Let’s piss off some of the #YangGang today.
But before we get to that, let’s cover some definitions.
Defining Universal Basic Income Vs. A Negative Income Tax
Universal Basic Income (hereby referred to as “UBI”) is a system where everyone in the country gets a check of equal-size from the government. So, if everyone gets $1,000 a month check from the government, that is a system of UBI.
There is another similar system, called Negative Income Tax (NIT) which we will also discuss in this article. It functions differently.
NIT works by having some baseline where people get paid until you reach a certain income level, and then you begin to owe taxes. Say the NIT base level is $10,000. If you earn $8,000 in a year, you will receive a check to help boost your income (it may not boost it completely to $10,000—for example it could be just 50% of the difference—so you would get $1,000 in a check). However, once you earn above $10,000 you now have to start paying progressive income taxes as usual.
Milton Friedman is a famous economist known for preferring NIT over UBI. He believed it was a better option to just have a NIT rather than all the current welfare systems.
These welfare systems include things like food stamps, child support programs, unemployment, and a plethora of other policies. We should design welfare systems to assist needy individuals temporarily until other measures can stabilize them. Issues such as an unexpected job loss, unexpected child-related issues, or medical emergencies. Yet, our system encourages keeping everyone within it dependent.
We have a mess of redistribution programs where we place no expectations on the receiver of the welfare. That cannot maintain itself. Friedman believed that removing all of those policies in favor of a NIT at a sustainable level was the appropriate answer. I don’t necessarily agree that it should be considered, but I agree that NIT is better than UBI.
A Case Study
Let’s consider someone who makes the minimum wage ($7.25). Assume no dependents and a single filing status. A NIT baseline of $15,000 with a 50% subsidy. UBI of $1000 a month.
If the minimum wage earner works full time, their yearly gross income will be $15,080 (7.25 x 2080). $2,880 of that is taxable income, with $1,153.62 going to social security and $288 going to federal income tax. This does not include any state taxes. The minimum wage worker will end the year with a take home of $13,638.38. This is based on our current tax system.
Under UBI, they earn $25,638.38 if they continue to work (baseline income minus tax plus the non-taxed UBI dividend).
This is still a relatively low income threshold.
Or, they could completely stop working and effectively earn only $1,638.38 less than they did while working full time. By not working, they would also be eligible for other welfare programs that they were ineligible for under their previous salary. Such as more food stamps, more support from WIC, and various other subsidies.
We can’t consider all the characters since they could have children, they could file jointly, and many other things that would affect their overall income status and eligibility for welfare programs. However, they likely would receive some additional welfare by dropping out of the income earning pool altogether.
In effect, by not working they would likely earn more than what they would if they had worked prior to UBI (greater than $13,638.38). The minimum wage worker could theoretically stop working after they pass a UBI bill and earn more money than they did previously by doing nothing productive for the rest of their life.
You could argue that we would remove all other welfare programs in favor of only UBI, but even then, the individual could just stop working and effectively earn only $1,638.38 less than they did while working full time. That’s a huge incentive to not work. Plus, it is not realistic. It would be impossible to remove most other welfare programs, and it would be incredibly harmful to remove welfare to certain at-risk populations in favor of everyone getting $1000.
Sure, they could earn more by continuing to work full time ($25,638.38 is likely greater than their base level of income + welfare). But why? It’s not that much more money. The welfare benefits, especially if they had children, would nearly fill this gap entirely. The most logical thing to do for someone that has any preference of leisure over labor is to simply drop out of the labor market. You could receive more than you do working full time currently. Or drop out and have 1-5 kids, then you’d likely make over what you would make working full time AND receiving UBI.
Now let’s consider NIT. The minimum wage earner earns a total amount of $15,080 a year before taxes. Under a NIT situation where the baseline is $15,000, they would only have to pay progressive income tax on the $80 that is above the $15k. That would also be the lowest tax bracket, since it is a progressive taxation program.
For fun, let’s just say it’s a 10% first bracket tax. So they would owe $8 in taxes (10% of 80). Thus, their final pay would be $15,072. Yes, the minimum wage earner would only owe $8 in taxes all year.
Compared to the current tax system in the US, under NIT the minimum wage earner would gain $1,433.62 a year ($15,072 – $13,638.38). Since they lose out on taxes under our current system, NIT would protect their first level ($15k) effectively giving them quite a bit more to live on a year. It protects the most impoverished from poverty, while not encouraging dropping out of the labor force.
How does it not encourage dropping out of the labor force?
Because of the 50% subsidy.
