We Can Do Better than UBI
A practical way to aid the poor
The pandemic exposed the inadequacies of the global welfare system. In the search for a more effective way of helping people, there is a growing movement toward a UBI, or Universal Basic Income. But I argue that a UBI is untenable. Instead, a Negative Income Tax (NIT) offers a more affordable, better-targeted, and simpler replacement for most social programs.
Targeted and Cheaper
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). An NIT is actually another form of a UBI, albeit one that uses the tax system to target its beneficiaries. To differentiate between a UBI and NIT, however, we will use the term “UBI” to describe an Andrew Yang-style universal benefit system.
Unlike a UBI, which is a flat universal benefit, 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. So if someone earns $10,000 a year, the government would pay them $8000. If someone earned nothing, they would get the $13,000 UBI. Hence, a “negative” tax.
Importantly, because an NIT is targeted and gradually phases out as income approaches the threshold, its overall cost is about half the cost of a UBI, at $1.8 Trillion, and roughly in with current spending on social welfare.
Crucially, an NIT wouldn’t actually add $1.8 trillion to the deficit. The NIT 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 cash. An NIT might even replace the minimum wage. Replacing these programs saves well over a trillion dollars a year, and may even cancel out the NIT’s total cost.
Cheaper and Better
Going further, an NIT may actually save taxpayers money. Remember, the above welfare bureaucracies engender significant administrative costs. They have to hire staff, review documents, lease offices…etc. A large percentage of funding is consumed by the administration (>5 percent). An NIT would eliminate this problem, with admin 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 also eliminate the “welfare trap” that keeps people in poverty. A byproduct of administrative design, a key flaw with many welfare programs is that benefits are cut off at a set income level. Earn a dollar more, lose your benefits. 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 the proper incentive to raise their income.
Taking all of the above into account, the NIT would probably cost less than the existing welfare system because it would actually coax beneficiaries out of poverty and off payment rolls.
Beyond a Traditional NIT
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 going further than most are willing. My NIT wouldn’t apply only to working adults. Instead, the NIT would apply 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 a positive externality, that is, the birth of more humans to work and innovate.
The NIT would also lift children out of poverty whilst avoiding the forced concept of “equity.” An NIT for minors would help provide a more equal footing for young people so that they have better opportunities and the ability to grow up and live their lives to their full potential.
In retirement, the NIT could form the backbone of the “Universal Benefit” of a 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 benefit.
A Net Positive
Factoring in the NIT’s ability to replace most welfare programs, its efficacy in fighting poverty, and its ability to subsidize more children and place them on a more equal footing, an NIT might actually provide a net benefit. The economic and productivity gains that result from a national NIT might turn the welfare system from a costly drag on society into a beneficial booster of growth and prosperity.