Critics say that UBI risks discouraging people from working, which would shrink our economy and thereby lower U.S. living standards.
by PPI Summer Intern Avi Lipton
In his long-shot bid for the presidency, Andrew Yang has brought fresh attention to an old idea: universal basic income. Yang’s UBI proposal, which he calls “Freedom Dividends,” would guarantee $12,000 a year to every American over the age of 18, without any other qualifications. Yang claims that this new entitlement would achieve many different policy goals, including reducing poverty, replacing the income of workers whose jobs are killed by automation, and helping people pay their bills while they pursue socially constructive activities other than paid work.
However, critics say that UBI risks discouraging people from working, which would shrink our economy and thereby lower U.S. living standards. What’s more, giving unearned benefits to every American regardless of need would be massively expensive, and Yang’s proposals to pay for his Freedom Dividends aren’t plausible. Yang’s plan stands in sharp contrast to proven policies, such as the EITC, that put cash into the hands of people who need it without discouraging work or spending huge amounts on payments for wealthy people. Does an idea that could undermine economic growth, steer public benefits to the wealthy, and swell public deficits really deserve to be called progressive?
Of course, everyone would like to have higher incomes and more leisure, but there is this nagging question of how we pay for it. The best way is to encourage private employers to compete for workers by offering higher wages, or positioning workers better to negotiate for a fair wage. But UBI is simply a no-strings-attached wealth transfer that erodes the link between work and economic reward. If UBI induces enough people to work less, economic growth will slow down. This could trigger a vicious cycle in which policymakers keep increasing the size of the UBI to compensate for a weaker economy.
UBI is also poorly targeted. Many of the benefits would go to wealthy Americans who don’t need support, at huge cost to taxpayers. Providing every adult in the country $12,000 a year would cost about $3 trillion annually, which is equivalent to 87 percent of all projected federal revenues in 2019. Even without UBI, the federal government is already expected to outspend its revenues by over $1 trillion next year.
Congress would have to raise taxes substantially or borrow heavily to fund Freedom Dividends. Yang proposes to raise a portion of these revenues with a 10 percent value added tax (VAT). But a 10 percent VAT would only raise between $600 billion and $1.3 trillion in additional revenues, depending on what would be subject to the tax, and the measures he proposes to cover the rest of the costs would not be sufficient to cover the $1.7-$2.4 trillion difference.
If UBI doesn’t make economic sense, what does? Expanding the Earned Income Tax Credit (EITC) is a better way to supplement the market income of Americans in need. The EITC is a refundable tax credit that phases in at a percentage of a taxpayer’s earned income until the credit reaches a maximum benefit. If the taxpayer’s income rises above a certain threshold, the EITC begins to phase out. This benefit structure incentivizes taxpayers whose incomes are in the phase-in region to work more because each additional dollar they earn also raises the value of their tax credit. The opposite is true for people whose incomes are higher than the phase-out threshold, as earning more income reduces the value of the credit, which may dampen the incentive to work. But people who do not have jobs only face an incentive to begin working, and empirical evidence shows that the EITC’s incentives to work strongly outweigh the disincentives. As such, expanding the EITC would put money in the hands of working people without the risk of discouraging too many people from participating in the labor force.
An EITC expansion would be better targeted than a UBI towards those who need support the most, so it can provide significant benefits to those who truly need them for a fraction of the cost. The EITC’s phase-out structure directs almost all of the credit to households in the bottom 60 percent of the income distribution, and the largest benefits to those in the bottom 40 percent. In 2017, the EITC lifted 5.7 million people above the poverty line (including 3 million children) without paying out large benefits for wealthy people that a UBI would.
One option for expanding the EITC would be to adopt PPI’s Living Wage Tax Credit (LWTC), which would provide additional benefits worth up to $2,900-$7,500 (depending on the number of children) to low-income households for only $1.6 trillion over 10 years. A similarly structured program that cost 10 times as much would still be roughly half as expensive ($16 trillion over 10 years) as Yang’s Freedom Dividend program ($30 trillion over 10 years).
Progressives – including Democrats running for President – ought to resist the siren song of UBI and instead embrace policies like the Living Wage Tax Credit and others in PPI’s Progressive Budget for Equitable Growth that are progressive, fiscally responsible, and empower people to participate in the economy.