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UNITED STATES: The American Enterprise Institute releases a proposal for a universal basic income

(Former Republican House Majority Leader Eric Cantor speaking at the American Enterprise Institute. Credit to: The Washington Post)

 

The American Enterprise Institute, a conservative think tank, released a piece of research in late May, which was an attempt to analyze the effect of the implementation of a universal basic income (UBI) on the current American social welfare system.

The proposal has been released as a working paper, meaning in this case a preliminary research paper with incomplete considerations, but a base model nonetheless to move forward with and make improvements.

The Basic Proposal

The paper’s proposal is a budget-neutral form of a UBI, meaning instead of implementing a basic income in addition to the existing American social welfare system; most existing programs like Medicaid, Veteran’s Benefits, and Social Security for the elderly over 65 are repealed and replaced with a UBI. Using data from the Federal government’s budget outlays from 2014, the paper finds that the repeal of large programs in America would yield about $2.54 trillion dollars. In addition to this, the proposal repeals 23 different tax benefits like the Student Loan interest deduction and Earned Income Tax credit, bringing in more revenue and freeing up a grand total of about $3.21 trillion for a UBI.

With additional taxes coming in from the UBI itself, and increased tax liabilities on all income tax brackets, the proposal finances and prescribes a basic income of $13,788 for individuals over the age of 18 and $6,894, or half the income of adults, for individuals under the age of 18.

Using Federal government tax data, the paper analysis the net benefit gain or loss by tax bracket and age. Using the parameters described, the findings show that some of the most adversely affected by this system are in the lowest tax bracket ($0-$10,000). This is unsurprising, because many of the programs this proposal had repealed to finance the basic income are concentrated on this tax bracket.

Another group adversely affected by this proposal are individuals 65 and older, also because their benefits, such as Social Security, have been repealed and distributed among the rest of the population. When excluding age groups of 65 and older, however, nearly all tax brackets see a net benefit in this proposal, with the brackets seeing the greatest benefits being those in the middle.

Assessing the Real Value of Welfare Dollars

The second section of the paper attempts to add in the variable of welfare multiples to estimate the real cost and benefit to this proposal. Welfare multiples try to calculate the value of each dollar the government spends to the value by the welfare recipient for each government welfare program. The value of the welfare recipient comes from the idea that funds allocated by a government program are not always as valuable as cash (for example, if a family receives funds allocated for food by SNAP, but would rather use a portion of those funds for other purposes). A good government program would have a welfare multiple close to 1, while a bad government program would have a welfare multiple closer to 0.

Essentially, this section attempts to use welfare multiples to assess the gains in efficiency made in eliminating government waste by allowing people to spend the money how they see fit, or giving them a cash payment as they would have with a basic income.

The paper draws from current literature that estimates the welfare multiple of some government programs, but the authors admit to having to estimate others (see referenced literature for welfare multiples in working paper). They range from more wasteful programs like Medicaid (around .30, as used by this proposal) to less wasteful programs like Veteran’s Benefits (around .95, as used by this proposal). The literature on welfare multiples shows that there are various estimates on how effective these programs are, and therefore other authors may come up with slightly different welfare multiples. The ones employed by the authors in this proposal are an approximation based on different estimates.

When adding the welfare multiples into the equation, the net loss in benefits for the lowest tax bracket is reduced by about $4 thousand dollars per tax unit, though there is still a net loss in benefits. In addition, benefit losses to the tax brackets aged 65 and older are decreased, but by a lower margin than the lowest tax bracket as the welfare multiple is higher for these government programs. This means that the greatest increase in efficiency by implementing a UBI would be in the lowest tax bracket.

Review of the Findings

The important findings in this proposal from the American Enterprise Institute show that, if a UBI were to merely replace the existing social welfare system in the United States, by repealing existing welfare programs and tax benefits, there would be an overall redistributive impact from the old to the young, and from the poor to the middle class; though there would be a gain in efficiency overall.

Again, this is not a surprising finding as the goal of redistributive programs in America is to allocate taxpayer dollars mainly to the poor and the elderly. Some programs allocate funds too stringently, as the welfare multiples try to demonstrate, and sometimes it may be better for a welfare recipient to merely receive a cash payment. While in this proposal of a UBI the overall efficiency is increased, it does not compensate for the net loss in benefits to the poor and the elderly.

It is worth noting that the American Enterprise Institute espouses classical liberal values of entrepreneurship and free enterprise, as expressed on their website. One of their main interests in exploring a UBI, therefore, is to eliminate government waste, but this may also mean increasing the freedom of welfare recipients to make financial decisions that make sense to them.

