On Bryan Caplan’s substack, Chris Freiman, a philosophy professor at West Virginia University, recently stated his case for a universal basic income (UBI). Not surprisingly, given that he makes arguments, most of which I had already responded to in my article “A Philosophical Economist’s Case against a Government-Guaranteed Basic Income,” Independent Review, v. 19, n. 4, Spring 2015, I was not persuaded.
I’ll hit a few highlights.
Freiman starts by making the correct economic argument that it’s better for someone to get cash than to get a particular good or service that costs the same amount, because the person can always take the cash and buy the bundle that the government wants the person to have. Notice, though, that that’s not an argument for a universal basic income. Instead, it’s an argument for changing existing welfare programs from payment in kind to payment in cash. A universal basic income would be far more expensive.
Or maybe it wouldn’t. What if the government gave everyone $1,000 a year? Clearly, that would be relatively cheap. Equally clearly, no one is advocating that. Unfortunately, Freiman never tells us what he is advocating. It might be $10,000 a year or $12,000 a year or some other number. He doesn’t say.
What about the idea that a UBI is wasteful because it goes to everyone? Freiman deals briefly with that, stating that “we can make a UBI progressive with adjustments on the tax end.” In other words, it is wasteful, but the government can increase taxes to pay for it.
I don’t know if Freiman has any sense of how huge UBI expenditures would be. I pointed out, using 2013 data, that about 206.8 million adult citizens would qualify for the UBI. At $10,000 each, that would bring the total to $2.068 trillion. Assuming that Freiman would get rid of all anti-poverty programs–federal, state, and local–that would have saved $952 billion. Net result: an increase in government spending of over $1.1 trillion annually. He advocates that taxes be increased for a lot of the high-income recipients. He doesn’t specify magnitudes. But I do. In discussing a similar proposal by philosophy professor Matt Zwolinski, I wrote:
How would Zwolinski fund this major increase in federal spending? If his goal were to keep the already bloated half-trillion-dollar federal deficit constant rather than increasing it, he would need to have the federal government increase taxes from their estimated $2.993 trillion to $4.361 trillion, an increase of 45.7 percent.
One of the most well-established facts in the economics literature on government finance is that raising a tax rate by x percent raises the revenue from that tax by less than x percent. The reason for this relationship is that the higher tax rate discourages the activity being taxed, so the tax base on which the tax is levied is smaller than otherwise. So if the federal government were to raise all tax rates by the same percentage to generate the revenue needed, it would have to raise all tax rates by more than 45.7 percent and probably substantially more.
Assume, for simplicity, a 50 percent increase in all tax rates, although the percentage would probably be more. Why more? Assume conservatively that a 45.7 percent increase in tax rates would reduce by only 5 percent the base on which the taxes are levied.Then a 45.7 percent increase in tax rates would increase the federal government’s tax revenues by only 38.4 percent.6 Thus, tax rates would have to be increased by substantially more than 45.7 percent.
That conservatively estimated 50 percent increase in tax rates means that the current Social Security payroll tax (Federal Insurance Contributions Act or FICA tax), instead of its current 6.2 percent each on employer and employee, would be 9.3 percent. The bottom marginal tax rate on individual income, instead of being 10 percent, would be 15 percent. The top marginal tax rate on individual income, instead of being its current 39.6 percent, would instead be 59.4 percent.
I go into a lot of other problems with the UBI in my 2015 article. So you can read it.
In my remaining space, I want to focus on that $1.1 trillion number. We are already in the hurt locker, as my Navy students would have put it, with the current federal budget and the current federal deficit. I’m not sure if Freiman has any idea how much hurt. If we are going to keep federal debt from going much above 100% of GDP and if we are to avoid major tax increases, we need to cut programs. Adding over $1 trillion a year to federal spending would hasten the likely budget catastrophe to this decade rather than the next one. If you want to see some relatively up to date numbers on this, read the transcript of David Beckworth’s March 2023 interview of Manhattan Institute’s budget analyst Brian Riedl. Here’s one excerpt:
Ultimately, the only two choices we have as a country are to address Social Security and Medicare or nearly double middle class taxes. Everything else doesn’t come close to closing the gap. Ultimately, this is what Europe does. Europe finances its large government spending with payroll taxes and value added taxes. You can’t do it all from taxing the rich. In fact, what I calculated was, just to stabilize the debt, not balance the budget, but stabilize the debt at about 95 or 97% of GDP, if you don’t do anything on the spending side, you would have to both raise the payroll tax from 15% to 24%, that’s the combined payroll tax, employer and employee, and do a 20% value added tax.
