Summary
We support:
- A Guaranteed Basic Income (GBI) designed to replace most means-tested transfer programs
- Simplifying the welfare system while reducing administrative costs
- Improving work incentives by eliminating benefit phase-outs that create high marginal tax rates
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Background
Andrew Yang brought renewed attention to the concept of a Guaranteed Basic Income (GBI) during the Democratic presidential primaries in 2020. The idea has a long history and broad ideological support. Supporters included Martin Luther King Jr., Milton Friedman (Nobel Prize-winning economist), and Richard Nixon.
Yang’s reason for favoring the GBI was that automation and globalization were moving too fast to allow workers to acquire the necessary skills to adapt to a changing job market. King’s reasoning was that it was the most effective way to eliminate poverty. Friedman’s was that means-tested welfare programs created a disincentive for work and required a large and expensive bureaucratic infrastructure to administer them. Richard Nixon’s proposed plan (1969) actually passed in the House but never made it to a vote in the Senate.
Incentives and Work
Our reasons for supporting the GBI are closer to King’s and Friedman’s than Yang’s. The problem with means-tested welfare programs, like those mentioned above in the summary, is that they effectively impose high marginal tax rates on low-income workers, because participants become ineligible for these benefits as their earnings increase. Since employment is the bottom rung in the escalator to a middle-class life, means-tested welfare programs trap their recipients and prevent upward mobility. The Earned Income Tax Credit was intended to offset this trapping effect, but because it, too, fades as income rises, it continues to act as a disincentive to upward mobility.
Another reason for favoring the GBI is that the administration of means-tested welfare programs is expensive and creates opportunities for exploitation. Yang’s proposal gave people the option of accepting the GBI or remaining with the current means-tested programs. Unfortunately, this version does not provide the cost savings that total replacement offers.
Universality and Fairness
Some proponents of the GBI think of it as a simple add-on to existing means-tested welfare programs (Yang was not in this group). Viewed as an add-on program, it is too expensive to be plausible and fails to provide the incentive and administrative cost benefits that attracted Friedman to the idea.
Some people object to the idea because they think that it will reduce incentives to work. There have been a number of experiments with the concept, in the U.S. and elsewhere, and this does not appear to be the case. In theory, the opposite effect should occur.
Some people object to the idea of guaranteeing the benefit to everyone, regardless of income. The idea of Bill Gates or Mark Zuckerberg receiving the benefit can seem inequitable to some. If the GBI is taxable income this ought to be a minor concern, since, in those cases, more than half of it will be taxed away through federal and state income taxes. In addition, the after-tax income will simply be taxed again as part of their estate when they die. The advantage of having no means test is administrative simplicity. It is conceivable to have a higher tax rate at very high income levels, specifically for this benefit. If the income level at which the higher tax rate on the GBI begins is high enough, it should not have any significant disincentive effects and it would not require any additional bureaucracy.
It is unlikely that the GBI would replace all means-tested programs. In some cases means-tested programs are intended to benefit children, for example programs for health care for pregnant women and children. If we lack confidence that parents will spend the GBI funds for the benefit of their children, we may want to retain these programs. We feel, however, that programs like SNAP (Food Stamps) should be replaced by the GBI, because, as “near money,” they are fungible and it is debatable that they have a materially beneficial impact on nutrition for the poor when compared to a cash payment.
We would oppose adjusting these benefits for the cost of living by location.
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