One area the paper could do better in is to explain with detail how the repeal of tax provisions increased tax liabilities for different brackets and age groups. In their base model, to help finance the UBI, the paper repealed several tax provisions, which brought the average tax liability for the second tax bracket ($10,000-$20,000) to around $6,714, or on average 45% of their income. The average increase in tax liability for the tax bracket of $200 thousand to $1 million, on the other hand, is $28,425, or on average 4% of their income. The increase in tax liability that helps finance this proposal, therefore, is falling mainly on the lower tax brackets and individuals over 65.

In future research, proposals like this could examine the current tax code with more detail, and how it could be restructured to help finance a UBI. Because most of the new tax burden in this proposal seems to be falling on the lowest tax brackets and the elderly, there should be a conversation about who needs to be bearing the new tax burden, and how much that should be.

Notably, the paper admits that it does not take into account behavioral changes that would take place with the implementation of UBI. Proposals like this could potentially include insights from other basic income projects like the Mincome experiment in Canada, which revealed increases in high school graduation rates, and a drop of health care costs.

It is fair to be wary of the intentions of the AEI in releasing this working paper, but clearly a fair amount of effort was put into it, and it appears to be an honest inquiry into the subject. Finally, it is worth saying that the proposal is only a particular vision of a basic income, one that may not agree with many other visions, but research such as this may nonetheless come across some useful insights.

More information at:

A budget-neutral universal basic income

About Benjamin Lascia

Benjamin Lascia has written 3 articles.

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The views expressed in this Op-Ed piece are solely those of the author and do not necessarily represent the view of Basic Income News or BIEN. BIEN and Basic Income News do not endorse any particular policy, but Basic Income News welcomes discussion from all points of view in its Op-Ed section.

12 comments

  • The 99% require SECOND INCOMES. Universal Basic Incomes can be transitional.

    The Second Income Plan originated with the late Louis O. Kelso, father of the Employee Stock Ownership Plan used by 11,000 companies. It does not depend upon jobs or savings.

    Kelso saw automation coming. He believed it could liberate humans from toil, work we do not choose to do. He thought that by age 50, almost everyone could receive about 50% of their income from diversified investments.

    This is the key to reversing the dangerous growth of inequality and loss of purchasing power.

    Robert Ashford, a Professor of Law at Syracuse University has developed Louis Kelso’s Binary Economics expanding upon Kelso’s work. Unlike mainstream economics, it offers a clear plan to end poverty and expand prosperity. See Binary Economics: The economic theory that gave rise to ESOPs; or his book, BINARY ECONOMICS: The New Paradigm. (Coauthored with Rodney Shakespeare.) http://www.cesj.org/learn/binary-economics/binary-

    A History of Economic Thought: A Concise Treatise for Business, Law, and Public Policy, Volume 1: From the Ancients Through Keynes Paperback – April 4, 2017 by Robert Ashford & Stefan Padfield

    In order to provide immediate impact, combine SECOND INCOMES with a transitional Universal Basic Income. These interim funds would gradually be replaced – as growing income is derived by individuals from SECOND INCOMES. See that title at aesopinstitute.org Look under MORE.

    • Benjamin Lascia

      Thanks for the reference, Mark!

      I definitely think the idea of income from diversified investments is an interesting one. As far as I am aware, if you have the money to invest you can get good returns by having a diverse portfolio, and can even hire someone to manage your investments. But I am not acclimated to the investing community, so take that with a grain of salt.

    • Hello Mark,

      Four a universal basic income please review the Global Resource Bank eco currency program at GRB.net.

  • OkinSama

    A proper Unconditional Basic Income also REQUIRES a Universal Healthcare system..

    • Benjamin Lascia

      There may be a few steps to be taken before UBI can be effectively implemented in the US, and a universal healthcare system would be one. Our treatment of addicts might be another, but that can also be addressed in the healthcare system. Instead of locking up addicts and other non-violent offenders, rehabilitative programs that treat them instead of discarding them socially.

    • Benjamin,

      For a UBI please review the Global Resource Bank eco currency program at GRB.net.

  • Hans Olsson

    Interesting reading. The political left is interested and the political right is interested, as shown in the article. I am interested, too, and I am right-left neutral. At least so I want to believe.

    Everyone is interested. The idea of UBI has potential, no doubt. And it should. It is logical.

  • Steve

    Thanks Benjamin! – Eric Cantor… A typical Republican! Your model is Counter productive, non-sustainable, & limited in scope! Your Republican views are narrow minded, stingy, and ignorant! People like you are lack minded, and thinking only about your kind, and yourself. Please get out of your stingy little box, and start thinking BIG! The US is in dire straights! And we need to act now! Below is my Idea…

    #Economics #BasicIncome #Healthcare #Education
    The Banksters are Gangsters! – My 20-year plan…
    Here’s what I would do “if” The Fed crashes the market! I would NOT bail them out! I would buy them out for pennies on the dollar, or seize it, & prosecute if necessary, make it public, & keep the system intact. In addition, this is what else I would do…
    Payback time for the last 30 years’ worth of wage stagnation, massive income disparity and trickle-down economics…