The UBI, already a bad idea in 2015, is a non-starter today.
The pic above is of Chris Freiman.
READER COMMENTS
robc
Nov 9 2023 at 8:42am
I am busy arguing in the comments section with someone who doesn’t understand that a negative income tax and a UBI are mathematically equivalent. Even after I gave an example.
Which leads to a question I have…I agree with you on the UBI, but what did Milton Friedman see, or not see, that would lead to him proposing a negative income tax? It makes me pause in my judgement, for obvious reasons.
robc
Nov 9 2023 at 8:50am
Also, an article I wrote in 2019 attempting to steelman the UBI.
https://www.glibertarians2019.link/2019/05/28/standard-libertarian-disclaimer-episode-1-universal-basic-income/
David Henderson
Nov 9 2023 at 12:02pm
I’ll check your article later.
Meanwhile, re UBI and NIT, by one version of UBI, you’re absolutely right. This is the version that I think, IIRC, Matt Zwolinski favors: past some income, the UBI phases out.
But the other version, which I focused on in my article, simply raises lots of tax rates. The proponents typically don’t say much about which ones and how much they need to be raised, which is why I focused on tax rates. I think they have very little concept of how massive the tax rate increases would have to be. This second version is not equivalent to a NIT.
Re Friedman, after proposing it in his 1962 Capitalism and Freedom, he didn’t say much more about it. I wonder if that’s because he had second thoughts. I’ll look back at that chapter and report back if I find anything.
Emma
Nov 9 2023 at 4:27pm
Why not focus on the NIT-type one? That’s the one Freiman puts forward with articles arguing that the gross cost you are implying is nowhere near the net cost, which is really effectively affordable.
Here is a proposal from the UK which demonstrates that little has to change tax-wise to implement a NIT-type subsistence allocation.
https://atlaspragmatica.com/arguments-for-a-ubi-the-accountant/
Do find this credible? If so, to what would you still object if cost is not an issue (at least not as much as the version you used)?
David Henderson
Nov 9 2023 at 4:58pm
You ask:
Because I’m not convinced that that’s the version he does advocate. You seem to be convinced of that and you mention his “articles.” Can you give me some links so that I can check them?
You write:
It depends on what you mean by “credible.” Could it exist? Yes. Would it avoid HUGE disincentive effects? No. Notice that even relatively low-income people would pay a 47% marginal tax rate. Keeping only half of their income from working would cause many people to work less and/or to work under the table, thus making government’s tax revenues lower than anticipated.
Emma
Nov 9 2023 at 5:14pm
Thanks for taking the time to respond!
Here are the links included in Mr Freiman’s article
https://qz.com/1355729/universal-basic-income-ubi-costs-far-less-than-you-think
https://medium.com/basic-income/if-we-can-afford-our-current-welfare-system-we-can-afford-basic-income-9ae9b5f186af
https://www.scottsantens.com/how-to-calculate-the-cost-of-universal-basic-income-ubi/
As for the disincentive, including the allocation which is not taxed, the general tax curve is the same as it is right now (more or less). So ultimately, you gain & lose as much as you are now, right? I’m curious to know more of you thought about this (I think I know, but would be pleased to read it from you, hehe).
David Henderson
Nov 10 2023 at 6:26pm
Emma,
You write:
That curve hides the factor that causes the bad incentive effect.
I’ll write a further blog post in the next day or two laying this out, because I think a number of people aren’t getting the difference between marginal and average.
Emma
Nov 11 2023 at 8:48am
Thanks David, that’s what I thought.
But I’m curious, since the tax curve is more or less the same as it is now, could we have a more “progressive” tax structure (instead of a flat one) that maintains the disincentive effect to a level on par with what it actually is today or even that further minimizes the said effect?
Looking forward to the next post!
Mathias
Nov 10 2023 at 8:58am
How is phasing out the UBI as income goes up any different from a tax? Doesn’t it have exactly the same impact on incentives on the marginal dollar?
