Economy / Labor Force / Social Insurance Programs / U.S. Domestic Policy

Understanding Universal Basic Income

Introduction

In December 2018, Finland’s Social Insurance Institution, KELA, terminated their two-year Universal Basic Income (UBI) experiment that aimed to “increase employment and simplify the Social Security system” citing insignificant changes in the employment rate of participants. Despite this outcome, prominent U.S. figures–such as Elon Musk and Mark Zuckerberg– and the California Democratic Party still advocate for UBIs. One proponent, Andrew Yang, is even seeking a 2020 Democratic nomination on the platform that every American aged 18 to 64 should receive a monthly check for $1,000.

Although the issue is still far from the national stage (it is mainly garnering attention in California), policymakers should not consider UBIs as a means to increase employment and simplify the welfare system. Canonical UBI proposals are relatively expensive and inefficiently target low-income demographics.

UBI Expenses

A $1,000-per-month-per-citizen program would cost the United States’ taxpayers approximately three trillion dollars, which is about 75 percent of our current government expenditures, annually.[1] Researchers commonly look towards the elimination of other welfare programs to make up for this cost: Ensor et al. calculate that eliminating all welfare programs would free up $3.21 trillion, enough to award a UBI of $13,788 for individuals 18 or older and $6,894 for individuals under 18. Another approach is to preserve only Social Security, Medicare, and Medicaid (the three largest welfare programs in the United states), yet the elimination of other welfare programs would only cover about one-fifth of the total cost of a three trillion dollar UBI. Federal tax revenues would need to be doubled to cover the rest.[2]

Inefficient Targeting

Even if the tax system were altered to allow for UBI expenses, the program does little to eradicate poverty and rather it decreases necessary welfare for elderly and disabled households.

For example, the average household with an elderly member (over 65) currently receives $17,400 in Social Security benefits and $12,900[3] in health care benefits (Medicaid and Medicare) annually; if these programs were eliminated for an annual UBI of $12,000, the average senior household would lose more than a third of his or her transfer income (Hoynes and Rothstein, 2017). This finding is echoed by Ensor et al.’s AEI report that concludes that a UBI in the United States would decrease income by $6,956[4] for those in the lowest wage bracket, those who need it the most.[5] According to AEI’s calculations (see graph below), while the lowest income bracket loses nearly $7,000, the second, third, and fourth highest income brackets receive $1,514, $8,831, and $9,376 (respectively) in combined UBI, tax reform, and benefits repeal. If the goal is truly to lift up those in poverty, the program is ineffectively doing so while higher income brackets gain benefits. Granted, it should be noted that the highest income bracket is losing $120,951 in combined UBI, tax reform, and benefit repeals to pay for these programs.

[6]

International research also concludes that UBIs would be detrimental to impoverished populations: a 2017 OECD report found that if a UBI were introduced in European countries, poverty rates would actually rise in countries such as Finland, France, and Italy; the UK is the only country where the improved benefit coverage would bring low-income individuals closer to the poverty line, but it would not necessarily reduce the headcount measure level of poverty.[7]

Impacts on the Labor Market

The most effective welfare programs encourage individuals to enter or remain in the labor market; for example, the Earned Income Tax Credit (EITC) is a refundable tax credit for low- to moderate-income workers and the benefit depends on income level and number of children. Families and individuals cannot receive EITC benefits if they are unemployed. As UBIs are “universal” in nature and have no work requirements, however, they do little to change employment rates: The limited data that exists show no significant employment changes when UBIs are implemented. Neither Finland’s Kela System nor the Alaskan Permanent Fund[8] saw significant increases on employment after their respective UBI and dividend implementations. However, the Alaskan Permanent Fund did see a 1.8 percentage point increase in part-time labor.[9] Further research must be completed to understand the full employment impacts.

