Matt Yglesias has a new post pushing back against the claim that a Universal Basic Income (UBI) program is too expensive to be practical in the US:
Let’s rerun the numbers with a little more precision, though we won’t change Greenstein’s ballpark estimate of the cost. The federal poverty line for a single adult is $11,880. Each additional member of the household is calculated to require an additional $4,140 to stay above the poverty line. There are 321 million Americans, of whom about 74 million are children. A reasonable UBI might offer:
$10,000 per adult, for $2.47 trillion
$6,000 per child, for another $444 billion
That comes out to a little bit less than Greenstein’s $3 trillion and eliminate poverty except for single, childless adults who have no other source of income whatsoever — a very rare life circumstance.This is a lot of money, but it’s not impossible
There is no doubt that this is a lot of money. It amounts to approximately 16.7 percent of GDP, which would obviously be a huge increase in the size of the federal budget.At the same time, while this would take federal spending to a level never before seen, it wouldn’t bring total US government spending to levels that are internationally unprecedented. Instead, it’d put us about where France and the Scandinavian social democracies are.
That’s not economics, that’s accounting! The IMF reports the following data for taxes as a share of GDP, and total GDP per person (PPP). I then multiplied to get total tax revenue:
France: .536 X $40,498 = $21,707
Germany: .446 X $46,160 = $20,578
Italy: .482 X $35,095 = $16,916
UK: .354 X $40,163 = $14,218
US: .314 X $54,360 = $17,069
Europe (average of 4) .455 X $40,480 = $18,354
These are the four biggest economies in Western Europe, and fairly representative of the whole region (the smaller economies include both poorer and more affluent places.)
Notice that tax rates in the US are about 31% lower than in Europe, so there is a lot of scope for tax increases in the US. But how much revenue would those higher taxes actually collect—in the long run? This data suggests not very much. We may not be at the peak of the Phillips Laffer curve, but we are in a region where disincentive effects are kicking in. GDP per person in these four countries is about 25.5% lower than in the US (PPP), so they only raise about 7.5% more revenue that we do, despite far higher tax rates.
Also note that, in an accounting sense, GDP per person in Europe is lower than the US mostly because of fewer hours worked per year (although in some individual cases like Italy and the UK, productivity is also lower.) But it’s mainly an hours worked problem. And of course fewer hours worked is exactly what you’d expect if you sharply raised tax rates, which are a disincentive to work. Europe taxes labor especially heavily, because that’s the only way to raise vast sums without sinking the economy.
[One common mistake is to focus on taxes from an income effect perspective, i.e. being poorer might make you want to work harder. This is wrong, as the tax revenue gets recycled back into the economy, and hence there is no first order income effect—it’s all about the substitution effect. It’s not so much higher taxes in Europe, it’s higher taxes combined with higher transfers that results in fewer hours worked. Exactly what we’d have with a UBI.]
The mistake that progressives make is to see the huge US GDP as a sort of piggy bank from which money can be raised for any policy objectives, without killing the goose that lays the golden eggs. Again, I’m not saying the US has no ability to raise extra revenue; the data above suggests we probably do. But I think it’s more realistic to think in terms of an extra 10% of tax revenue, or perhaps 15% if we are lucky, which is barely more than 3% to 4.5% of GDP, not the 16.7% postulated by Yglesias in his “static analysis”. If we currently collect a bit under $6 trillion (in 2016), then perhaps we could collect another $600 to $900 billion for everything progressives want to do. (A single payer system, free community college, free day care, guaranteed basic income, more infrastructure, improved education in inner cities, etc., etc.) But no chance of $3 trillion. Looked at for this perspective it’s clear that progressivism can never succeed in America. The only question is how badly it will fail. How many of the “unmet needs” will remain forever unmet.
PS. If I had to push back against the argument I just made, I’d claim that it would still be worthwhile to push taxes up to 50% of GDP, despite the hit to GDP. Even though the actual amounts collected would be smaller than planned, the average middle class income would also be proportionately smaller. Thus a UBI could eliminate poverty in a relative sense, although it would still exist in an absolute sense, in terms of the current definition.
I don’t even believe this argument, for complex reasons, but I think it’s the strongest argument against my critique of Yglesias.
PPS. This analysis is loosely based on an old post by Greg Mankiw, from 2010.
READER COMMENTS
Craig
May 31 2016 at 6:08pm
Laffer curve instead of Phillips?
Scott Sumner
May 31 2016 at 6:23pm
Thanks Craig, Brain freeze on my part.
CMOT
May 31 2016 at 6:31pm
It’s even worse.
The US is better at taxing rich people than anyone, and is probably at the limits of doing so.
It’s likely that most of the new revenue would have to be raised directly from middle class tax payers, which, even if it’s ‘hidden’ via a VAT, they’re going to notice as doubling or trebling (or more) of their tax incidence. To pay money to people who could work, but aren’t working.
