Opinion of Universal Basic Income

[DC Al Fine]

It's an interesting idea, but it has too many issues to be 'normal, sane etc'. I really like how unintrusive it is compared to traditional forms of aid but it has its problems.

The main issue is that that even a modest minimum income would be hugely expensive, and the clawbacks required to make it affordable would result in ridiculous marginal tax rates for the poor. Even in relatively high tax countries, such a system would be prohibitively expensive. Between that and the implementation issues involved, I think it should be limited to vulnerable populations like families with children, the elderly and disabled.

[DC Al Fine]

Seems like a grossly inefficient way to create a reasonable social safety net

Eh, the only thing more inefficient than giving poor people money is doing something else.

People say that, but it ignores the other side of the equation. Take a look at this graph



Suppose we want to limit aid to households making $20k per year. This would result in extremely steep implied tax rate for the poor, perhaps in excess of 60%. This is problematic both morally and from an incentives point of view.

In light of this knowledge, many governments opt for less aggressive clawbacks, but this results in ballooning costs and yes, inefficiencies as the government cuts cheques to households that don't need it. From the graph, you can see that a relatively small set of households are low income, but many, many more have moderate incomes. Every time one expands the range of aid, costs and inefficiencies increase dramatically.

To use a real life example, Canada has a modest minimum income for seniors. It costs about 16% of revenue to boost the incomes of a the wealthiest groups in the country. Expanding this to the whole population would be hugely expensive, to the point that it could crowd out things like universal healthcare and education. This is in a country that already has a good size VAT and top tax rates of 46-59%.

There are a lot of tradeoffs required to make even a modest minimum income work. I question whether its worthwhile to implement a universal basic income if universal healthcare could be in jeopardy. It would be better to focus aid on demographics like seniors and children who either cannot earn due to frailty or have no control over their family's income.

[DC Al Fine]

Freedom policy in conjunction with a comprehensive welfare state providing free access to other basic goods and services, and not as a substitute for all that.

Doesn't seem all that expensive to me either. Let's say we make it $1000 a month - that would be $12,000 a year. Based on DC's chart, that would cover about 10% of households (does this reweight income by household size, btw? Because it's a pretty meaningless chart otherwise).

Afraid not. I'm not an economist, so I'm limited to data I can get online for free. However, I did find some more detailed data on Wikipedia. It gives mean household size and income in each bracket on my chart. Average household side in very low incomes is about 1.9, increasing to about 2.5 in middle income brackets.

But you don't have to give $12,000 to each, just enough for them to get to $12,000. A majority of them seem like they already make more than half that much, so let's say on average we give around $5000 each. That's a total cost of around $60 billion, ie 1.5% of the federal budget. You can easily pay for it by scrapping one or two useless military programs.

I took a look at the more detailed data and your costing is surprisingly accurate even though some of the inputs are way off. Your cost is correct to within 10% Funny how things work.

There are two major costs not included in your calculation:

1) Poverty line in the lower 48 is about $12k for a single, $16k for a couple and $24k for a family with two kids. Your proposal would solve poverty for singles with no kids, and no one else. And even that is by the guidelines set out by the US government, which many progressives criticize as too strict. Most minimum income proposals are more generous. $18k for a couple is the one I've seen thrown around lately.

2) Your proposal has no payments to households making over $12k, which implies a 100% tax rate on the first $12k of employment income. That creates an outrageous set of incentives. A person could work part time, or even full time for a year and not be any better off for it. I've seen your income tax proposals, and even in your very left wing scheme, Warren Buffet would have a better tax regime than an unemployed single mother, if benefits weren't paid over $12k in income.

As I noted in a prior post, the outrageous cost of minimum incomes doesn't come from topping up the incomes of the destitute; it comes from making the clawbacks reasonable.  As you reduce the clawback rate, benefits are paid to the more numerous lower middle class, dramatically increasing the cost. To use a Canadian example, the three major benefits are clawed back at 7, 15, and 50 cents on the dollar respectively, and the 50% one is bitterly opposed by the NDP and some Liberals.

I made a basic model based on the data I linked and a pretty standard proposal of $18k and a 30% clawback rate cost well over half of discretionary spending, and that's at an upper middle class implied tax rate.

[DC Al Fine]

snip

Fair point. The thing is, I'm not really concerned with "perverse incentives" because, to be honest, I don't want to encourage people to work. I think people should work if they want to, but I don't subscribe to the visions of society wherein employment should be the ultimate goal of an individual. The current economic system makes it perfectly possible to guarantee everyone a comfortable existence even if a significant share of the workforce doesn't participate, provided sufficient redistribution.

Do I really need to explain to a progressive why regressive tax schemes are a bad idea?

There is no justice in taxing away 100% of the poor's income. It inhibits economic mobility, and creates a disincentive to move beyond the minimum income. If you want to create a permanent underclass, 100% clawback rates are a good start.

Still, if my estimate was too conservative, let's triple it: still less than 5% of the budget. It would require a few changes to pay for it, but would still be far from having a prohibitive cost.

Except your proposal was unworkable due to the clawback rates, and wouldn't have even eliminated poverty. Actual proposals ask for higher incomes and much, much lower clawback rates.

Also, the total budget is a poor basis to compare by. Discretionary spending is a much better basis. Mandatory spending either can't be cut by your specifications (healthcare, interest), or would increase the costs of the income program in a way we can't model (Social Security).

I ran some real life proposals that would eliminate poverty through my model and got anywhere from $370 billion to well over $1 trillion. That's between 33% of discretionary spending to over 100%.

[DC Al Fine]

I'll just say that calling it a "tax" in this context is highly disingenuous.

'Implied tax rate' then, if you want me to use proper accounting terms. I'm describing how many cents on the next dollar one gets to keep.

Terminology isn't really relevant to my point though. If you think the first dollar of income should have a lower net benefit than the millionth dollar, you should have your socialist card revoked.

[DC Al Fine]

I am yet to encounter a construction of UBI that does not either a) condemn some poor people to basically starve or b) bankrupts the budget in a way that is totally unsustainable to finance even with higher taxes. Most cases I've seen for it have seen confused to me.

From my understanding, it's contested, but there is no conclusive evidence that, when applied, UBI does lead to people choosing not to work. Some correlates have been noted with a reduction in number of hours worked, but largely among new mothers and teenagers; so you could argue that was a good thing

That's not the issue though. Women becoming stay at home moms and teenagers staying in school are small beer compared to the sheer cost of the system overall.

In order for a minimum income to work, it needs to be high enough to keep the poor comfortable, have reasonable clawbacks to maintain economic mobility, and be cheap enough that it can be reasonably achieved through taxation without crowding out the rest of government spending. The problem is that government can only choose two of those things in a universal system.

If the income floor is reasonable, and clawbacks modest, the cost will be high enough to crowd out everything else, even in a high tax country. If costs are controlled and clawbacks modest, then the poor are condemned to starve. If costs are controlled and the income floor is good, then clawbacks must be so high that they prevent the poor from ever moving out of poverty.

Given this paradox, I think it is more appropriate to limit UBI to vulnerable groups to keep the system effective and inexpensive.