistance provided by the public program is phased out. For example, a person who earns an extra $100 might find that eligibility for public assistance has been reduced by $50. Economists call this reduction in benefits as income rises a \”negative income tax,\” and it is not unusual for studies to find that certain working poor families face negative income tax rates in the range of 50% of the marginal dollar earned, 60%, or even higher (for examples, see here and here). These high negative income tax rates diminish work incentives for those with low incomes.
There\’s a way out called \”universal basic income.\” Ed Dolan explores \”The Pragmatic Case for a Universal Basic Income\” in the Third Quarter 2014 issue of the Milken Institute Review (free registration may be required for access).
The idea of a universal basic income is that every U.S. citizen would be entitled to a chunk of money each year. This amount would not vary based on income level, or employment, or disability, or age, or any other reason. Specifically, when a low-income person works and earns income, the universal basic income check would not be reduced in any way. The \”negative income tax\” rate is zero percent.
The idea of a universal basic income raises obvious questions. How much would it be per person? How would it be financed? Are the politics of such a program conceivable? Let\’s tackle these in turn.
How much? Dolan suggests that we aim at having a universal basic income that reaches the poverty line. The current poverty line for a family of three is roughly $18,000. Thus, in round number terms, the goal might be to have a universal basic income of $6,000 per person, perhaps paid every other week. (One can easily imagine having a number that is a little higher for adults and a little lower for children, or keeping some of the money for children in trust and giving it to them over the first decade or so of adulthood, but let\’s not make this example too fancy.)
How would this amount be financed? The starting point is that this program would replace programs currently aimed at those with low incomes: for example, it would replace welfare, Food Stamps, the Earned Income Tax Credit and the Child Credit. For the sake of this thought experiment, Dolan suggests not including public policies that help low-income families with education or health (like Medicaid). The other programs for supporting low-income Americans spend roughly $500 billion.
But remember, the universal basic income goes to everyone, not just those with low incomes. Thus, Dolan suggests that a second source of revenue would be to eliminate a number of tax deductions and deferrals, including the mortgage-interest deduction, the deferral of income taxes on retirement, and the deduction of charitable contributions. He also proposed eliminating the personal exemption. (In keeping his argument separate from health care financing issues, Dolan does not propose touching the tax exemption for compensation paid in the form of employer-provided health insurance.) These changes would raise about $1.2 trillion. Most middle-income and upper-middle income families, who either do not itemize deductions at all or don\’t have that many deductions to itemize, would come out ahead with $6,000 per person rather than using these tax provisions, although those at the highest income levels who make substantial use of these provisions would end up paying more.
Finally, Dolan suggests that Social Security recipients can have a choice: they can either receive the Social Security payments they are already entitled to by law, or they could instead receive the universal basic income. Those receiving the lowest Social Security payments now would benefit from this choice, and the rest of the elderly would be unaffected by the plan.
Taking these steps together, Dolan estimates that the U.S. could fund a universal basic income of $5,800 per person. In addition, consider some of the side benefits. Work incentives for those with low incomes would be greatly improved. The need for government to set up and enforce complicated eligibility rules for those with low incomes would be eliminated. The tax code could be greatly simplified, and many more people could file very simple tax returns. At the most basic level, everyone in the United States would be guaranteed an amount close to the poverty level of income.
What about the politics of a universal basic income? It\’s no surprise that many who lean liberal like the idea of guaranteeing a basic income. However, the idea has a reasonable number of conservative and libertarian supporters, who like the idea of a program that addresses the basic concern over helping those with low incomes, but in a clean, clear way that involves much less interference of eligibility rules and phase-ins and phase-outs in people\’s lives. Dolan claims that there are lively debates over a universal basic income happening behind the scenes between those with very different political persuasions.
The idea of a universal basic income is appealing to me in theory, but I have a hard time believing that once enacted, the U.S. political process would be willing or able to leave it alone. One one side, those who favor higher tax rates for those with high incomes would immediate start trying to figure out ways to claw back payments to those with high incomes. On another side, there would be continual pressures to reinstate programs like Food Stamps, or targeted welfare payments for certain types of families, or favored tax provisions for home-buying or charitable contributions or retirement. There would be continual political pressure to alter the amount of a universal basic income, as well. The U.S. political system does not excel at replacing complexity with simplicity, and then leaving well enough alone.