There’s going to be a serious social cohesion problem …
Mike Moore
May 31 2016 at 6:49pm
No matter where we set the UBI, there will be some fraction of the population that chooses to not work because they can rely on the UBI.
As in ALL cases where goodies are handed out by the government, the axiom “give them and inch and they’ll take a mile” applies and soon the moochers will demand (and leftist politicians and Al Sharpton agree) that they are “entitled” to even more. With subsequent increases in the UBI, an even greater fraction of the population will switch from producing to consuming. Further iterations will prevent the UBI model from being sustainable.
The formula proposed by Mr. Yglesias – essentially rewarding people for having kids they not only cannot support, but that increase consumption of Capital – will ensure and even quicker route to the demise of UBI. Aside from being economically dumb, it’s repulsive that he would propose a formula that makes the workers pay for the optional kids of those who have chosen not to work.
Another problem with the UBI (also with minimum wage) is that it raises demand and as a consequence raises prices – even though productivity has not been raised. The result is that any hoped for improvement in the well being of the moochers is wiped out by the inflationary byproduct of the “welfare” plan.
The absolute best that any of these plans can hope for is to simply redistribute wealth. However, man’s nature to respond to incentives, the real result will always be less wealth, i.e. less well being.
Chris
May 31 2016 at 7:30pm
Scott,
What do you think about combining a basic income with a large sales tax? It seems like a simpler way of implementing a progressive consumption tax than many of the proposals I’ve seen (which generally involve reporting income and then deducting saving) and would probably distort incentives less than trying to make up the revenue through a higher income tax. I haven’t thought through the numbers, but I imagine we could replace all income taxes with the sales tax and all welfare with the basic income.
Mr. Econotarian
May 31 2016 at 7:48pm
USGovernmentspending.com uses State & Local Government finance from the Census to add to Federal spending, and comes up with closer to 36% of GDP for total US government spending (at all levels).
$3 trillion is a lot of money, way more than government spends on any of: defense, pensions, education, health care, or welfare.
Scott Sumner
May 31 2016 at 8:53pm
Chris, I prefer a subsidy for low wage workers, rather than a UBI. It doesn’t have as much of a disincentive effect for working.
Mr. Econotarian. The figures I quoted were tax revenue, not spending. I agree that spending is probably closer to 36% in 2014.
ThaomasH
May 31 2016 at 9:02pm
Scott: Do you think the same effects would apply if we taxed consumption, not income and especially not wages?
floccina
May 31 2016 at 9:15pm
1.IMO $200 per adult is plenty. It being a federal program people would be able to relocate to places with very low cost of living.
2. IMO you cannot pay anything for children or you will be paying poor people to have children, not good. Children are great. They are benefit not a cost and most children are cheap to raise (though some are very expensive due to health problems and other big problems and we may need to continue with programs that help folks with very ill children but people are more likely to fund charities targeted at children.)
3. You can tax away the benefit at a rate of 50% people especially men still work at the 70% rate and there would no longer be a minimum wage so remove the price floor as a reason for unemployment.
4. The program should replace Social Security payments.
5. No more SNAP, no more TANF, no more medicaid just the subsidies under the PPACA and change PPACA to only cover evidence based medical care. No single payer because it reduces motivation to work.
5. Also I am convinced that defense spending can be reduced by 50% without putting the USA in more danger.
Because you are correct it is hard to raise money from taxes.
floccina
May 31 2016 at 9:54pm
Oh yeah and there is this:
I love to link to it.
Khodge
Jun 1 2016 at 1:11am
Many years ago, the head of the local public school system pointed out that there was more taxable income that could be raised (a fair reading of the Laffer curve), therefore taxes should be raised.
Why is it that the government has a right to this money? How much revenue the government could raise is precisely the wrong question.
Khodge
Jun 1 2016 at 1:36am
Floccina points out people’s perception of their neighbors’ budgets. I recently read a comment from a woman who was thrilled that she was going to be a beneficiary of an increased minimum wage…she could take a vacation, stop living paycheck to paycheck. She clearly does not understand that expenses expand to exceed income.
With UBI, those with no budgeting skills will be complaining about how little the government pays them while others will manage to budget the little amount that they receive to avoid working. Nobody wins except (as Mike Moore points out) politicians and bureaucrats (who also are under-productive).
mbka
Jun 1 2016 at 1:46am
Scott,
from anecdotal evidence, Europe is somewhat of a more complex mystery. A fraction of the population works very long hours, on either side of the hourly wage spectrum. Laws on generous overtime rates, combined with disincentives to hire more workers that are hard to fire, seem to somewhat combine to cancel out the disincentive of higher taxation. Also note that often overtime pay in Europe is taxed at a lower rate (!).
And, on the other side of the equation, we have a fraction of the population that works less or none at all. Here, there’s a combinations of welfare that disincentivizes work, and generous free education that allows people to remain in education much longer than reasonable.
The many different possible combination of such odd incentives and disincentives IMO explains why some European welfare states do quite well overall and some much less so, even though they all share the same approach to policy here.
