What happens if you replace every social program with a universal basic income

Basic income — the idea of just giving everyone in a given country a regular, guaranteed cash payment, no strings attached — is still pretty far from being adopted in the US. But it’s been gaining steam as an idea for a while now, most recently garnering praise from Facebook CEO Mark Zuckerberg in his widely viewed Harvard commencement speech last week. But no one quite agrees on what the term “basic income” means.

And in particular, no one agrees on how such a plan would be funded. Conservative and libertarian proponents tend to want to pay for it by eliminating the entire welfare state, including health programs like Medicare and Medicaid and social insurance programs such as Social Security. More cautious center-left or moderate libertarian proponents — who are loath to cut those aspects of the safety net, endanger people’s retirements, and let uninsured sick people die in the streets — tend to only propose funding through eliminating means-tested programs like food stamps and the earned income tax credit, as well as tax benefits such as the health care exclusion and mortgage interest deduction. The most ambitious lefty proponents want to finance the program entirely through new tax revenue.

As two big new reports on the impact of basic income show, “how would we fund it” is a massively important question.

The first, by the OECD (an international organization of developed countries), models a basic income that would "replace most cash benefits for working age households." That includes unemployment benefits, cash welfare, early retirement pensions, child and family allowances, and personal exemptions and standard deductions in income and payroll taxes. They assume no additional tax increases and no changes to programs for retired people, and that "the provision of public services, such as health, education, care, or other in-kind supports … continue[s] unchanged."

The report then calculates how the introduction of a budget-neutral basic income, available to every person below retirement age, would affect rich, middle-class, and poor people in four illustrative countries: Finland, Italy, France, and the UK.

OECD

The charts in question are slightly confusing, but the important line is the one with blue circles, showing the percentage change in income for each slice of the income distribution. What you see, consistently, is that the poorest people in each country would gain the most as a result of the change. In the UK, existing spending on the cash programs that would be replaced by a UBI is quite low, resulting in small basic income payments; that means poor but not extremely poor people would lose out a bit. But in Finland, Italy, and France, the greater benefits for the poor would be subsidized by benefits and tax breaks lost by higher-income people.

The biggest losers in each country tend to be the near-elderly; early retirement benefits offered to those below 65 tend to be a great deal more generous than a basic income, so the policy would effectively redistribute that money to people across the age spectrum.

And despite high average increases in income for poor people, a UBI financed through existing benefits would do little to cut poverty, the report finds. So would one set at countries’ pre-established welfare benefit level, and funded where necessary by increased taxes (or decreased taxes in Italy, where welfare benefits are below the budget-neutral UBI level). The average effect on income obscures some specific losers from the policy who would fall back below the poverty line in greater numbers than beneficiaries from the policy would climb above it.

OECD

In the UK, raising taxes to pay for a more generous basic income makes it reduce poverty mildly. In every other country, though, a truly universal basic income makes poverty worse, not better.

"Many of those who are brought out of poverty by unemployment insurance and early retirement benefits would fall into poverty again if they received a BI," the report concludes, since a basic income is less well targeted.

An American basic income, funded by cutting everything, would screw the elderly and help almost everyone else

The OECD report is illuminating about the trade-offs posed by replacing existing programs with a UBI — but it concerns countries with larger existing benefit systems than the US has. America has arguably the least generous unemployment insurance and cash welfare programs in the developed world, and offers minimal early retirement support. So funding a large-scale, truly universal basic income out of existing spending would necessarily require using funding not just from working-age cash programs like welfare or unemployment insurance, but in-kind subsidies such as Medicaid and programs for retirees like Social Security and Medicare.

Four researchers at the American Enterprise Institute — Matthew Jensen, William Ensor, Anderson Frailey, and Amy Xu — used three open source models of American tax and benefit policy to calculate the effects of a UBI funded by repealing "most welfare and transfer programs, including Social Security and Medicare," and "most base-narrowing features of the individual income tax system." They throw everything into the pot: Medicare, Social Security, veterans benefits, the standard deduction, every itemized deduction (including mortgage interest). Basically the only major program not repealed is the employer-paid health care exclusion, and that’s just because there wasn’t data available to model the change.

Getting rid of all those programs would finance a UBI of $13,788 for adults and $6,894 for children. So a family of four would get a whopping $41,364. Then again, if they received health insurance through Medicaid or Obamacare subsidies, they’d lose that.

AEI

The researchers find that this policy would, on average, help people under 65 in all but the highest income categories. The middle class would gain the most: A family making $50,000 a year would get a $15,287 boost on average, once you take lost tax and other benefits into account (and when you consider that cash benefits are often more valuable than in-kind ones). People making $200,000 would be held basically harmless, while millionaires would face more than $100,000 a year in increased taxes.

AEI

By contrast, more or less everyone over the age of 65 would lose out — big time. The poorest seniors would lose more than $34,000 worth of benefits in exchange for the UBI. Low- and middle-income people would lose $18,000 to $28,000 each. The rich would lose out for the same reason poor non-seniors would.

Despite losing insurance programs like Medicaid, you could imagine this trade being very good for poor non-seniors. For $41,364 a year, a family of four where both parents are in their 20s to 40s could afford a pretty comprehensive health insurance plan, as well as most or all of their rent, food, and transit costs.

