Category Archives: Setting Economic Priorities

Greg Mankiw’s case for the UBI

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He writes,

To put it another way, the effective marginal tax rate when a person moves from the bottom to the middle quintile is . . . 76 percent.

The blog post explains how he arrives at this. He is comparing incomes before taxes and transfers with incomes after taxes and transfers. The high implicit tax rate comes from the loss of eligibility for food stamps, Medicaid, and other benefits.

If you replaced all current low-income subsidies with a Universal Basic Income, you could come up with a more rational tax rate for people. Even if the current system doesn’t discourage work effort (although I suspect that it does), just the way that it retards upward mobility strikes me as wrong.

Thoughts on a wage subsidy

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Scott Sumner writes,

let’s suppose that in my town, eliminating the minimum wage laws would cause the equilibrium wage for entry level jobs to fall to $9/hour. (I think it would he higher, but I’ll use this example.) The government could then chip in enough wage subsidy to boost the equilibrium wage to say $14/hour, which is about $28,000/year for a full time worker.

1. Note that the wage subsidy has to go to more than just minimum-wage workers. Otherwise, the marginal tax rate on workers earning just above the minimum is too high. You can only phase out the subsidy slowly, or not at all. I am sure Scott was thinking that, but he didn’t say it.

2. But why go to the trouble of implementing a wage subsidy? We already have a wage penalty, namely the payroll tax. Just cut the darn thing. You only need to implement a subsidy if cutting the payroll tax to zero still doesn’t get the equilibrium wage up to your desired minimum.

Means Testing and Behavior Testing

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When it comes to giving taxpayer aid to poor households, I think that people favor a combination of means testing and behavior testing. [UPDATE: between the time I wrote this and the time I posted it, Bryan Caplan expressed similar ideas.]

Means testing follows the principle that the more you can earn on your own, the less aid you get. Contrary to appearances, a basic income grant works that way, assuming that there is an income tax operating in parallel. See my explanation of the equivalence of a basic income grant with a negative income tax.

Behavior testing follows the principle that the more that your poverty is your fault, the less aid you get. Somebody who is mentally and/or physically handicapped deserves more aid than someone who is able-bodied and able-minded.

My view is that the Federal government has a comparative advantage at handing out means-tested aid, while local governments and charities have a comparative advantage at handing out behavior-tested aid. So I would like to see the Federal government provide a small basic income grant and have local governments and charities supply behavior-tested aid.

Ron Haskins on Work and Welfare

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He writes,

Significant advances against poverty in the coming years seem likely to depend on significant increases in paid work among the poor — and the reasons are not purely economic. Work means increased earnings, to be sure, which in turn would increase self-sufficiency, increase economic mobility, increase income in retirement, and reduce public expenditures on welfare and related programs. But work is more than just a means of income generation. Work also provides adults and their families with a time structure, a source of status and identity, a means of participating in a collective purpose, and opportunity for social engagement outside family life. A host of studies have connected joblessness to increased risk of family destabilization, suicide, alcohol abuse, and disease incidence, as well as reduced lifespan. Several large reviews of research conclude that unemployment not only reduces physical but also psychological well-being.

Read the whole essay. He argues that cutting off welfare benefits for people who choose to not work was a good idea, and we should do the same with food stamps and housing subsidies.

While he does not discuss a Basic Opportunity Grant directly, I think that his analysis clearly lines up against the idea.

Mike Munger and Russ Roberts on the Basic Income Grant

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I found listening to this podcast very frustrating. I just have a very different conception of how a basic income grant works.

You have two parameters to play with. One is the size of the grant, and the other is the income tax rate (let’s go with a flat tax to keep the arithmetic simple). Together, they determine the breakeven income, that is the amount of income someone earns where the tax and the grant cancel out.

