In the search for a more effective welfare system, there is a growing movement toward a UBI, or Universal Basic Income. I argue that a UBI is untenable. Instead, a Negative Income Tax (NIT) offers a more affordable, better-targeted, and simpler replacement for most welfare programs.
Presidential candidate Andrew Yang propelled the idea of a UBI into the mainstream. Yang’s plan would indiscriminately send monthly checks of $1000 to every American. But at a cost of over $3 Trillion a year, or 3/5th of the total Federal budget, a UBI is simply too expensive without massive tax hikes. For many, Yang’s UBI would only hand back money already taken through taxes, yielding no net benefit.
There is an alternative to a UBI that, believe it or not, is championed by the Libertarian Right: a Negative Income Tax (NIT). Unlike a UBI, an NIT sets a threshold and a phaseout rate. Perhaps you want to eliminate poverty ($13,000 a year). With a 50% phaseout rate, you would set the threshold at twice the target, or $26,000. For those who earn less than $26,000 a year, the government would pay them 50% of the difference between their income and the threshold.
For example, if someone earns $10,000 a year, the government would pay them $8000, raising their income to $18,000. If someone earns zero dollars, they would get the $13,000, hence a “negative” tax. Importantly, because an NIT gradually phases out as income approaches the threshold, its overall cost is about half that of a UBI, at $1.8 Trillion, roughly the same as current welfare spending.
Crucially, an NIT wouldn’t actually add $1.8 trillion to the deficit as it would replace most of the existing welfare infrastructure. Housing assistance? Gone. Pell Grants? Gone. Lifeline? Gone. SNAP/WIC? Gone. The only exceptions might be education and healthcare benefits that are not easily replaced by cash. An NIT might even replace the minimum wage. Replacing these programs saves well over a trillion dollars a year.
But Even Cheaper
Going further, an NIT may actually save taxpayers money. Remember, the current welfare bureaucracies engender significant administrative costs. They have to hire and train armies of staffers, lease offices, conduct interviews…etc. A large percentage of funding is consumed by the administration (>5 percent). An NIT would eliminate this problem, with administration costs cut by over half (<2 percent), saving tens of billions a year.
An NIT would also be more effective than the current hodgepodge of welfare programs. Unlike traditional welfare which provides non-cash benefits, an NIT is a direct cash benefit with no strings attached. Experience learned after decades of welfare research confirms that if you want to help people out of poverty, it is more effective to give them the resources and the freedom they need to do it.
An NIT would eliminate the “welfare trap” that keeps many in poverty. A byproduct of administrative design, a key flaw with existing welfare programs is that benefits are cut off at a set income level. This punishes subscribers for exiting poverty. An NIT does not do this because the cash benefits phase out gradually. Every dollar of earned income yields the subscriber a net benefit, providing an incentive to raise their income.
Taking all of the above into account, the NIT could cost less than the existing welfare system because it would actually coax beneficiaries out of poverty rather than trap them there.
Beyond a Traditional NIT
Globally, we face the twin challenges of too few children and too many elderly. This global demographic crisis poses a very serious risk to civilization as we know it, endangering innovation, economic productivity, and social stability. My NIT would go a long way toward remediating these issues by applying to ALL people who do not or cannot work, including the unemployed, the disabled, retirees, and even minors.
The latter is especially important. The financial burden of raising a child is the primary reason that fewer children are born today. With minors eligible for the NIT, parents would have substantial additional assistance raising children. In effect, the NIT would subsidize the birth of more humans to work and innovate. The NIT would also lift children out of poverty and place all on a more equal footing, providing every child the opportunity to live to their full potential.
In retirement, the NIT could form the backbone of the “Universal Benefit” portion of my plan to greatly simplify Social Security, which I outlined in detail here. In short, an NIT may solve two of the most pressing issues of our time, all in one parsimonious and affordable benefit.
A Net Positive
Financing an NIT would not be difficult, but is best done through a Land Value Tax, as I detailed here. Factoring in all of the merits of an NIT, the true cost may actually also be negative. Rather, the economic and productivity gains that result from an NIT could potentially turn the welfare system from a costly drag on society into a beneficial booster of growth and prosperity.