Features; The Independentarian

The BIG misunderstanding about the cost of Universal Basic Income

The cost of a Universal Basic Income (UBI) is often greatly exaggerated, because people are tempted to think the cost of UBI is the size of the grant multiplied by the size of the population. You can call that the “gross cost” of UBI, but it’s a gross overestimate of the real cost of UBI. It fact, it’s not a cost in any meaningful sense, because UBI is a “tax rebate” or “a refundable tax credit.” That is, UBI is a negative tax. People seldom call UBI a negative tax because that would invite confusion with a similar policy formally named “The Negative Income Tax.”

But in the more important generic sense, 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.

Far more than any other policy, UBI involves the government taking money in taxes and giving it back to the very same people as a UBI.

A calculation of real redistributive cost of UBI requires subtracting all of that taking-and-giving-back to focus on the net increase in taxes on contributors (or net cuts in other spending) that will be necessary to support the net benefit to net recipients. The redistributive burden is the only real budgetary cost of UBI.

UBI’s net cost issue requires a careful explanation because the issue is almost unique to UBI, extremely important, and sometimes difficult to grasp. The issue occurs because UBI is both universal and in cash. Because it is universal, everyone receives it, even net taxpayers. Because it is in cash, people receive the same thing that they pay. Because it is both universal and in cash, people receive the same thing at the same time that they pay for it.

Most transfer payments go to people who are not at the time also paying taxes to support it. For example, almost no one both pays for and receives Unemployment Insurance, the Earned Income Tax Credit, Temporary Assistance for Needy Families, disability insurance, Medicaid, and so at the same time. The vast majority of people pay for Social Security at one time and receive it at another time. The net issue so important to UBI is negligible or nonexistent for all these policies.

About half of U.S. transfer payments are healthcare related and many of these do involve the same people both paying for and receiving benefits at the same time, but they pay in cash and receive back in something very different: health care. We need to know the cost of converting the cash into that healthcare. So the gross cost of healthcare spending is relevant, although we might be interested in its net redistributive effect as well.

UBI is fundamentally different from all of these policies because for the vast majority of people it works like a tax rebate. You pay taxes in cash and receive back cash at the same time. Suppose you buy something for $100, but you instantaneously receive back a rebate of $50. You do not have to budget for that $100. You have to budget for $50. That $50 is the only real cost to you of this policy. If we want to know the budgetary cost of UBI, we have to net out the enormous extent to which it functions as a rebate. Unlike healthcare spending, the gross cost has no budgetary effects at all. There is a limit to how much healthcare the government can provide you even if you are paying all the taxes for it. You only have so much purchasing power. Only so much of it can be converted into healthcare. But there is no limit to how much cash the government can give you as long as it taxes it right back. The government could give every single American $10 billion in cash without increasing prices—as long as it taxes back that $10 billion as soon as it pays it out. We need to get rid of any attention to this meaningless gross cost and focus on the one cost of UBI that matters: its net cost.

Here are some of the many examples of people mistreating the gross cost of UBI as if it were a real cost:

A google search will produce more articles making this error than I can count.

I recently made some simple estimates of the real cost of UBI in an paper entitled, “the Cost of Basic Income: Back-of-the-Envelope Calculations.” It’s currently under peer-review at an academic journal and available in un-reviewed form on my website. I found that a UBI large enough to eliminate poverty costs on $539 billion per year–less than 16% of its often-mentioned but not-very-meaningful gross cost ($3.415 trillion), 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).

-Cru Coffee House, Beaufort, North Carolina, May 23, 2017

Karl Widerquist

About Karl Widerquist

Karl Widerquist has written 883 articles.

Karl Widerquist is an Associate Professor of political philosophy at SFS-Qatar, Georgetown University, specializing in distributive justice—the ethics of who has what. Much of his work involves Universal Basic Income (UBI). He is a co-founder of the U.S. Basic Income Guarantee Network (USBIG). He served as co-chair of the Basic Income Earth Network (BIEN) for 7 years, and now serves as vice-chair. He was the Editor of the USBIG NewsFlash for 15 years and of the BIEN NewsFlash for 4 years. He is a cofounder of BIEN’s news website, Basic Income News, the main source of just-the-facts reporting on UBI worldwide. He is a cofounder and editor of the journal Basic Income Studies, the only academic journal devoted to research on UBI. Widerquist has published several books and many articles on UBI both in academic journals and in the popular media. He has appeared on or been quoted by many major media outlets, such as NPR’s On Point, NPR’s Marketplace, PRI’s the World, CNBC, Al-Jazeera, 538, Vice, Dissent, the New York Times, Forbes, the Financial Times, and the Atlantic Monthly, which called him “a leader of the worldwide basic income movement.” Widerquist holds two doctorates—one in Political Theory form Oxford University (2006) and one in Economics from the City University of New York (1996). He has published seven books, including Prehistoric Myths in Modern Political Philosophy (Edinburgh University Press 2017, coauthored by Grant S. McCall) and Independence, Propertylessness, and Basic Income: A Theory of Freedom as the Power to Say No (Palgrave Macmillan 2013). He has published more than a twenty scholarly articles and book chapters. Most Karl Widerquist’s writing is available on his “Selected Works” website (works.bepress.com/widerquist/). More information about him is available on his BIEN profile and on Wikipedia. He writes the blog "the Indepentarian" for Basic Income News.