David Henderson
Nov 10 2023 at 2:27pm
You ask:
It’s not. It’s an implicit added marginal tax rate in the range of income over which the UBI phases out.
You ask:
No. It certainly hurts incentives but it’s not close to exactly the same impact. As the UBI phases out, incentives are hurt for the people in the phaseout region of income. The higher the phaseout percent, the bigger the disincentive effect for those people. The lower the phaseout percent, the lower the disincentive effect but the greater is the number of people affected.
With no phaseout but just added taxes, everyone paying taxes faces a disincentive.
Matthias
Nov 12 2023 at 7:04pm
Sorry, I don’t get your second point.
For every phase out schedule, there’s an equivalent income tax brackets of marginal rates.
Or are you operating under the additional assumption that the income tax has to be progressive, but phase-outs are allowed to have any shape?
MarkW
Nov 10 2023 at 7:28am
Somebody should point out that the form of negative income tax that was adopted and has been in place for decades (the EITC), was designed to minimize the disincentive effects of a ‘pure’ NIT or UBI. Specifically, EITC requires employment — you can’t get it if you don’t work. The danger of a UBI that’s enough (or nearly enough) to live on is that many people will discover they prefer relative poverty (topped up with some home production and off the books work) in exchange for having all of their time to do what they like and never having to punch a clock or answer to a boss. And I can’t say that’s irrational. We spend a fair amount of time in northern Michigan. It wouldn’t take a lot of money up here to live in a trailer, fill your freezer with venison and salmon, grow some vegetables, do some handyman work for second home owners, and drive an old truck maintained by a local shade tree mechanic. As in Appalachia, there are already a number of people up here on disability who do pretty much exactly that. But qualifying for disability isn’t so easy whereas qualifying for a UBI would be automatic.
Emma
Nov 11 2023 at 8:51am
I’m curious: how is that kind of life a problem? There seems to be labor and value creation involved, no?
MarkW
Nov 12 2023 at 1:04pm
Are you really asking — what’s the problem with increasing numbers of working-age, able-bodied people deciding they’d prefer to live their lives on the dole?
Brandon Berg
Nov 9 2023 at 11:19am
The late 20th century mantra of tax reformers was “broaden the base and lower rates.” The advantage of this approach, of course, is that the lower rates reduce the disincentive to work.
A UBI does the exact opposite. It dramatically narrows the tax base while increasing marginal rates.
Tom Jackson
Nov 9 2023 at 12:05pm
I’ll dig into the details of the debate later, but I just want to correct on statement: Chris Freiman actually is a professor at West Virginia University:
https://business.wvu.edu/faculty-and-staff/directory/profile?pid=3577
His current affiliation also is listed on his X account, worth following because of the libertarian memes:
https://twitter.com/cafreiman
David Henderson
Nov 9 2023 at 3:08pm
Thanks. Correction made.
Charley Hooper
Nov 9 2023 at 1:38pm
We’re driving toward a financial cliff, so…step on the gas? Advocates of government programs such as this should be looking for ways to reduce spending to protect the programs they like. When we hit the cliff, there might be collateral damage to the “good” programs.
― Margaret Thatcher
That’s probably 2015.
David Henderson
Nov 9 2023 at 3:09pm
Right you are about the date. Sometimes my touch-typing fingers move faster than my brain.
nobody.really
Nov 14 2023 at 4:32pm
Maybe–but why rush to judgment? We’ll know in about 82 years.
Mark Z
Nov 9 2023 at 1:49pm
It would make more sense, strategically, for proponents of the UBI to start by advocating for converting existing government services into vouchers, e.g., free public education into an education voucher, government health programs into a healthcare voucher. Doing this across all programs would gradually approach something like a UBI (but with limits on how much you can spend on each category of good/service), and would avoid a net increase in spending.
It Freiman’s defense (maybe, since I’m speculating here), it’s possible that he sees a UBI as replacing more than just anti-poverty programs. He may also see it as replacing government spending on public schools and healthcare and other public services. If that’s the case, then it may not increase spending.
David Henderson
Nov 9 2023 at 3:10pm
Good point in your first paragraph.
Also good point in second paragraph. My guess is that he doesn’t have that in mind, but who knows?
Emma
Nov 9 2023 at 4:34pm
You can replace much of the spending when opting for NIT-type subsistence allocation. Welfare, unemployment insurance, social security, student grants, culture and arts subsidies, etc.
