Common Misconceptions About The Universal Basic Income

Isaiah Minter | United States

Some years back, Professor Walter Williams of George Mason University showed that we could give the poor enough money to lift them out of poverty at a fraction of what it now costs us to maintain a severely bureaucratic welfare system.

In other words, not only does the US welfare system spend a lot; it spends this large sum badly. One proposed solution to the said ills of our current welfare scheme is a Universal Basic Income. Under this measure, all citizens would receive an unconditional sum of money from the government. Some proposals of a UBI give money to both adults and children, other proposals give money to just adults. In any case, this approach has many objections, and I will address those most common.

Perhaps the greatest quarrel with the UBI is its supposed cost.  Multiplying the estimated American population of 327,270,267 by the UBI, which we’ll say is $10,000, runs a calculated cost of $3.26 trillion. Even when we apply the UBI to just adults, an estimated US adult population of  249,485,228 yields a price tag of $2.49 trillion. 

While multiplying the total US adult population  by the UBI is the common way of calculating a UBI, this approach is wrong, as Dr. Karl Widerquist explains:

UBI is–and must be understood as–a negative tax. When you pay the government, that’s a tax. When the government pays you (without you having sold something to the government), that’s a negative tax. It doesn’t cost you anything for the government to give and take a dollar from you at the same time. If you want to know someone’s total tax burden, you need to subtract the negative taxes they receive from the positive taxes they pay.

Allow a scenario. Imagine that we have a group of four people with incomes of $10, $20, $40, and $100. If we tax them at 40% and divide the revenue evenly among everyone,  total tax revenue is $68 and each person receives $17.

In this system, everyone but the individual with $100 is negatively taxed, meaning they receive money. For example, the individual with $10 pays $4 in taxes but receives $17 back, representing a total amount paid of -$13, as they gained money, and an income increase of $7. The poorest three individuals, in total, receive $23, while the richest person loses that same amount. Ultimately, the richest individual is positively taxed, meaning they lose money, and the three poorest are negatively taxed, meaning they receive money.

By failing to account for the net transfers of the tax system through negative and positive taxation, the majority of UBI cost calculations grotesquely overestimate the price tag of a basic income. In respect to the real cost of a UBI, Widerquist found that:

The net cost of a roughly poverty-level UBI ($12,000 per adult, $6,000 per child) with a 50% marginal tax rate is $539 billion per year: about one-sixth its often-mentioned but not-very-meaningful gross cost of about $3.415 trillion. The net cost of this UBI scheme is less than 25% of the cost of current U.S. entitlement spending, less than 15% of overall federal spending, and about 2.95% of Gross Domestic Product (GDP).

Another common concern with a UBI is that, by offering a free sum of cash,  it would decrease the incentive to work and therefore lower employment. However, the data does not support this claim.

One study done on Iran’s UBI found the following:

The report found no evidence for the idea that people will work less under a universal income, and found that in some cases, like in the service industry, people worked more, expanding their businesses or pursuing more satisfying lines of work. The researchers did find that young people — specifically people in their twenties — worked less, but noted that Iran never had a high level of employment among young people, and that they were likely enrolling in school with the added income.

Likewise, a working paper by the National Bureau of Economic Research found that unconditional cash transfers from the Alaska Permanent Fund Dividend had no significant effect on Alaskan employment, even increasing part-time work.

In truth, this claim would only have validity if the needs and desires of people could be met without having to work, which a poverty-line UBI does not achieve. However, under our present welfare system, we actually do see a disincentive to work courtesy of the welfare cliff. Therefore, the claim that a UBI would provide a disincentive to work is not only false but is also applicable to our current welfare system.

Even the claim made by Nathan Keeble of the Mises Institute, that a UBI would not help alleviate poverty, is demonstrably false. One working paper found that net transfers in Iran as a result of the nation’s 2011 UBI reform reduced poverty. Similarly, cash transfers in Kenya, India, Uganda, and Namibia have all proven that simply giving cash is highly effective at alleviating prosperity and promoting prosperity in the developing world.

Ultimately, the UBI represents a refreshing approach to welfare policy that is based on practical liberty and true poverty reduction. Compared to our current welfare scheme, it is significantly less intrusive on, and more equitable to, the pockets of Americans, offering an unconditional sum of money to all Americans but with a lower price tag. With an estimated $2.48 trillion boost to GDP over eight years, it is a measure we can, and must, pursue.

Image Source World Economic Forum