Basic Income Guarantees: What We Know (Part 2)

June 17, 2016

In my previous post, I discussed one variant of a Basic Income Guarantee (BIG), the Negative Income Tax (NIT). In this post, I will examine the BIG specifically and discuss some of the pros and cons of this approach.

Unlike a means-tested transfer such as the EITC, Basic Income Guarantees (BIGs) would offer all citizens, regardless of income and employment, a yearly cash grant. This would represent a departure from our current system of transfers, which usually requires recipients to work in order to receive cash assistance. Some of these proposals call for eliminating all federal welfare programs in exchange for a BIG. Other plans would offer a small cash grant in addition to current government transfers.

In his book In Our Hands: A Plan to Replace the Welfare State, Charles Murray proposes replacing our patchwork of federal welfare programs, as well as Social Security and Medicare, with a BIG of $10,000. Under his plan, only adults over the age of 21 would receive the grant. According to the most recent U.S. Census data, there are 234,929,690 individuals over the age of 21, and 87% of the total U.S. population is native-born. Assuming that some foreigners will become U.S. citizens, I will round this up to 90% to produce a conservative estimate of $2.11 trillion for this proposal. Currently, the federal government spends about $1.5 trillion on Social Security and Medicare and $1.15 trillion on other transfers. Overall, replacing current transfer programs with a BIG of this kind would reduce federal expenditures by $540 billion.

Arithmetically, this seems like a good trade. The reduction in expenditures could be used to finance tax cuts on households and businesses. Politically, however, such a program would be difficult to implement. The average Social Security recipient received approximately $14,745 in 2015. Adding in Medicare benefits would push this figure well above $20,000 each year. Any reform that calls for cutting current transfers to the elderly by more than half is likely to be a political non-starter. Even Murray’s BIG proposal calls for providing $3,000 in health care benefits in addition to the yearly grant, though this would add to the cost of the program.

A simpler and perhaps more politically feasible option would be to keep some of these transfer programs but eliminate most of the middle-class tax expenditures in the tax code, such as the personal exemption and standard deduction, to finance a basic income grant. Economist Ed Dolan has discussed a similar plan here. While this would increase marginal tax rates for some households, this type of plan would reduce high marginal tax rates the poor often face due to the phaseout of welfare as they earn more income.

One additional political problem concerns how well a BIG could adapt to cost of living disparities across the country. As we have discussed previously, most income data does not account for differences in regional price levels. A $10,000 grant would likely provide an adequate safety net in areas of the country where housing costs are low, such as in the South and the Midwest, but might be insufficient to those who live on the West or East Coast. These cost of living differences could lead to political pressures to raise the BIG to levels that may ultimately prove unsustainable.

Many policymakers and economists are reasonably concerned about how a BIG would impact labor supply. If some individuals dropped out of the labor force, this would require higher taxes on current workers in order to finance the program. Several experiments have been conducted in developing countries that examine the effects of unconditional cash transfers on labor supply decisions. While most of these studies find that these programs do not discourage work, it is difficult to extrapolate from these studies the impacts of such programs on citizens in developed countries.

Unfortunately, the only study relevant to the U.S. was conducted more than 40 years ago. From 1975-1978, researchers offered 1,300 Canadian families a basic income that was near Canada’s poverty level at the time. The program was canceled before the results could be analyzed, but a subsequent analysis in 1993 found only small negative labor supply effects. To the extent that this labor supply effect can be attributed to individuals increasing school attendance or investing in their education, this is not a particularly troubling finding. However, as I noted in the first part of this analysis, we regrettably lack evidence that would allow us to properly estimate long-run labor supply because these experiments only lasted a few years.

Randomized, controlled experiments that tracked families over a period of 10 years or longer would go a long way toward providing evidence of how a BIG impacts labor supply and economic mobility. Currently, an innovative startup in Silicon Valley is working on its own basic income pilot project for residents in Oakland, California. It will be interesting to follow the implications these projects have for public policy going forward.


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