John Quiggin has been taking up the case against the basic income guarantee at Crooked Timber recently. See here and here. Unfortunately, he is attacking a weak man version of the policy.
It doesn’t look like he actually opposes the BIG, in theory, but his objections all appear to demonstrate that a Basic Income is much too hard and expensive to implement, short of a revolution. As such, he ignores the experimental evidence out of Namibia, Manitoba, and the US. Quiggin starts by eliminating an unconditional and universal basic income guarantee and instead focuses on a means-tested guaranteed minimum. Then he assumes that this will reduce employment as workers leave the workforce (presumably to surf). He also assumes that it will be funded by income taxes, natural resource extraction taxes, or capital expropriation.
All of these assumptions are wrong, and caste the BIG in the worst possible light. The real appeal of the BIG is that it is easy to implement, can work piecemeal, will likely increase employment and productivity, and can ramp up slowly, and even unsteadily, to make the transition politically palatable and in accordance with the rule of law.
Cheap at Any Price (“Cost” versus “Dead-weight Loss”)
How much would a basic income cost? There are a few ways to ask this question:
- “How much would we have to raise taxes in order to pay for this policy?”
- “How much productivity would we lose under this policy?”
- “What would the effective tax rate be under this policy?”
It’s important to note that these are separate questions. We would certainly have to raise tax rates to pay for a basic income: there is not a currently a revenue stream devoted to it. These higher taxes might reduce people’s propensity to work, and still more productivity might be lost because people choose not to work when their needs are met. However, depending on how those taxes are collected, such an increase might not increase the effective tax rate: the difference between the tax rate and the services supplied. The early Crooked Timber discussion totally confused effective rates with headline rates, in much the same way that people pretend that the rich actually paid 91% under Eisenhower. They didn’t.
The best way to ask this question would be:
- “What is the dead-weight loss of a basic income guarantee and its associated taxation, compared to what we have now?”
The answer is that, on the most plausible accounts, a basic income guarantee is actually cheaper than the current system.
It’s important to note that the current cost of government in the US is approximately 21.41% of GDP. That’s the GDP divided by the Disposable Personal Income. Doing it this way adds back transfers payments and the positive benefits of government like firefighters and medical research. 21.41% is how much money we spend on all the stuff we don’t really want: invasions and aerial drones, pretextual traffic stops, cavity searches, TSA employees, drug warriors, and CIA black sites.
Government as a whole produces net benefits (a social surplus) because it makes transactions possible through the rule of law. Yet GDP probably overvalues government services and undervalues technological innovation over time, so it’s pretty controversial whether the number is anywhere close to this 21.41% in reality.
In contrast, calculating the economic cost of a transfer payment is pretty easy: I take $100 from Bill Gates and give it to a poor person, there’s no lost disposable personal income in that transaction. Gates has less, but the poor person has more. Yet some ways of funding that transfer can be said to produce a dead-weight loss, an “excess burden” compared to other revenue-generating mechanisms. If it costs me $10 dollars to pay for the administrative costs of running the $100 transfer, the transfer tax costs 10% of disposable personal income. If Bill Gates produces $10 less income than he would otherwise because he has less of an incentive to work knowing that some of his money will be taxed, then the deadweight loss is 20%. ($10 from lost productivity, and $10 to pay for the transfer.) The current administrative costs of Social Security are 0.9%, which isn’t much, so the question is, how much less will Gates and the poor person work under the BIG?
It’s a trick question, of course: Bill Gates doesn’t work, and neither do the very poor! The capitalist allows his investments to work for him, and the poor can’t afford to work or they’ll lose their benefits. So some transfers are less distortionary than others.
Unconditional & Universal (Guarantees reduce Dead-weight Losses)
The big question is whether current workers will respond by leaving the workforce and relying on the basic income. We’d expect and want this to happen to some extent – the whole idea is to free workers from absolute dependence on wage income. But if the shift is too large, the tax burden will become unsustainable.
How large is too large? Suppose the employment rate falls from 60 per cent to 50 per cent, and that capital income falls in line with labor income, so that a larger benefit cost is being supported by a smaller income.
The basic income guarantee solves a problem that Quiggin seems to think it creates: various parts of the government actively discourage remunerative work by creating a “poverty trap” consisting of various means-tested programs that are necessary for survival but are lost as incomes increase. Many of the poor literally can’t afford to work: they’re exiled from the (remunerative) labor pool. That’s a powerful coercive effect that more than trumps the lessened interest in employment felt by middle-class workers who conclude they have enough. This will also be a problem with a negative income tax, which is why a universal guaranteee is actually more efficient.
All of the experiments designed to test the employment effect found that work effort increased under a BIG: in Namibia, workforce participation rose from 44% to 55%! The poor can work for each other if they become the middle class. In Manitoba, hours worked by new mothers and teenagers decreased, but only because the teenagers focused on education and the new mothers on child-rearing. In that sense, remunerative work declined slightly, but productive work effort increased: this isn’t about a “right to surf.” Each marginal dollar earned still increases a poor family’s well-being, but now they can afford to make longer-term decisions by investing in human capital.