For example, suppose that the grant is $20,000 and the tax rate is 20 percent. In that case, if I earn $100,000 then I pay $20,000 in taxes and that just offsets my $20,000 grant. If the BIG is administered by the IRS, at $100,000 a year the IRS and I don’t exchange any money. If I earn $80,000 then the IRS pays me $4000 (20K in BIG minus 16K in taxes), and if I earn $120,000 then I pay the IRS $4000.

Note that this works out exactly the same as a negative income tax with rate of -20% for people earning less than $100,000 a year.* So when Russ says that a negative income tax is better than a BIG, he loses me.

Now, I think that a $100,000 breakeven point is not a good choice. But if you want to get to a lower breakeven point, you need a lower BIG, a higher tax rate, or some combination of the two.

I prefer a lower BIG, say, $10,000 per person, perhaps even less. People who need more and cannot earn it can get help from charity or local governments, which are closer to the family in need and can be more in touch with individual circumstances.

But I also think that a tax rate of 25 percent would not be too high. So with a $10,000 BIG and a 25 percent tax rate, the breakeven point would be $40,000 in income for a single individual.

Incidentally, I also disagree with Russ that our current programs are not problematic in terms of high implicit marginal tax rates. Even if every single program has only a gradual fall-off in eligibility, the combination of programs has fall-offs that for some people make the marginal tax rate on additional income 100 percent or higher.

One issue with a BIG, and with assistance programs of all kinds, is the treatment of households vs. individuals, or adults vs. children. Suppose that the BIG is $10,000 per single adult. Does a household with two adults and two children get $40,000? Or some other number?

Finally, if you only want people to spend assistance on “merit goods,” you can provide the BIG in special savings accounts that can only be used for housing, education, food, and health care. See my early posts in the category of Setting Economic Priorities.

*Mathematically, draw a line with the equation Y = $20,000 – 0.2X [corrected–I had written $40,000], where Y is what the individual nets from the IRS and X is the person’s income. If you think of the line as starting from the coordinate (0; $20,000) and going to the right, then you have a BIG. If you think of the line as starting from the coordinate (100,000; 0) going to the left, you have a negative income tax. But it’s the same line!

Disincentive to Work

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Two chapters from a forthcoming NBER volume.

1. Alan J. Auerbach and others:

We conclude by addressing the question posed in this paper’s title, Is Uncle Sam
Inducing the Elderly to Retire? Based on the work disincentives Uncle Sam imposes on the
elderly, the answer seems clearly to be yes. But an open question is the extent to which the
elderly correctly perceive these disincentives. Indeed, given the complexity and interactions of
our fiscal system and the heretofore reliance on current-year marginal net tax rates, it’s hard to
believe that policymakers, themselves, are cognizant of the level and spread of the work
disincentives they are imposing on the elderly.

2. Gizem Kosar and Robert Moffitt:

families participating in two or more [needs-based] programs, while still facing negative or modest positive rates at low earnings, usually face considerably higher MTRs [marginal tax rates] at higher earnings ranges, often up to 80 percent and even occasionally over 100 percent. While the fraction of families in this category is not large, they constitute about one-fifth of single parent families and this should be a cause for policy concern.

You do remember my argument for replacing these programs with a single basic income, don’t you?

Tyler Cowen on the Universal Basic Income

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He writes,

If two able-bodied people live next door to each other, and one works and the other chooses to live off universal basic income checks, albeit at a lower standard of living, I wonder if this disparity can last. One neighbor feels like she is paying for the other, and indeed she is.

Compared to what, Tyler? Today’s fragmented hodge-podge of programs puts many of the working poor in 100 percent tax brackets. If the problem is to give able-bodied males an incentive to participate in the labor force, the solution is not to maintain a system in which somebody who earns $30,000 a year is no better off than someone who earns $10,000 a year.

Maybe the term “universal basic income” sends the wrong signal. How about “repeal and replace food stamps, housing subsidies, welfare, and Medicaid with a negative income tax?”

A Modern Jubilee Year?