You can make a pretty compelling case for abolishing the minimum wage too, which should get much support around these parts, I guess. You can facilitate layoffs and remove other regulations to further liberalize the labor market.
As pointed out elsewhere in this thread, this doesn’t have to be much more expensive than than the actual programs it could replace. Look for the net cost, not the gross cost.
nobody.really
Nov 14 2023 at 5:02pm
Somewhat off-topic, but fun to contemplate:
Various authors forecast a world in which machines/computers become ever more productive, causing human employment to become ever more lucrative, prestigious, and–thanks to government transfers such as UBI–optional. In a world in which unemployment poses no economic or personal problems, would we still need official sanctions for employment discrimination? Or for having a hazardous workplace? Are there other regulations that we might surrender under these circumstances? Perhaps the techno-utopian future could be a libertarian dream!
Alternatively, in a world in which people had fewer other things to occupy their time and attention, would people become ever more obsessed with status/symbolism and safety–and thus MORE desirous of regulation? Indeed, hasn’t this been the pattern as society has grown wealthier? Thus, perhaps the techno-utopian future could become a libertarian nightmare.
vince
Nov 9 2023 at 3:19pm
David: Have you considered the benefit of eliminating the cliff effect that discourages so many from increasing their incomes?
If UBI were taxed at an average rate of 18 percent (per IRS statistics of income), an additional $360 billion would be raised. That would leave a deficit of about $750 billion.
If real GDP increased by $750 billion, wouldn’t it be a breakeven? If eliminating the cliff effect led 30 million workers to produce an extra $25,000 each, we’re there.
David Henderson
Nov 9 2023 at 5:00pm
You write:
Please explain what you mean when you say that UBI would be taxed at an average rate of 18 percent. Would there be a separate tax on UBI? If so, how would that work?
vince
Nov 9 2023 at 7:12pm
According to the IRS, total taxable income in 2020 was 9.8 trillion and total tax before credits was 1.8 trillion. It’s from Publication 1304, which is loaded with information.
If UBI were taxable income, it would be an addition to the 9.8 trillion.
David Henderson
Nov 10 2023 at 10:26am
I still don’t get your point. What do you mean when you say that UBI would be taxed at a rate of 18 percent?
vince
Nov 10 2023 at 4:46pm
On national taxable income of 9.8 trillion, tax was 1.8 trillion. That’s an 18 percent effective rate. With UBI of 2 trillion, national taxable income would increase to 11.8 trillion and the tax should be at least 2.16 trillion, an additional 360 billion.
David Henderson
Nov 10 2023 at 6:16pm
I think you’re misunderstanding a UBI. If if were all being taxed, there would be no point in having a UBI.
vince
Nov 11 2023 at 1:40pm
My main point is that UBI eliminates the cliff effect, which discourages production. Any discussion of the benefits of UBI should include an estimate of increased production.
As for taxes, nothing about UBI says it shouldn’t be considered taxable income. As taxable income, UBI becomes more progressive.
If someone makes $650,000 his bracket is 37 percent. With $10,000 taxable UBI, his taxable income would be $660.000 and his tax would increase by 3,700. For someone in the 10 percent bracket, his tax increase would be $1,000. My 18 percent was a rough approximation of the overall tax that would be collected from $2 trillion of UBI.
Jim Glass
Nov 12 2023 at 9:45pm
Are we saying we have a political system that will enact a $10,000 annual subsidy for people with $650,000 of taxable income, and more?
I can see Bernie and AOC supporting UBI. I can’t see them supporting that.
In the real world no UBI will be truly “U”, it will be means tested. No voters ever want to get hit with paying tax cost (including the cost of carrying increased debt) to pay money to people richer than them. So look at the income distribution across the voting population and guess where the phase-out for your favorite kind of UBI will be.
There will be one, just as there is for other breaks for the less rich throughout the tax code. (Why don’t Jeff and Elon get the EIC, when after all, they’d pay 37% on it?)
Ahmed Fares
Nov 9 2023 at 4:16pm
If we assume that a UBI would cause a reduction in crime costs, the US could find the funding here.
https://news.vanderbilt.edu/2021/02/05/new-research-examines-the-cost-of-crime-in-the-u-s-estimated-to-be-2-6-trillion-in-a-single-year/
David Henderson
Nov 9 2023 at 5:03pm
You seem to be assuming that UBI would end crime. Otherwise, why even mention the $2.6 trillion?
