UBI For Children

An alternative to UBI and NIT

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Ninety-nine percent of billionaire Warren Buffett's wealth was made after he turned 65 years of age. His primary secret to success was not skill or luck; it was time. In the 21st Century, humanity faces the unprecedented challenges of caring for an aging population alongside rising wealth disparity at the hands of technology. To address these challenges, proposals range from hiking the minimum wage to a Universal Basic Income. Funding for UBI or a similar program, however, remains problematic. Here I ask, what if we are doing it backward? Today, most welfare spending is directed at caring for the elderly. What if we directed it to children instead? Could we simultaneously address the dual challenges of falling fertility and wealth disparity by taking a page from Buffett’s book and leverage time?

The Minimum Wage Dead End

The global population is rapidly aging and will likely begin shrinking after 2050. These demographic realities strain the finances of governments and ultimately, the taxpayer. An older population costs more to care for and pays less taxes than a young one. Put bluntly, the welfare commitments made in the 20th century are no longer sustainable in the 21st. I have already addressed some pathways to reform healthcare and retirement programs, however, while these proposals will save money, they do not address the inequality challenges posed by AI and progress generally. As I’ve warned, technological progress has tended to elongate wealth disparity as the forces of progress pull harder on some than others. In a world of AI, we should expect the wealth gap between labor and owners of capital to grow even faster.

Technologically-driven wealth inequality isn’t a new concern. In the industrial era, many countries passed minimum wage laws to address this challenge, but I believe these laws will become increasingly counterproductive and possibly harmful in the 21st century. In a competitive market, businesses often operate on razor-thin profit margins. Grocery stores, for example, survive on margins of around 2 percent. Raising the minimum wage places immense strain on these businesses, particularly small businesses that cannot leverage economies of scale. It could even be argued that minimum wage laws serve the interests of big corporations by helping eliminate weaker competition.

The classic Econ 101 model holds that we already have a minimum wage, set by the supply and demand for labor. Price controls, in this case, a wage floor, distort the market. When wages are forced above the market price, inevitably, some will lose their jobs. This Econ 101 view, however, is only half right; in some places, we have a monopsony problem. Monopsony is the opposite of a monopoly. Instead of one entity controlling the supply of something, in a monopsony, one entity controls the demand, in this case, the demand for labor. Monopsony is common in small towns where there might be one or two dominant employers who control the wage “market price.” Here, a minimum wage beneficially corrects the monopsony. This is why raising the minimum wage does not cause as much unemployment as predicted by economic models.

This is not, however, a license to double or triple the minimum wage to address the widening “spread” in wealth distribution. Hiking the wage floor does have negative effects. For example, in the wake of forced wage hikes, studies have found that employers think more strategically about employee scheduling, they comply with the law, but cut employee hours or benefits. Further, dramatic hikes in the minimum wage would likely result in significant unemployment. In 2019, the CBO estimated that doubling the federal minimum wage would kill 1.3 million jobs. In sum, a higher minimum wage might help some people in some circumstances, but it will make many worse off, in part by accelerating and encouraging automation. In short, it is a blunt, 20th-century instrument that will not work in the 21st.

Enter Universal Basic Income

Perhaps, instead of forcing employers to pay above-market prices for wages, the government can make up the difference. This was the concept promoted by 2020 presidential candidate Andrew Yang, who propelled the idea of a “Universal Basic Income” (UBI) into the mainstream. Yang’s plan would indiscriminately send monthly checks of $1000 to every American, funded by a VAT placed on the goods and services Americans consume. Detractors noted that, at a cost of over $3 trillion a year, or 3/5th of the total Federal budget, UBI is too expensive without massive tax hikes. For many, it would only hand back money already taken through taxes, yielding no net benefit. However, if done correctly, there is some logic to a UBI and variants thereof. 

One alternative to UBI has been championed by the Libertarian crowd: a Negative Income Tax (NIT). Technically, an NIT is a type of UBI; an income tax system that reverses the direction of taxes is paid for incomes under a certain level. For example, perhaps you desire to eliminate poverty, defined as an income of < $13,000 annually. If the government sets a 50 percent “phaseout rate” for the NIT, policymakers can set a threshold of $26,000 where taxes reverse. For those who earn less than $26,000 a year, the government would pay 50% of the difference between their income and the threshold. For instance, if someone earns $10,000 a year, the government will pay them $8000, raising their income to $18,000. If someone earns zero dollars, they will get the $13,000, hence a “negative” tax. 

Importantly, because the NIT phases out, the cost is significantly reduced. Yongsung Chang, Jong-Suk Han, and Sun-Bin Kim found that under a linear tax system, an NIT can replicate the allocation of a UBI on a smaller budget. Remember also that neither UBI nor NIT would add as much to the deficit as first appears. UBI/NIT are intended to replace most of the existing welfare infrastructure, including housing assistance, Pell Grants, Lifeline, SNAP/WIC…etc, the only exceptions might be certain education and healthcare benefits that are not easily replaced with cash. Ending these programs saves over a trillion dollars a year. There are also administrative savings. The existing welfare industrial complex requires armies of staffers, leased offices, equipment, etc. An NIT or UBI would easily cut administration costs from 5-10 percent to under 2 percent, saving tens of billions annually.