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  • Mike Flynn

    There is a huge mistake in this article. The author writes that there is no cost if the government gives you give back a tax you’ve paid. He claims if a person earning $100,000 pays $20,000 in taxes and the UBI is $10,000, that there’s no cost to the government if it gives him his UBI as a tax rebate; that is, the taxpayer pays $10,000 in taxes instead of $20,000. But that 10k the government gave back to him would have paid for tanks, medical research, roads, student loans, the FBI, etc., The government has no spare cash to give away. It already has to borrow to fund its spending. So the $10,000 will have to come from higher taxes somewhere. Multiply that 10k by all taxpayers who will receive the 10k rebate and you have a huge number. Where would it come from?

    • You’re just making a mistake, Mike Flynn. Let my try to clear it up for you. Take a person at the breakeven point. He starts with $24,000. We taken $12,000 in taxes. We give him back $12,000 in UBI. He still has $24,000. This costs him nothing and it doesn’t preclude you of introducing your plan of taking $12,000 from him to use for tanks, medical research, roads, student loans, the FBI, etc. If you do your plan, his income goes down from $24,000 to $12,000. That really costs him something. You can do both at the same time if you want. The fact that he pays his own UBI in no way makes him less able to pay tax dollars for other things.

    • Adam

      I think Mike’s confusion might center around what costs we are talking about.

      When most people/papers talk about the “cost of a UBI,” they mean the additional cost of the policy, at least as far as tax burdens are concerned. So, the extra amount we’d need to come up with after existing taxes. This article is just saying that when most people think about this additional tax burden, they forget that part of that burden will be offset by the basic income. So, if my gross tax burden were to increase by $15,000 as a result of a UBI policy, but I got a UBI of $12,000, my total/net extra tax burden would really only be $3,000.

      The fact that my tax burden would only be $6,000 instead of $30,000 wouldn’t cost the government anything, though. They still can collect just as much taxes for tanks, roads, the FBI, etc. as they did before. We’re just talking about money from the new taxes that would be needed to pay for the UBI. This article is saying that those new taxes wouldn’t burden people as much as many studies say, because people would get part of the new taxes back in the form of the UBI.

  • carol

    a topic I’d like to learn more about. thanks.

  • Karl, there are some comments by Leximize and Mark Conrad on that santacruz article that bear reading.

    One of the concepts I’m toying with is the concept raised here: (article does NOT take into account the *net* outlay that you mention) https://anonymole.wordpress.com/2017/05/17/ubi-is-not-the-solution/

    In there I try to examine why UBI is needed. And one of the reasons, I think, is that the lower 3/4’s of people just don’t (or can’t) invest. The wealthy ALWAYS invest. If we could get everybody else investing somehow in the productivity gains of the country’s future — then maybe we can solve some of this inequality that way too.

    • Yes, at its core, a UBI is a tool for reducing income inequality. It’s needed because capitalism creates unfair income inequality so we need the UBI to fix this one key defect of capitalism.

      The reason capitalism creates unfair inequality is because of capital — the ability of private property to produce “free” income to whoever owns it. They don’t have to work, they don’t have to do anything, but their private holdings provides free income for them.

      Under capitalism, the only way to become super rich is to hoard lots of capital — to keep others from owning it and collecting some of that free rent. If you own a block of land in Manhattan, you are super rich, because it produces tons of free income for whoever owns it.

      That’s what investors do. Mosty. They compete to be the best hoarder. The most aggressive, most nasty, most selfish people, tend to do well in this game, a whoever does well, ends up owning massive amounts of the fixed assets of our economy.

      If the only way to get income, was to sell your labor, then the economy would be fair. But if you can get free income for being the best hoarder, there is nothing at all socially fair about it.

      The economy needs investors. And we must pay them for doing their jobs. BVut what we don’t need, and most fix, is that the investors should have NO RIGHTS to the free income, their investments create. That “free income” should be a public shared resource — aka, the UBI.

      We don’t want average people doing the investing. We want them to have an equal share of the rent income investments create. We want the best investors in society doing the investing, and we want them to be paid THE SMALLEST INCOME POSSIBLE, to get them to do that job.

      The way a UBI will work is that it will tax all the effective “free rent” out of the economy, and share those “free rents” with everyone in our society. What is left after taxes, will be “fair pay” of labor — such as the true labor cost of hiring a top investor.

      We need a UBI, because capitalism has serious social problems, which must be fixed to make society a better place. And though capitalism has always had this weakness, the problem is getting much worse as automation rises and converts larger shares of the total economy, from labor income (the good income) to capital income (the problem income).

  • Steve Richardson

    Thank you for supporting arguments for the feasibility of UBI. My own article in Basic Income Studies (https://www.degruyter.com/view/j/bis.2013.8.issue-1/bis-2013-0001/bis-2013-0001.xml?format=INT) includes similar assumptions and conclusions. Major differences are that I advocate replacing Social Security and replacing the payroll tax with progressive income surtaxes.

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