Alternate Proposed Solution: Negative Income Tax

Instead of eliminating our current welfare programs, many experts suggest the implementation of a Negative Income Tax (NIT), a tax that Milton Friedman believed would bring the poor out of poverty. A NIT is a refundable tax credit that brings every American up to the federal poverty level. As the University of Michigan explains, a family with no income would receive 100 percent of the federal poverty level at $20,780; a family that received half of the federal poverty level would receive $15,585 in tax credits; and a family that received twice the federal poverty level in income would receive no NIT benefits. This would cost the United States $219 billion, which would again be affordable if other welfare programs were cut.[10]

Alternate Proposed Solution: EITC Benefits

A recent report from the National Academies of Science, Engineering, and Medicine (NASEM), however, suggests several sustainable options to reduce childhood poverty, one of which is to raise EITC benefits and decrease issues surrounding over or incorrect payments. Recent research has favored the augmentation of EITC benefits as a means to increase incomes for low-income working families. Hardy et al. found that DC’s 2001 to 2009 EITC credit expansions led to recipient pre-tax earnings of approximately three to four percent, specifically among single mothers; overall, EITC expansion has positive effects on labor market outcomes and household well-being. Specifically in the Great Recession, EITC benefits helped to foster LFPR and decrease poverty for single-parent households (while the change to married households was statistically insignificant). As a result of increased earnings from EITC, the inequality gap of after-tax earnings is reduced for lower quartile families. Hardy et al. finds that in 2002, the EITC reduced the ratio of after-tax earnings between median and 10th percentile households by 15 percent; in 2013, the reduction was about 13 percent. Additionally, for 50th and 25th percentile households, the ratio reduction was approximately 6 percent for both 2002 and 2013.[11] Unfortunately, according to the Center on Budget and Policy Priorities, about 20 percent of households eligible for EITC do not claim their benefits, so increasing participation is also important for these at-risk groups. Not only would raising EITC benefits help families, but it would also help the nation. According to the NASEM, the 9.6 million U.S. children that live in impoverished families cost the nation between $800 billion and $1.1 trillion annually in lost productivity, increased costs of crime, and increased health expenditures.[12]


[1] Hoynes, Hilary, and Jesse Rothstein. “Universal Basic Income in the US and Advanced Countries.” NBER, 7 Feb. 2019. www.nber.org/papers/w25538.

[2]Ibid.

[3] Actuarial value

[4]Ensor, William, et al. “A Budget-Neutral Universal Basic Income.” AEI, May 2017, http://www.aei.org/wp-content/uploads/2017/05/UBI-working-paper.pdf.

[5]Ibid.

[6] Ensor, William, et al. “A Budget-Neutral Universal Basic Income.”

[7]OECD. “Basic Income as a Policy Option.” OECD, May 2017, http://www.oecd.org/els/soc/Basic-Income-Policy-Option-2017-Brackground-Technical-Note.pdf.

[8] A constitutionally established program wherein all citizens of the State receive oil dividends.

[9]Jones, David, and Marinescu, Ioana. “The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence from the Alaska Permanent Fund.” NBER, Feb 2018. https://home.uchicago.edu/~j1s/Jones_Alaska.pdf.

[10]Jessica Wiederspan, Elizabeth Rhodes & H. Luke Shaefer (2015) Expanding the Discourse on Antipoverty Policy: Reconsidering a Negative Income Tax, Journal of Poverty, 19:2, 218-238, DOI: 10.1080/10875549.2014.991889

[11]Hardy et al. “The Effect of the Earned Income Tax Credit in the District of Columbia on Poverty and Income Dynamics.” SSRN Electronic Journal. Jan, 2015. https://www.researchgate.net/publication/315309272_The_Effect_of_the_Earned_Income_Tax_Credit_in_the_District_of_Columbia_on_Poverty_and_Income_Dynamics

[12]The National Academies of Science, Engineering, and Medicine. “A Roadmap to Reducing Child Poverty” NASEM, 2019. https://www.nap.edu/read/25246/chapter/1#ii

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