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In an email exchange, I wrote

“I have been reading War Peace and War by Peter Turchin, and I came across this:

When land becomes a scarce commodity. . .Those who do not have enough land to feed themselves will have to start selling what they have to make up the difference. As a result, they become poorer. By contrast, those who have more land than they need to feed themselves will have a surplus income that they can use to acquire even more land. Thus, the rich get richer.

This might explain the custom of the Jubilee year. To stop what otherwise would be a strong tendency for wealth to concentrate, particularly when a society is typically operating close to the Malthusian margin. If you don’t employ such a custom, the society is likely to disintegrate.

This also may account for the laws against usury. People on the brink of starvation will need to borrow. If they are charged interest, you will have poor people getting poorer and rich people getting richer.”

To which, my correspondent replied,

That makes sense. Does this spark any more thoughts on how this concept/phenomenon plays out in today’s world where land isn’t necessarily the key commodity and what an equivalent system might be to abate the issue?

My thoughts.

1. As an aside, land is still an important source of wealth, but it is not the land per se. Rents are high in Cambridge, but that is not because of the fertility of the soil.

2. That is not the only difference between our economy and the sort of agrarian society that Turchin is focused on or which gave rise to the Jubilee year. We no longer are in a Malthusian population situation. In the developed world already, and pretty soon almost everywhere, we have the demographic transition, in which the number of children born to each woman falls dramatically. Humans have created many tangible assets (roads, sewer systems, communication tools, factories, etc.) as well as intangible assets (rule of law, pro-social norms and customs, knowledge, etc.) As a result, there is no reason that people have to be pushed to the margin where they have to sell everything they have in order to eat.

3. Still, there may be other forces that cause the rich to get richer and the poor to get poorer. Let’s not worry about the rich getting richer, but instead worry about why the poor might be getting poorer. Maybe poor people pass along genetic endowments to their children that are adverse. Maybe poor people lack access to mainstream banking, and this makes their everyday transactions more costly. Maybe poor people are stuck with bad schools.

4. Suppose we believe that poor people themselves best understand why they are poor. In that case, it would be better to give them money than to have legislators and bureaucrats design packages of benefits like food stamps and Medicaid and so on. My own guess is that this is the best way to go (although like anything else, it would not be perfect). In that case, the modern equivalent of the Jubilee year would be to get rid of all the social programs and replace them with a fairly large cash payment. This is known these days as Universal Basic Income. It has proponents and opponents on both ends of the political spectrum.

James Surowiecke on the Universal Basic Income

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He writes,

One striking thing about guaranteeing a basic income is that it’s always had support both on the left and on the right—albeit for different reasons. Martin Luther King embraced the idea, but so did the right-wing economist Milton Friedman, while the Nixon Administration even tried to get a basic-income guarantee through Congress. These days, among younger thinkers on the left, the U.B.I. is seen as a means to ending poverty, combatting rising inequality, and liberating workers from the burden of crappy jobs. For thinkers on the right, the U.B.I. seems like a simpler, and more libertarian, alternative to the thicket of anti-poverty and social-welfare programs.

Pointer from Mark Thoma. A few thoughts of mine:

1. The apparent left-right consensus breaks down if in the last sentence the left is thinking that the word “alternative” should instead be “in addition to.”

2. There is a question of how to finance the UBI. For those on the right, the answer is by getting rid of the other programs. For those on the left, it may be less clear. See (1).

3. The existing approach to anti-poverty programs fits with what in my forthcoming book I describe as real-world economic policy: stimulate demand, restrict supply. Food stamps stimulate demand for food. Housing subsidies stimulate demand for housing. Student loan subsidies stimulate demand for accredited colleges. Medicaid stimulates demand for medical services.

A UBI would allow the recipients to decide on their own priorities. It thus lacks the base of support that the other programs have.

Charles Murray on Universal Basic Income

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He writes,

A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear.

Relative to what I have suggested in the past, Murray proposes a higher UBI. From a budget standpoint, he does this by replacing Social Security.

See John Cochrane’s commentary.