Universal basic income should balance the benefits and costs

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Recent proposals to expand the child tax credit, which are supported by President Biden, Democrats in Congress, and Senator Mitt Romney, have been viewed as a type of universal basic income, at least for families with kids. The concept of universal basic income garnered national attention last year when presidential candidate Andrew Yang proposed a monthly payment of $1,000 for each adult. The idea has attracted support from voters and lawmakers across the political spectrum.

What makes universal basic income different from the existing programs we have today? Some observers think the major difference is that a pure universal basic income would be sent to everyone, regardless of income, unlike some of the benefits programs that use a means test to ensure the payments are sent only to households with lower incomes. But as I point out in a recent article, the lack of a means test for universal basic income is relatively less important when the idea is considered in the context of the taxes that would be levied to finance the benefits.

Instead, there are three distinctions between universal basic income and many existing programs. First, eligibility for universal basic income does not depend on characteristics other than income, like age and disability status. Second, universal basic income is paid out in cash rather than in the form of health care or other services. Third, it may subject recipients to less shame and other barriers to access than some existing programs. The choice to adopt or reject universal basic income should depend on the benefits and costs of those three main differences.

To see why the lack of a means test is not a radical departure, consider a monthly universal basic income of $1,000 funded by a tax of 10 percent. Someone with zero income receives it and pays no tax while enjoying the net federal transfer of $1,000. Someone with $10,000 of monthly income receives it and pays the tax of $1,000 with no net transfer. Someone with $50,000 of monthly income receives it and pays a tax of $5,000 for a net tax of $4,000. Universal basic income is like a “tax and transfer” system in which those with no income receive a transfer of $1,000 which is phased out or means tested away as income rises. There are still key differences between universal basic income and existing programs.

First, programs like Medicare and Social Security base benefits payments on characteristics other than income, such as age and disability status. A key rationale to target transfers based on these characteristics is that they are related to the ability to earn income but are not affected by individual decisions on how much to work. Basing benefits on these characteristics enables the government to target transfers toward those with less ability to earn income, while reducing the disincentive to work and earn income. Universal basic income does not use these characteristics, so it gives up this chance to target benefits without a penalty on work.

Second, programs like Medicare and Medicaid provide benefits with the form of health insurance and other services. From one perspective, cash benefits like universal basic income are preferable over similarly costly in kind benefits because cash will allow recipients to buy exactly what they need. But proponents of in kind benefits also argued that individuals may not always make the best choices for themselves or their families. Paying in kind benefits may also deter those who do not truly need medical care and other services from gaming the system for benefits.

Finally, some current programs are thought to create stigma or shame for recipients. They may also have other barriers to access like cumbersome application procedures. Universal basic income would likely reduce all of these issues. In one respect, that is a positive as removing these barriers clearly makes recipients better off. However, some have argued that the barriers would, like paying in kind benefits, deter those workers without genuine need for assistance from applying for programs.

Universal basic income in the context of the entire tax system does target net benefits toward lower income workers. But it does not target benefits based on age or disability, does not provide in kind benefits, and does not add major barriers to access. Those features, especially the first two, may provide social benefits. Those features, especially the last two, may place real costs on recipients. So the decision to adopt universal basic income should depend on the balance of the benefits and costs.

Sita Slavov is a professor at the George Mason University Schar School of Government and a visiting scholar with the American Enterprise Institute.

Tags Business Economics Finance Government Income Market Politics President

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