But what enables a subsidy that large is a wholesale gutting of America’s programs for retired people. Without Medicare, seniors would face very costly insurance premiums given their age and medical risk, and $13,788 is considerably less than the $16,400 average annual Social Security payment to retired workers. Without dependents, most single seniors would get just $13,788, and couples a mere $27,576. That’s not nearly enough to replace the benefits they’d lose.

Instead of a pure basic income, it might be time for a negative income tax

Both the OECD and AEI reports suggest that an immediate cashing out of big social programs to fund a UBI would be kind of a mess. It’d create massive disruption with big winners and losers, and given the scale of change required, it probably isn’t the most effective way of alleviating poverty you could imagine. Indeed, many of the models they consider would lead to poverty going up, not down.

But it’s important not to interpret these results as implying that any attempt to offer cash without work or other requirements is bound to be ineffective or require gutting necessary programs. It just suggests that there are better avenues for advocates of cash to explore than a large-scale UBI reform.

For example, both these papers assume that the basic income would be paid out to everybody: homeless people with no earnings, plus Bill Gates, plus everyone in between. That might make sense if you fund the program with bigger taxes on high earners, so as to claw back the benefits, but none of the plans modeled rely on that as their primary financing mechanism.

If you’re not willing to entertain big tax increases, then you should be thinking about a negative income tax. That’s the term used for a universal basic income that tapers off with income. So a negative income tax of $10,000 for adults and $5,000 for children, and a 50 percent phaseout rate, for example, would offer a family of four with $0 in earnings benefits worth $20,000; if they started earning $10,000 in wages, the benefits would fall to $15,000, for a total income of $25,000; by the time they earned $40,000 in wages, they’d be getting no basic income payment at all. A negative income tax is just a UBI financed in part by a somewhat regressive tax on the first chunk of earnings people make, and because of that tax, its net price tag is much lower.

Wiederspan, Rhodes, Shaefer, 2015

In an absolute must-read paper for anyone interested in the basic income debate, the University of Michigan’s Jessica Wiederspan, Elizabeth Rhodes, and Luke Shaefer estimated the cost of the US adopting a negative income tax large enough to wipe out poverty. To be conservative and get a high-end cost estimate, they assume that such a program would discourage work substantially.

Despite that, they find that a household-based negative income tax, set at the US poverty line and with a 50 percent phaseout rate, would cost $219 billion a year. That’s almost exactly the same as the combined cost of the earned income tax credit (which supports the working poor), Supplemental Security Income (itself basically a negative income tax but only for the elderly and disabled), food stamps, cash welfare, school meal programs, and housing subsidies. You could swap those programs out, put a guaranteed income in their place, and wipe out poverty entirely.

Is this the best possible way to do a guaranteed income? Not necessarily. Because the plans they consider are household-based, they impose a significant marriage/cohabitation penalty that you’d ideally want to avoid. Fifty percent might be too high as a phaseout; maybe spending a bit more for a 33 or 25 percent rate is worth it. And the exact trade modeled here would hurt some low-income families above the poverty line, who get more in EITC and other benefits today than they would from a negative income tax. I’d want to see a careful analysis along the lines of the OECD or AEI paper on what share of low-income people would gain or lose in such a trade.

But the Wiederspan, Rhodes, and Shaefer paper shows something important: Funding a basic income through a negative income tax model is doable. It’s not something outside the realm of possibility for a country as rich as the United States.

There are smaller-bore ways to expand cash programs too

The OECD/AEI results also say nothing about non-UBI attempts to expand access to cash. Take, for instance, a child allowance: a policy in most OECD countries that gives cash universally to all parents, on a per-child basis. That’s basically the child component of a basic income, and we know for a fact that it substantially cuts poverty. There are a few different ways the US could adopt this plan, which I run through here, but it’s a very good idea and would not require the kind of gutting of safety net programs the OECD and AEI reports consider.

Another likely way that cash payments could come to rich countries is through a carbon “cap and dividend,” or “fee and dividend,” system. Under those plans, carbon is taxed or permits for carbon emissions are auctioned off, and then the government refunds some or all of the revenue raised in the form of a per capita dividend check. The check is meant to compensate for increased fuel costs due to a carbon price, but in many cases it will end up more than making up for energy price increases and turn into a de facto cash benefit that helps many low-income households.

The Put a Price on It DC campaign is touting a plan that would impose a fee on all companies buying and selling fossil fuels in DC (starting at $20 a ton of carbon in 2019 and ratcheting up to $150 per ton in 2032), and direct most of the money to dividend checks, with the biggest checks going to low-income people. By 2032, the dividends would reach $2,750 for every low-income family, and more than $1,600 for the average family. Three-quarters of residents would get more back in dividend checks that they paid in increased energy costs. California is also considering making a dividend plan the centerpiece of its carbon pricing efforts.

Those initiatives to expand cash payments are attractive both because they have a very good revenue source (a hyper-efficient tax on pollution) and because they don’t require the clawback of any other benefits. They’d straightforwardly reduce poverty for low-income families.

So basic income and cash advocates would do well to pivot away from the kind of big, disruptive plans modeled in the OECD and AEI papers, and toward negative income taxes, child allowances, and carbon dividends, all of which are more politically feasible and likelier to be implemented in a way that doesn’t hurt low-income people or seniors.

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