    Here is My Idea… At least for the USA, but this system could really be implemented in any country. (Robots or not) The future is in our hands… + The Federal Reserve Bank Is a Private Secret Society! Make it “PUBLIC”! Note: The Fed & Treasury are already printing / creating money via, public debt, then selling & buying deals, guaranteed by the government and public through (Bonds & Taxes). Massive interest for the bank, out of thin air. My system is unique only in that it would not affect the current operation of business. At least for the time being, except for the 3 programs outlined below. + maybe a “voluntary” inmate & drug addict rehab program. This idea is not a fix all panacea or silver bullet but it would go a long way towards solving many of our social ills, & getting people off the streets, + extra income for everyone. Helping those at the lower end of the economic scale the most. + begin the process towards surplus & away from debt! THINK LONG TERM! The simpler we can keep this the better it will be. And the fewer conditions we add / the more likely it will ever happen at all! This Must Be A Standalone Program!
    NO STRINGS ATTACHED, Period!

    Vote with your dollars! But don’t rob Peter to pay Paul! There is a better way! And everybody gets a slice! – A “Public” Federal Reserve Bank. Owned & Ran by the US Government. E.g. – US Treasury Department & Congress; Our House of Elected Representatives. With a “BASIC” (Created, or QE fund) for “The common man”! Not just the Corporations, Banks, and Wall Street. Thus, easing our massive income disparity! Tax, debt & interest free money. For A – (UBI), – (UBHC) & merit/aptitude based – (B, K-16) education grant. Would go a long way towards getting us out of this mess we are in & everyone would (have more money to spend). It would have to be completely independent of any & all other programs or entitlements except maybe a “voluntary” rehab program for incarcerated criminals & drug addicts who might want to make something better of their life. This could be managed by our Judicial & Medical institutions. The only other requirement would be US citizenship, Bar none… No strings attached! Rich/poor, young/old, working or not. (FREE MONEY FOR LIFE) to be used any way the person sees fit – A (Basic safety net / income supplement) for everyone! It would have to be scaled properly & generously enough, but not so much as to discourage our vocational aspirations. Or disincentives people still needing or wanting to seek work, & additional financial/economic gain. Plus, maybe a little extra for people who cannot work by no choice of their own. e.g. – age, handicap, poor health, special needs, etc… I think this or some version of this is coming! Whether we like it or not! But it’s going to take some, Bold New Leadership, Economic Creativity & Monetary Policies to get the program started! But start we must!

    • The scale as follows would be suggested for the (UBI)… Remember, this money would be – Nontaxable, debt & Interest free, money/income! Created and pumped into the system. No strings attached! Everybody gets money! Simple! Sweet! Won’t cost a dime! Simplicity is the key! And It will be great for society, it’s ills, and the economy! We just need to get it started! ASAP

    1. The Disabled would be eligible for an additional – $600. Per month.
    2. Adults would receive – $1200. Per month.
    3. Teens – $600. Per month.
    4. Youth 12 & under – $300. Per month.

    • And a (UBHC) – Start with (Medicare for all) as a “Basic” plan with a sliding scale, low income, clinic option for the less fortunate. Then any supplemental private Insurance could be purchased at buyer’s discretion! Short, simple, sweet! & already in place! Don’t reinvent the wheel. Just grease it! Putting an enfaces on prevention & Cure.

    • A – (B, K-16) is self-explanatory. Merit/Aptitude based Education according to one’s own ability.

    Premise #1. We are not out of money! Nor will we ever be!

    Premise #2. We have to get rid of this lack minded mentality! And keep things constructive!

    Premise #3. It’s really not – “How can we afford it” – But… How can we afford not to!

    Too the rich… – Just give the damn dog his bone! & You get one too.

  • Nancy Campbell

    Not UBI, (Universal Basic Income) but UBM, (Universal Basic Money) – that’s the solution. Not funded by taxes, but used to infuse newly printed and minted money into the economy to keep the ever-increasing GDP, (gross domestic product) in motion.

    It’s no coincidence that our national debt numbers and the GDP are nearly the same. Both have reached the $19 trillion range.

    For as long as anyone knows, governments have been introducing new money into the economy by loans and debts that need to be paid back with interest. National debt appears to be a horrific bookkeeping “doppelganger” created by politicians: people who have long forgotten whatever they once knew about balancing a daily ledger in a businesslike manner. Business accountants know that posting the same new entry as both profit and loss at the same time results in the exact chaos and confusion that seriously disrupts the various world economies today.

    UBM, distributed evenly at the grassroots to every person who is eligible to vote, as needed, without any other changes attached, in neutral money – not a loan to be paid back, not taxable as income until after it is first used in exchange for goods or services- would be a very easy fix that’s very easy to adjust.

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