I don’t even see who UBI would reduce crime much. Can you explain?
Ahmed Fares
Nov 9 2023 at 8:33pm
As an example of a UBI reducing crime, this from Namibia:
https://en.wikipedia.org/wiki/Universal_basic_income_around_the_world
john hare
Nov 10 2023 at 4:01am
I am not convinced by that study. Villages of people right at the edge will have some that steal to survive, which is implied by the results. In the US, I have noticed that a lot of lower end crime is by people already getting government aid in various forms. It does seem that the aid actually increases crime in some cases as the criminals don’t have to hold a job to pay bills.
BC
Nov 9 2023 at 5:24pm
“Freiman starts by making the correct economic argument that it’s better for someone to get cash than to get a particular good or service that costs the same amount”
It never occurred to me before, but this point means that we could actually replace in-kind benefits with a cash benefit that is *less* than the cost of the in-kind benefit without actually reducing the benefit to the recipient. So, we can cut spending without reducing benefits!
In fact, we can actually *increase* benefits while cutting spending at the same time. For example, we could offer Medicare recipients a cash benefit that is less than the current cost of Medicare health insurance. Only people that value the cash more than the Medicare health insurance would take the cash benefit, of course, so that would result in a net increase in benefits. Yet, because the cash benefit would cost less than the Medicare insurance premiums, we would also get a net reduction in Medicare spending.
Similarly, we could offer people an option to receive Social Security benefits even sooner than age 62 but for an amount that was less (in present value terms) than if they wait. The result would be a cut in Social Security spending even while benefits went up.
Ditto school choice vouchers: a voucher for less than current per-pupil spending can both increase education benefits and reduce spending. Contrary to what one might think, offering people more choices is actually cheaper than forcing them into only one option — a true free lunch! (Speaking of school lunch programs…)
Jim Glass
Nov 12 2023 at 9:58pm
And social scientists have known this forever. They didn’t even need economists to tell them. Yet they move only ever so slightly in this direction. So clearly there are major problems with this idea…
Matthias
Nov 10 2023 at 9:02am
You could tax away all land rent (via a land value tax) and not discourage any economic activity at all.
That could raise a lot of extra revenue.
(Though I would suggest using the proceeds to eliminate the deficit, then lower or eliminate inefficient taxes like capital gains taxes or (corporate) income taxes etc, and then think about a UBI. In that order.)
robc
Nov 10 2023 at 11:55am
As someone who favors the Single Land Tax, the key word is “Single”. It replaces all other forms of taxation, so it wouldn’t raise any extra revenue…it would reduce it by about 2/3rds.
Which is a good thing, IMO.
Matthias
Nov 12 2023 at 7:08pm
That’s why I didn’t call it a single tax.
Whether a land value tax can replace all other forms of taxation, and whether that would increase or decrease the overall tax take is a different question.
(I suspect it might increase the overall absolute tax take. For example, Swiss real estate is a lot more expensive than German real estate, even for properties both right next to the border: that’s because income taxes are much lower in Switzerland.)
Ahmed Fares
Nov 11 2023 at 3:00pm
vince,
Arnold Kling came out with an article in favor of a UBI that mentions the “cliff effect”. A quote and link to follow:
https://arnoldkling.substack.com/p/the-ubi-should-be-inadequate
vince
Nov 12 2023 at 12:38pm
Thanks for the link, Ahmed. That’s basically what I was trying to say.
Jim Glass
Nov 12 2023 at 11:06pm
So he wants to cut them to $8 per day per person to cover housing, food and medical care. While giving the same cash amount to Jeff, Warren, Elon, Bill, and all the other deca-millions of well off Americans, as a matter of economic principle. Don’t want them all quitting their jobs!
This will really sell well through the political system, for sure!
I’m all for getting the whip out and beating all the lazy slugs who are mooching off the welfare system into going out and getting a job.
But even I realize that a whole lot of the people who receive Medicaid, food stamps, and housing subsidies already are working, or are incapable of doing so. And $8 a day for them, to cover all that, just seems like a lame insult. Why not be sincere and cut them off cold?
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