Special question: the UK has some of the lowest tax rates and some of the most liberal labour policies in Europe. Why the low per capita income?
Luis Pedro Coelho
Jun 1 2016 at 4:40am
UBI would also have an incentive effect on the working poor as well, thus making negating some of the effects of the poverty reduction. If, say one member of the household now reduces their wage income in response to UBI, that might make UBI insufficient to take them out of poverty (maybe their overall standard of living went up, but statistically, they’d still be poor).
Miguel Madeira
Jun 1 2016 at 5:29am
Luis Pedro Coelho,
With the values proposed by Yglesias, for almost all families UBI alone will be enough to make them statistically not-poor.
Prakash
Jun 1 2016 at 6:06am
Matt Yglesias is not completely unaware of Henry George. The only way the UBI would work is if the extra tax was a land value tax. Any other tax and you’ll be seeing rent rising to scoop up the extra money. I don’t know why he didn’t specifically bring it up in the article. Too confusing, too many ideas to introduce?
UBI for children is a bad idea. UBI from the age of 13 might be better. I agree with Prof. Sumner on wage subsidy. A wage subsidy would be better than UBI. They are on a continuum anyway.
Brian Donohue
Jun 1 2016 at 9:02am
Um…the first $500 billion in additional revenue, if it can be found, would go to eliminating the deficit, right? Right?
By now, everyone should be familiar with the trajectory of entitlement spending in the US over the next 10 years, right? Right?
Europe’s in even worse shape.
Sorry, no shiny new government programs for a while.
Floccina
Jun 1 2016 at 11:15am
I meant to write: 1.IMO $200 per week per adult is plenty.
Floccina
Jun 1 2016 at 11:50am
BTW here is some data. An experiment was tried in Canada.
Scott Sumner
Jun 1 2016 at 12:32pm
Thaomas, A wage tax is essentially identical to a consumption tax in the long run (not at the point of transition). Obviously I’d rather have a UBI financed by a consumption tax, but I’d still prefer a low wage subsidy.
floccina, $200 seems too low, but lots of good points.
OK, I see later you said per week. That seems too high to me, but defensible.
Khodge, I agree that we should not be aiming for the top of the Laffer curve.
mbka, Good points, but even the best are poorer than the US. And of course the US would not be as successful as the best, because our workforce is no where near as well educated (top to bottom) as in say Switzerland or Austria.
The European welfare state has a much bigger work disincentive effect on the less skilled, which supports your point.
Prakash, I agree about children.
Brian, You said:
“Um…the first $500 billion in additional revenue, if it can be found, would go to eliminating the deficit, right? Right?”
That’s my wish, but I suspect you are as skeptical as I am that this is where the revenues would go.
zeke5123
Jun 1 2016 at 1:38pm
Isn’t the plan a lot more tenable if you decrease the UBIT in half? Sure, those with no jobs would live in poverty. But first, people already are in poverty and second it would be relatively easy for those people to earn 5K a year.
The above would still require more spending, but you’d be able to eliminate a lot of inefficient programs.
… Okay — maybe make the UBIT 1/3 of the poverty line? Maybe freeze current government spending levels, and divide future spending between UBIT and debt reduction until UBIT equals the 11K?
ericj
Jun 1 2016 at 4:07pm
I wish people would separate the “how” from the “how much” (a phrase I picked up from Tyler Cowen) in discussing the UBI. Let’s evaluate replacing some set of current government support programs with a UBI at a level such that the overall tax burden is unchanged. I don’t know what kind of UBI this would mean; maybe it would be much less than $10k. But now we’d be comparing apples to apples.
Sol
Jun 1 2016 at 10:46pm
Maybe this is a completely naive way of looking at things, but I just assumed everyone middle class and above would have their taxes raised enough to completely offset the new income they were getting from the UBI? I mean, it seems like a compete no-brainer you can’t give more than half the people in the country free money.
The other thing I’m assuming is that there will still be meaningfully poor people, even if their UBI means they technically are no longer living in poverty…
Lorenzo from Oz
Jun 2 2016 at 4:09am
The US is really a strikingly productive large country.
Another way of making broadly the same point as your post is that postwar US federal revenue oscillates remarkably stably around 17.5% of GDP.
The suggestion that the political economy of US federal politics is going to suddenly shift dramatically because of [fill in policy brainwave here] is not supported by the evidence.
benj
Jun 4 2016 at 4:54am
As with all things, there is a Laffer Curve on the correct level of a UBI.
Too low, and people will still need State support to meet basic living needs, and too high and it will affect work incentives.
In the UK, we’ve calculated that a Citizens Income set at current Child Benefit, Basic State Pension and Job Seekers Allowance, would be revenue neutral (or very near to it) if paid for from scrapping the income tax threshold, in work tax credits and admin savings.
If there is any shortfall, as long as this is financed by a slight flattening of our Council Tax (a form of regressive LVT) then there will be no cost in efficiency.
The UBI is an excellent idea. But for it to work, it’s scope and cost must be limited.
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