Basic Income Guarantees: What We Know (Part 1)

June 13, 2016

Basic Income Guarantees (BIGs), or Universal Basic Incomes (UBIs), have been gaining a lot of attention lately. These policies call for providing unconditional cash transfers to all citizens, either in addition to or in place of current federal transfers and welfare programs. Commentators across the political spectrum, from Charles Murray on the right to Matt Yglesias on the left, have advocated offering a basic income to all U.S. citizens to reduce poverty and administrative bureaucracy.

Last week, Switzerland voters overwhelmingly rejected a proposal to provide $2,555 a month to every adult and $650 to every child. With the Netherlands, Finland, and Canada rolling out their own basic income pilot projects, we can expect this issue to continue to grow in relevance.

In a two-part series of posts. I will discuss the empirical and theoretical evidence for BIGs and highlight some of the concerns with these proposals.

Though basic income has surged in popularity recently as a political topic, variants of a BIG have been studied in the past as well. The earliest example is Nobel Laureate Milton Friedman’s Negative Income Tax (NIT) proposal, which he discussed in his seminal work Capitalism and Freedom. During the 1960s, Friedman was concerned about how the U.S. tax and transfer system affected the labor supply decisions of the poor. Welfare recipients would lose their benefits once their income exceeded a certain threshold, effectively imposing a significant marginal tax rate on their earnings beyond that threshold. To address the problem, Friedman suggested that in place of all welfare programs, workers below a certain earnings threshold should receive a transfer from the government instead of paying an income tax. His plan would have allowed any unused deductions and personal allowances to be partially refunded to the taxpayer. For example, a taxpayer with earnings of $5,000 and personal allowances of $10,000 would be able to use half of that personal allowance to offset his earnings. The other half would then reduce his taxable income below zero, resulting in negative taxes paid. At a subsidy rate of 25%, for example, this taxpayer would receive a cash transfer of $1,250 or 25% of his unused allowance.

Between 1968 and 1980, randomized controlled experiments with a NIT were conducted with families ranging from urban areas in New Jersey and Pennsylvania to rural areas in Iowa and North Carolina. The experiments found that in contrast to Friedman’s predictions, an NIT reduced the number of hours worked and led to prolonged periods of unemployment for recipients who were not already employed. However, none of the experiments found evidence of workers withdrawing entirely from the labor force, as some economists and politicians had feared. While the reductions in hours worked were small, most of the participants in the control group were eligible for other welfare programs. Given that these experiments occurred during a period when welfare recipients were not required to work in order to receive cash assistance, it is plausible that this negative labor supply effect would be larger in our post-welfare reform era.

Although these experiments received a fair amount of attention from the media back in the 1970s, it is important not to overstate their conclusions. Very few single, childless adults were included in these studies, and it is for this group where negative labor supply effects may be the most pronounced. Moreover, most of the experiments lasted no more than a few years, and participants knew that the programs would be temporary. Since many of these workers likely anticipated that they would have to look for work once these experiments ended, it is possible that they did not want to risk losing any work experience from reducing their hours worked. Overall, these experiments at best provide some evidence of a short-run labor supply response, but cannot tell us anything meaningful about the long-run response to this type of policy.

While Friedman was never able to persuade Congress to abolish all federal transfer programs in favor of an NIT, his proposal eventually evolved into the Earned Income Tax Credit (EITC). The EITC, like the NIT, offers a cash transfer to workers whose earnings fall below a certain threshold. However, unlike Friedman’s original vision, the EITC is conditioned on family structure and employment. Unemployed workers cannot claim the EITC, and working childless adults receive a substantially smaller credit than families. Should politicians muster the will to legislate Friedman’s original proposal, the simplest means to enact it would be through the current EITC system.

In my next post, I will examine the costs and benefits of recent basic income proposals, and discuss some of the evidence from cash transfer experiments.


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