Earlier in December, Wonkblog hosted a debate on a guaranteed basic income (GBI) for all Americans.
The idea is simple: the federal government would send a check to every adult each month. It would replace all income security and health programs (Medicaid, EITC, TANF, SNAP, etc.) run by the federal government.
This would give low-income Americans more autonomy to use their benefits as they see fit while also cutting down on numerous bureaucratic programs. The goal is to create a more robust, more efficient benefit system.
The proposal has supporters and opponents on both the left and right, but one of the biggest concerns of both sides is how to fund it. It's impossible to implement a large GBI ($1,000 a month or more) without significantly expanding the size of government.
But it is much easier to create a smaller, means-tested basic income ($500-600 a month) and fund it using savings from the elimination of current social benefit programs and a few new taxes. In fact, it's even possible to create a revenue-neutral, $500 a month basic income program. Here's how:
First, we have to settle on a monthly benefit. A $1,000 a month benefit would be tough (though not impossible) to finance, but $583 a month ($7,000 a year) is plausible, as you’ll see.
Second, we'll have to make the program means-tested. This means it is no longer universal, but that's okay. The rich don't need a monthly check from the government. This switch allows the government to target the benefits to those who need them most and not waste resources on those who don't.
The problem with means testing is that it imposes a high-marginal tax rate on beneficiaries. This is a major disincentive to work, but if you want to means test a program, there's no way around this. And to adequately fund a GBI, you need to means test it.
A basic income program could phase out benefits starting at an income level of $30,000 with benefits falling by $233 for each $1,000 rise in income. For instance, someone earning $45,000 would receive a basic income of $3,500. Anyone earning more than $60,000 receives nothing.
The problem here is clear: For every $1,000 a person gains an income they lose $233 in benefits before even accounting for taxes. That means that the phase-out of the program imposes an additional 23.3% tax on the beneficiary. The marginal tax rate on Americans earning $30,000-$60,000 could be more than 50% once all taxes are included.
While this certainly disincentives work, similar disincentives already exist in our current system. As low-income Americans climb up the income ladder, they lose access to benefits as well. In 2012, the Congressional Budget Office found that those Americans could face an effective marginal tax rate as high as 95%. Thus, high marginal tax rates are not a reason to prefer our current benefit system to a GBI.
Third, adults with children should receive an additional benefit. This should also be means tested, but I could not find data on the income levels of parents. For this analysis, all parents receive a $1,500 yearly benefit per child.
In addition, the most recent Census data breaks down income levels for different age groups starting at age 15, but does not separate out the 15-18 age cohort (it only includes the larger 15-24 range). For this analysis, a person becomes an adult (and thus receives their full basic income) when they turn 15. This overstates the cost a bit as full benefits should not kick in until a person is 18.
Fourth, seniors (over the age 65) do not receive a basic income under this program. They have social security, which offers an average monthly benefit of $1,300. Whether or not to increase that is another conversation.
Now, let's get to some numbers (all numbers from Census data).
Just over 120 million Americans between the ages of 15 and 65 earn less than $30,000 a year. All of them would receive the full annual benefit of $7,000. There are also 65 million children under the age of 15, whose parents each would receive a $1,500 yearly benefit per child. That's a total cost of $941 billion.
Using Census data, we can calculate the cost of phasing out the program as well. For instance, there are 6,755,000 Americans earning between $40,000-$42,500 and the average benefit for a person in that range is $4,375. Thus, the total cost of the GBI in that range is almost $30 billion. Here's the cost of each different income range:
Phasing out the programs costs $206 billion for a total cost of $1.147 trillion. That's certainly a lot of money, but it's actually not that difficult to finance.
First, eliminating all state and federal programs for low-income Americans will save almost $800 billion. An October 2012 report from the Congressional Research Service breaks down federal spending on means-tested programs for low income Americans from 2008-2011. Since the recession significantly increased spending on these programs during the past few years, the 2008 figures are a more accurate representation of the typical cost of the federal government’s benefit programs (after adjusting for inflation using the PCE deflator - the Federal Reserve's favorite inflation measure). This means that the funding amounts are not biased upwards due to the counter-cyclical nature of safety net programs.
That total comes to nearly $600 billion. A recent Heritage Report study found that state spending on similar safety net programs comes to $190 billion.
Second, additional funding comes from elimination of benefits in the Affordable Care Act. Obamacare subsidies will be $107 billion a year starting Jan. 1, 2014 and the Medicaid expansion is another $71 billion. These are transfers to low-income Americans that are already enshrined in law, but are not currently included in the Congressional Research Service’s estimate.
Third, the remaining $180 billion in funding can come in the form of new revenues. Eliminating the mortgage interest deduction ($71 billion) and implementing a carbon tax ($105 billion) would just about be enough. A more radical approach could be the implementation of a land tax, which could fund a much larger GBI.
A $180 billion government expansion is not small. For comparison, our 2012 defense budget was $670 billion. Conservatives will certainly dislike those new revenues. If Rep. Paul Ryan wants to propose a GBI that doesn’t expand the government at all, he could lower the benefit to $6,000 a year for adults and $1,000 for each child. That would be revenue neutral while eliminating dozens of bureaucratic government programs and giving low-income Americans the freedom to use their benefits as they want.
Of course, a $500 monthly benefit isn’t much ($583 isn’t much more). But for that reason, the work disincentive of giving poor Americans an unconditional cash transfer may not be particularly strong either.
I still would not suggest that the United States implement the proposal right away. It is a relatively untested idea and would be a radical departure from our current benefit system. In the coming years, Switzerland will hold a referendum and vote on its own basic income program. Hopefully it passes and we can analyze the results. Until then, the idea of a basic income should stay just that
But don't dismiss a GBI, because it seems impossible to fund. That’s simply not true.
SEE ALSO: Paul Ryan Should Support A Basic Income