If the minimum wage earner leaves the labor force, they earn $0. Under NIT (our example with a 50% subsidy), they would only get $7,500 a year (50% of $15,000). This is not enough to survive on and does not match their previous salary. It is also far less than the UBI equivalent. This discourages leaving the labor force entirely.
Now I know what you’re thinking. They could, theoretically, drop half-time. Work 20 hours a week. This would be $7,540 annually ($7.25 x 1040). With the NIT subsidy, they would still only make $3,730 extra for a total of $11,270 (15,000 – 7,540 = 7,460/2). This is a much lower level of income while still having to work half-time. Thus, encouraging participation in the labor pool.
While the change to half time is possible for some families and will probably occur, it is not nearly as prevalent or as easy-to-fraud as UBI.
NIT also encourages people to stay in the labor force or to grow their income as the taxes are non-existent to at least 15k, so every dollar people earn can go straight to them.
A couple of quick studies:
- In a study by economist Gary Burtless, he found that NIT reduced work effort among participants when they received it. This issue is worsened with UBI, as demonstrated above.
- Another study showed that there was a consistent trend of workers reducing labor supply under both of these programs.
Both studies show evidence of reduced productivity under these programs. And they are permanent.
They both are bad for the economy, but NIT is simply the better option of the two. The math proves it.
Now let’s consider the cost. Assuming the $1000 “freedom dividend” we mentioned above, that is a total of $12,000 annually per person in the U.S. There are 327 million people in the US. That’s $3,924,000,000. When I first typed it in, it broke my calculator. Administrative costs of juggling that amount of money would easily put it to 4 trillion dollars. Our entire GDP (gross domestic product) is 19.39 trillion (2017). This one single program would be nearly 20% of our 2017 GDP.
Even if you reduced the UBI for kids or took them out entirely, you’re still looking at a bill of around $3 trillion.
The effect this would have on infrastructure development, business investment, and taxation rates over time is insurmountable.
The US currently spends (an estimated) 1.2 trillion on welfare costs. Just this one welfare program would almost quadruple that amount.
That price does not decrease. In fact, it only increases as we grow in population size. Who is paying for that? Where will the money come from?
Even proponents that say we could get rid of all the other welfare programs seem to miss this. Even if we reduce all of these welfare programs to $0 (which is highly unlikely) we’re still coming up $2.8 trillion dollars short. Annually.
We would have to divert money from nearly every sector of the economy and still raise taxes to make UBI work financially. It would end up being a complete disaster for the economy, as most large-scale socialist programs are. Ask Venezuela how well those policies worked for them.
Not to forget that this is a governmental program. It will only increase in size and scope. We can’t expect it to stay at the price it is at currently. Like all governmental programs, as soon as politics get involved it will only increase. Look at politicians that continually fought to raise social security. It was easy votes since everyone that received the welfare would vote yes to increase their own income. UBI would be no different. No one would vote to reduce their tax free nanny-state money.
GDP Calculation Shift
We calculate GDP as GDP = C + I + G + (X-M). Where GDP is the gross domestic product. C is private consumption. I is gross investments. G is government expenditures. X-M is an import/export calculation (exports – imports). For the purpose of this calculation, we are only concerned with C, I, and G.
Why are we worried about GDP? Because the shifting of GDP expenditures creates drastically different living standards and societal benefits. We will discuss more of how this happens below.
Government spending changes the allocation of resources from what the population wants (consumers) to what the government thinks consumers want (or what the government wants).
All government spending, including welfare, comes from some form of taxation. Whether it’s indirect taxation through inflation or direct tax or capital gains on the previously taxed monies. They do not create their own money in the sense that a consumer and business does.
Under UBI, it is literally impossible for welfare to increase C or I since the government is taking that possibility away. Every dollar of welfare must have first been taxed. And every taxed dollar comes with some kind of administrative or bureaucratic government cost. This results in less money throughout the economy for anyone to spend: taxpayer or welfare recipient.
GDP is very lucky we include the “G” in the calculation (GDP = C + I + G + (X-M)). But even with a program like this, it will harm GDP because of what we just discussed.
You could argue that GDP will increase because government expenditures will increase and consumers will have more to spend increasing C. However, this just shifts the GDP expenditures primarily to the G portion (government expenditures), instead of the I (investment) or C (consumption) portion.
G does not increase the economic growth, activity, or living standards in a country better than C or I. In fact, it is almost always less since the taxed money is never on a 1:1 parity as previously discussed. Add the fact that government expenditures are not as beneficial to consumers. Even further, government expenditures lose money from additional costs associated with a government that businesses and consumers do not face.