Additionally, UBI and NIT would be more effective than existing anti-poverty programs, which are inherently paternalistic in their treatment of subscribers. Government committees, for example, determine what foods SNAP recipients can buy, instead of allowing them to make their own decisions. Research suggests this approach is not very effective. Instead, cash benefits give the poor the resources and freedom they need to help themselves. Finally, a NIT/UBI would eliminate a key flaw of contemporary welfare systems: the “welfare trap.” The “welfare trap” is the income level where benefits are cut off, which perversely punishes subscribers for exiting poverty. There is no incentive to seek better employment when doing so would leave subscribers worse off on the net. UBI/NIT have no hard cut-offs; every dollar of earned income yields a net benefit, providing an incentive to raise incomes. Instead of trapping people in poverty, UBI and NIT could coax them out.

One crucial difference between an NIT and a UBI is that a UBI can be funded with any revenue source, while an NIT inherently requires an income tax. This creates a strong incentive to evade taxes. Further, as longtime readers know, I abhor the idea of taxing incomes. When we work, we trade our time on Earth for money. Income tax is, therefore, a tax on our time, which feels immoral. Many will counter that taxes are a “price one pays” for civilization, and I do not disagree. But there are better alternatives to income taxation, and we should be using them. I have already outlined the relative merits of Land Value and Value-Added taxes. These could raise the funds society needs without the same moral and economic quandaries.

Viewed in this light, UBI offers several advantages over NIT. It is cheaper and easier to administer, and because the funding mechanism is flexible, it can forgo the burdensome income tax required to fund it. Admittedly, both a UBI and NIT would discourage some work…but this is not always a bad thing! As I previously discussed, the labor of a stay-at-home mother or father is currently uncompensated by the economic system (and also, for that matter, uncounted in GDP). This is a well-known and gaping hole in economics. UBI could be the solution; finally compensating necessary, if informal, “labor.”

A Social Wealth Fund

To administer a UBI-type benefit, we could establish a “social wealth fund” (SWF) that pools the wealth, the gifts of society and nature together. The Alaska Permanent Fund (APF) is the closest analog to a SWF in the United States. In 1976, the Alaska legislature passed a bill that required 25 percent of mineral lease rentals and royalties to be directed into the APF. Soon after, the Permanent Fund Dividend (PFD) program was established. The PFD draws from that APF annually, paying dividends to residents of Alaska. Dividend issuances vary based on the fund’s revenue and performance but typically range from $1000-$2000 a year, and up to $8000 for a family of four. The dividend has proven popular with no discernible impact on labor participation, except for a slight 1.8 percent increase in part-time work.

But an SWF needn’t only rely on taxes, it could be open to donations as well, providing a straightforward means to philanthropic ends. Though difficult to enforce, we could also require that upon a citizen’s death, part of their assets be surrendered to the fund, returning their unused bounty to society. The revenue would be invested in conservative and diversified funds consisting of equities, bonds, and other financial instruments. One of these instruments could include packaged ISAs to fund higher education.  Importantly, to prevent economic distortions, the equities would come with no voting rights. So long as economic growth and progress continue, we should expect the fund’s value to grow, increasing the wealth of the citizenry. Furthermore, because of the simplicity of the fund, management fees should be near zero. Indeed, Norway’s gpf-Global sovereign wealth fund achieves returns of around 5.8 percent annually with management expenses of just 0.06 percent.

MUBI

To the extent that a true UBI or NIT may prove unaffordable, however, I suggest we consider limiting payments only to minor children and their parents, a “Minor Universal Basic Income,” or MUBI, if you will. A MUBI would parallel my earlier suggestion for an expanded “child tax credit.” If we view children, more nodes on the “social supercomputer,” as a positive externality and force of progress, then a MUBI makes sense. A MUBI would effectively subsidize more humans by compensating parents for the cost and labor of raising children. Further, if we split these payments, half to parents and half to children, with the latter held in an index fund accessible at age 18 or 21, compounding interest and capital gains work their magic. A $500-a-month MUBI, held in a conservative index fund for 18 years, allows a young adult to begin their adult life with ~$175,000 of assets. These assets could be used to buy a home or a car, start a business, or be kept in the fund until retirement. Indeed, without adding a single dollar, the capital gains alone could grow to $2 million by the time that child is ready to retire.

Conceptually, the MUBI would function similarly to a “baby bond,” an idea promoted by some as a means of reducing inequality. By enabling the young to begin their lives on a more equal footing, historically disadvantaged groups have a better opportunity to catch up with their peers. Presumably, it would help mitigate wealth inequality and may even nullify the need for true UBI in the first place…at about 1/3rd of the cost. Further, if we allowed the MUBI to replace most other welfare programs and factor in the positive externalities it creates, the social cost could go negative. In other words, unlike NIT or UBI, where the fiscal costs are difficult, but not impossible, to swallow, a MUBI would be a comparatively straightforward sell, for the benefits far outweigh the cost.

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