Sigh, Another UBI Study (Rant)

I have a need to rant as a result of recent discussion of yet another Universal Basic Income (UBI) study on Twitter. Rather than deal with the ugly political realities of a UBI, UBI proponents insist on doing studies on a tangential topic (how do people spend regular cash grants?).

I use a standard definition of a UBI where all living adult citizens receive a fixed monthly payment from the government. The idea is that the fixed monthly payment provides a guaranteed minimal standard of living without any other income sources needed.

The Only UBI Study You Need

The only UBI study you need to do is get a bunch of people in the middle of the income distribution, and ask them to take part in the following pilot programme.

1. They receive a cheque (OK, direct deposit) from the government for $1000 each month. (Yay!)

2. They use different tax brackets than the rest of the population. They will most likely end up paying more than $1000 in extra income tax each month. (Boo!)

The fact that it would be necessary to coerce people into this study — since enrolling in it would stink — is a massive hint about the problems with a UBI.

UBI Sustainability

A UBI is a boost to household sector incomes. Although it would be easily sustainable if the monthly payment was trivial (e.g., $10/month), the problem is if the amount is supposed to be a minimal acceptable income on its own.

There are two ways of sustaining a UBI where the payments represent something similar to a poverty-line income.

1. Conveniently be located in a rich commodity exporting country or sub-sovereign (e.g., Alaska). The government can impose surcharges on the commodity industry that “pays” for the programme. (The commodity exporter will have a trade surplus that allows it to import consumer goods purchased by the UBI flows, and the government’s fiscal balance reflects these real goods flows.)

2. Impose new taxes on the household sector to dampen the demand created by the UBI income flows. The matching is going to be closed to balanced fiscally since this is a redirection of income flows within the household sector. The programme will not create any new real resources (and would most likely reduce production). Since the UBI flows would be used to buy goods and services within the broad household sector consumption basket, the only way to counter-act the inflationary effects is a similarly broad measure.

A UBI has exactly the same macroeconomic profile as the negative income tax proposals of the 1960s. These proposals were of popular interest (supported by everyone’s favourite monetary crank, Milton Friedman), but pretty much everyone realised they were a terrible idea once one mapped out the effects on income tax brackets. The idea was rightfully abandoned. However, after a a few decades, zealots have re-floated the same idea under a new brand.

The Tax Code Problem

The problem with a UBI is easily seen if you look at what has to happen to the tax code to compensate.

Let us stick with a $12,000/year UBI (which is arguably too low in 2024, but convenient for discussion). There is going to be some income level where the increased income tax payments match the UBI payments. My guess is that the most optimistic level for that breakeven would be $60,000 (i.e., it probably would be lower). That is, for someone earning $60,000 per year, they would need to pay an additional $12,000 income tax — which represents a 20% increase in the average tax rate (versus the pre-UBI tax rate). Assuming that the government keeps the policy of allowing a certain level of income to be earned at a 0% rate (to do things like not dragging teenagers with paper routes into the income tax system), this requires an even larger increase in marginal taxes, since the $12,000 in extra taxes has to be drawn from higher incomes.

To summarise another way, the disposable income redistribution is going to benefit only a minority of the population, and the rest of the population will either be close to cash-flow neutral or negative. This requires a tax increase that is comparable to the amount of the UBI, which is going to result in ugly marginal tax rates.

Basic Income

One of the more tedious responses to the previous argument is that the government does not have to give everyone the income (drop the “universality”). This greatly reduces the economic footprint, and lowers the required tax rates.

However, this is entirely uninteresting, since conditional income flows are already part of the welfare state. For example, I am nearing the age of being able to draw the Canadian Old Age Security (OAS) payment, which is paid to all Canadian oldsters. Although re-branding “welfare” as a “basic income” is the sort of linguistic game that many people like playing, it would only take a decade for “basic income” to end up being used as a slur (as “welfare” is now).

Macro Effects

We can do a static analysis of incomes and try to figure out what tax rates are needed to support a UBI with new taxes matching the new spending. That effectively assumes that the UBI is neutral with respect to inflation — it is just a redistribution within the household sector.

The problem is that if the income is high enough to live off of (which allegedly is the point), one would assume that people will drop out of the labour force. Such an effect is not going to be a feature of time-limited income studies: people in the real world know that they would need to get a job after the study, and employers do not like gaps in resumes. If people do drop out of the labour force, that reduces potential supply, making the inflationary impact worse — requiring even more taxes.

Increasing marginal tax rates also has a well-known response: people drop out of the formal economy and into the informal economy (“working under the table”). Although this informal activity will absorb demand, it will create structural problems as taxes only hit the formal economy. Law-abiding taxpayers are not particularly happy continuously seeing other people having larger incomes and not paying taxes on that income.

One of the attractions of the UBI for free marketeers is that the state could fire social workers on the basis that they are no longer necessary, reducing total expenditures. I have doubts about the potential savings — many social workers are dealing with issues that extra payments from the government will not solve. Meanwhile, there would need to be a new bureaucracy needed to police the UBI payments to ensure that they are not being captured by scam artists. The press is hyper-sensitive to fraudulent abuse of governmental programmes by poor people (but no so much by firms or rich people). Nevertheless, even if the number of civil servants drops slightly, it would be a drop in the bucket when compared to the gross flows of the UBI programme.

We Did The Macro Experiment Already

We already ran a major experiment to see to what extent voters are willing to support very high marginal income tax rates to support lower income groups. This was the post-World War II policy consensus. Since then, those high marginal tax rate regimes were dismantled, along with many welfare state programmes.

Although many progressives pine for the old days, I doubt that any serious left of centre politician wants to run on a platform of extremely high marginal tax rates that supports the ability of the government to mail cheques that mainly go to the people paying higher taxes.

Why Do Free Marketeers Like A UBI?

It makes perfect sense for enemies of the welfare state to push for a UBI. Doing so would allow them to dismantle the rest of the welfare state, on the argument that it is redundant. And once the unpopularity of the higher taxes kicks in, the real value of the UBI would be allowed to wither.

Conversely, it is unclear to me why progressives are lining up behind a programme that was popularised by Milton Friedman.

Concluding Remarks

Continuing to launch studies to see whether people benefit from receiving money instead of confronting the questions around the tax code is a fairly good example of why long-running economic debates never end.