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Henderson’s Case Against a Universal Basic Income

Summary:
Even some free-market economists, such as Duke University’s Michael Munger, argue for a UBI that would replace the current welfare state. But assuming unrealistically that the existing means-tested welfare state programs could be completely replaced, a UBI of ,000 a year or even of ,000 a year would require large increases in federal government spending and large increases in taxes. This is an excerpt from my article on Hoover’s Defining Ideas site, published yesterday. It’s titled, “Universal Basic Income, In Perspective.” Other excerpts: [Professor Matt] Zwolinski argues against the current welfare system by pointing, correctly, to the enormous implicit marginal tax rates paid by people who decide to get a job. Under our current system, making a certain

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Even some free-market economists, such as Duke University’s Michael Munger, argue for a UBI that would replace the current welfare state. But assuming unrealistically that the existing means-tested welfare state programs could be completely replaced, a UBI of $12,000 a year or even of $10,000 a year would require large increases in federal government spending and large increases in taxes.

This is an excerpt from my article on Hoover’s Defining Ideas site, published yesterday. It’s titled, “Universal Basic Income, In Perspective.”

Other excerpts:

[Professor Matt] Zwolinski argues against the current welfare system by pointing, correctly, to the enormous implicit marginal tax rates paid by people who decide to get a job. Under our current system, making a certain amount of money can cause a welfare recipient to lose more in government aid than she makes on the job. (I say “she” because the vast majority of adults receiving welfare benefits are women.) That aspect of the system causes many people on welfare not to work.

In a 2013 article, Zwolinski cited Cato Institute economist Michael Tanner’s calculation that federal, state, and local expenditures on 126 anti-poverty programs in 2012 totaled $952 billion. Zwolinski calculated that the average expenditure per poor person was a whopping $20,610. He then asked, “Wouldn’t it be better just to write the poor a check?”

Maybe, but that’s not what’s at issue. Zwolinski cited these figures to make a case not just for writing the poor a check, but for writing everyone a check. And that’s a much more expensive proposition. Using Zwolinski’s numbers and updating to 2015, I showed that even if all means-tested welfare programs were eliminated, funding a $10,000 UBI to every American adult would take another $1.068 trillion in federal spending. In 2015, when I wrote, this would have required raising tax revenue by 45.7 percent. And to raise tax revenue by 45.7 percent would have required raising tax rates by more than 45.7 percent. Why? Because large increases in tax rates would substantially discourage work and production in general.

There is one way to avoid raising tax rates on everyone. That would be to adopt a proposal made by Charles Murray when he suggested a $10,000 UBI in 2006. The federal government could guarantee all American adults $10,000 and then phase out the $10,000 as their income increases beyond a threshold. So, for example, anyone with other income of $15,000 gets to keep the whole $10,000 for a total of $25,000. But as their other income increases beyond $15,000, they lose some percent of this $10K. Say that percent is 25 percent, a number I have heard tossed around in informal discussions with libertarians who propose a UBI. That means that someone would have to make an extra $40,000 beyond the $15,000 before he loses all of his federal subsidy.

Consider the implications for work effort for the whole society. Everyone making between $15,000 and $55,000 ($40,000 + $15,000) in non-UBI income would receive some of the subsidy. But the median individual income of Americans is about $40,000. So, a majority of Americans would receive some subsidy. That means that the majority of Americans would face an implicit marginal tax rate from their loss of the subsidy of 25 percent. That might not sound bad at first, but remember that this is on top of their other marginal tax rates, including the federal income tax, the Social Security (FICA) and Medicare (HI) payroll taxes, and their state income taxes. So, a majority of Americans would give up about 50 cents of any additional dollar they make. Even this version of the UBI, therefore, would dramatically reduce the incentive to work for tens of millions of Americans.

Also, I note how one under discussed issue in the whole UBI debate, the 1996 welfare reform, means that the disincentive to work under the current system is not as strong as many people think. The relevant paragraph:

Don’t forget that a good reform, welfare reform, was done in the 1990s.  There were two key elements of the welfare reform that Republicans in Congress pushed, and President Clinton signed, in 1996. First, one cannot receive welfare funded by the federal government for more than two years in a row unless one works. Second, there is a five-year lifetime limit on receiving welfare. Thus the word “Temporary” in the name of the program: Temporary Assistance for Needy Families. Those two provisions offset the disincentives caused by the pre-reform welfare state. It’s still true that while you are on welfare, you can literally make yourself worse off financially by getting a job that pays a fairly low wage. But if you are about to bump up against the two year in a row limit, or if you want to “bank” a few years of the five for when life gets tougher, you might well take that job. And that’s good, not bad.

Read the whole thing.

Also, note that I referenced my 2015 piece on this. It’s part of a symposium in The Independent Review. Mike Munger, whom I reference above, has an article in the symposium in which he claims to show that “a negative income tax would save tax dollars.” But he doesn’t actually do so. Instead, he uses a hypothetical income distribution that has very little connection with the actual income distribution in the United States. With any kind of realistic numbers and with the $10,000 UBI or anything even close to it, the increase in both government spending and taxes from a UBI would be huge.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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