Note: the US experiments with negative income tax do show a 13% decrease in hours worked for wages, but similar increases in educational effort to Manitoba’s Mincome, and didn’t test overall employment effects from new labor market entrants because the unit of experimentation was the household. This is a famous moment in social scientific research, when we noticed that the “unit of analysis” matters.
Populations with a basic income guarantee work more, not less!
Tax Consumption, Not Income (If you want more of it, why tax it?)
Quiggin worries that marginal income tax rates needed to fund a basic income proposal might become unsustainable:
Depending on the design of the tax scales and the mix between income and other taxes, the marginal rate for the average worker would probably be around 40 per cent, and with a moderately progressive tax scale, lots of workers would be paying marginal rates above 50 per cent.
For a lot of people, the 50% marginal tax rate mark has psychological significance, since it seems like you’re working for more for the government than for yourself. But that’s precisely why we should focus our taxing attentions on consumption, a belief shared by the majority of economists on both the left and right.
A Basic Income Guarantee causes some to receive payments who don’t actually “need” it. But that’s not such a problem if we fund the basic income with a sales tax or value added tax. (A value-added tax, or VAT, is like a sales tax that is collected all along the supply chain rather than only at the point of sale: it’s cheaper to administer and harder to cheat than a sales tax.) That way, we can recapture the basic income grant paid to the very rich, who will spend more of their earned and basic incomes on consumption and thus repay the basic grant. I’ve written about this before, here, here, and here.
An ideal level for both the VAT and the basic income might be to cause the bottom two quintiles of the population to receive a subsidy paid by the top three quintiles. In the US in 2003, this would have been about $34,738: anyone earning less than this would be subsidized by anyone earning more. Other proposals might aim to redistribute around the median income of $44,000, such that a household earning the median income would receive exactly the same amount in basic income that they pay out in VAT (if they spent every penny they earned.) Since the basic income is designed to supply the poorest with the means of subsistence, the VAT might be as high as 30%: in the median proposal, each household would receive 30% of the median income (about $13,200) as a guaranteed payment, but the median income household would pay out the same amount over the year in sales tax, thus breaking even. This is the best way to widen the tax base while enhancing progressivity.
Transition is as Easy as a Tax Rebate (A BIG can start small!)
Quiggin claims that that the BIG+VAT would require a “big bang” rather than a slow transition:
The simplest way to get to a universal basic income would be to pay it to everyone, then recoup the cost, through the tax system, from everyone above the basic level. While conceptually simple, this way of doing things would be almost impossible to implement except as a ‘big bang’, and is also too hard for me to evaluate.
Along with Chris Bertram, Quiggin has been saying that the path to a BIG is totally unimaginable:
So, any serious approach must, as Chris suggests involve transferring a large proportion of existing wealth from its private owners to the public. Leaving aside questions of justice, I can’t see an obvious transition path here. The problem, as illustrated by the existing wealth-based funds, is that it takes a lot of capital to generate a return that would finance a UBI at or above the poverty line. In the US context, you’d need something much larger than the Social Security Trust Fund (2.7 trillion) to get near the target. On the other hand, it’s hard to see how a universal payment at a level far below the poverty line could mobilise the kind of popular support needed for a policy of radical redistribution.
Hardly! You can start with a partial BIG+VAT and grow it over time. The current proposals for a carbon tax or a national sales tax would both suffice. Make these important Pigovian taxes palatable by giving them back to the people using classic Republican tax rhetoric. Just don’t give them back in the same distributional pattern as they were collected: take a 5% tax on all carbon emissions, and use the revenue to pay every American a small annual income. Call it a “rebate.” A partial BIG wouldn’t replace the current welfare state, but it could help ween us off means-testing, reduce the size of the poverty trap, and help us iron out the kinks in this plan while supplying lots more evidence for pundits, wonks, and social scientists to study.
Take your time, the poor will still be here: we can do 5% now, and another 5% in a decade.
As it grows, the BIG can replace the expensive or particularly paternalistic parts of the welfare state, things like Social Security (which isn’t actually egalitarian) and food stamps. The BIG is tailor-made for these kinds of gradual tradeoffs; it enlists the middle-class in poverty-alleviation. Just think of all the ways in which conservative economists and progressive activists can ally to accomplish economically efficient policy changes: a minimum wage becomes a clear obstacle to employment (with no distributional upside) if everyone has a BIG, and that means even greater workforce participation, as would decreased unemployment insurance, which current employers must factor in to the cost of hiring decisions.
What’s more, we needn’t transfer any wealth at all! For a consumption tax, the current economy is all we need to get started: the household part of the US economy is worth $57 trillion or so. We only need to redirect the income stream from that enormous wealth. If a rich person lives as frugally as Warren Buffet, she won’t pay much in consumption taxes, but that’s okay. We don’t want to discourage investment and productivity increases! We want more of that, not less. We want less conspicuous consumption, right? We want less class difference! You may think that this requires wealth redistribution, but even the Scandinavian social democracies actually have quite large wealth inequality. What matters most is how people live.