G increases with unhelpful things like UBI and war.
Some of the greatest government expenditures were bombs in World War 2 and the Vietnam war. This benefited no one in either country. One could even argue that it diminished the potential value that we could have spent if it stayed within the C or I categories.
UBI is no different. It just reorganizes the GDP calculation to the less helpful sectors.
Issues with Universal Basic Income
Another issue plaguing UBI is the community multiplier issue. This issue involves people forming communities that could then pool their money for mutual utility, so no one in the community has to work, instead existing solely off of the welfare payments.
This is not something that is exactly “new”. The Fundamentalist Church of Jesus Christ of Latter-Day Saints (FLDS) is a prime example. FLDS encouraged their communities to take advantage of government assistance through welfare and the woman-infant-child programs. FLDS is a polygamy group, so there are often 4-5 wives to each man. The women would just claim to be single unemployed moms with 3+ children and receive hundreds of thousands in combined welfare support. This money is then pooled by all the community to practically pay for their entire life off the backs of actual taxpayers.
FLDS communes in Colorado City, AZ were noted as receiving as much as $6 million in welfare support over time. Many of these groups actually consider it a virtuous act against a government they don’t agree with. UBI would only inspire to increase the rates of this type of welfare fraud by allowing easy access to the welfare and incentivizing formation of the communes.
It would not be difficult for 10 people to survive on $120,000 a year ($1000 x 12 months x 10 people). Especially when that $120,000 is tax free. Hell, one large family (mom, dad, 5 kids) would get an incredible $84,000 a year. At that point, entire families could just drop out of the labor force. That is a greater amount than many low-income households already earn in the US. Free money, no tax, and no reason to spend your entire life working. The entire economy would crash, GDP per cap would plummet, and productivity would nose dive.
Just as in the case with the welfare fraud, when people see this they also form similar communities and stop working. Eventually you reach a point where there are not enough people to support the non-working or at least there are not enough net-payers to society to support the overall economic system. What do we see when the economic system can’t support the productivity levels? Shortages. No one working in retail because why the hell would you if you can survive off UBI levels?
UBI will work great. Until we run out of money to fund it. The socialist policies are always thought of in good nature, but fail due to human nature of greed and wanting something for nothing. UBI will not reduce income inequality or poverty, it will only increase it in the long run as the economy cannot maintain the program forever.
Even More Issues With UBI
The famous saying goes:
There is nothing more permanent than a temporary government program.
We’ve talked about the noticed economic ramifications of UBI, but what about the hidden ramifications? We are redistributing money from the productive sectors of the economy (producers, net taxpayers) to the non-productive sectors of the economy. This money would no longer be invested, spent for capital upgrades, allocated for economic advancement, support business expansion, or other productive ventures. Instead, being used for items that don’t benefit the economy.
The best way to increase the average income is with business investment. UBI indirectly transfers money away from these productive ventures further harming workers down the line.
Stepping away from the hidden aspects, can we take a moment to consider how UBI goes to everyone? Yes, even the billionaire gets $1,000 off of the backs of the working class. At least under NIT we don’t have multi millionaires getting welfare.
And then we have immigration. If you personally lived in any impoverished country and realized you could move to the US and immediately begin receiving $12,000 tax free a year along with free schooling, healthcare, and non-citizenship benefits, would you?
Proponents of UBI typically claim it would only be given to residents–but we all know that will never sustain. The left also said that about free college and healthcare to illegal aliens, but eventually the left made sure they received those as well. Who fronted that cost? The taxpayer.
The rates of illegal immigration and the law enforcement we would need to control this influx would be astonishing. If we think the rates of illegal immigration are bad now, wait until we enact a UBI program. We’d be dreaming of having the low illegal immigration rates we have now.
Universal Basic Income Recap
I am not a proponent of NIT. But, if we’re debating between UBI and NIT the math is obvious on which is the better option: NIT. Don’t listen to the guy trying to push the Asian-math superiority stereotype on you. UBI would be a complete disaster. NIT would just be a minor disaster.
Universal Basic Income would crash and burn financially. It would require all of us to work 3x as hard to fix the broken pieces it leaves behind. It would not fix poverty, financial issues, or the economy.
In short, economists can see UBI for what it is. A way for politicians to buy political votes from people who do not want to work.
The kicker? Those same politicians that implement a UBI program won’t have to deal with the fallout from it. They’ll be long gone with their pockets stuffed full while the entire system collapses under the weight of its own financial illiteracy.