Mike Munger and Russ Roberts on the Basic Income Grant

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!

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25 Responses to Mike Munger and Russ Roberts on the Basic Income Grant

  1. John Hall says:

    “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?”

    HHS defines the Federal poverty level based on the number of persons in a family unit. One person is 11,770 (in 2015, from wikipedia), while four people is 24,250. Seems reasonable to base any BIG on these numbers.

    Of course, one could disagree about how a poverty level is calculated…

    • JustinD says:

      In my view, this would probably be the least bad way to structure a basic income grant. Using 2015 data on the number of households by size (HH-4 from the Census Bureau), it would cost $2,234 billion/yr, which is 12.3% of 2015 GDP and 14.4% of 2015 personal income. Given that we can expect some evasion, it would probably require a flat tax on personal income of around 17% to fund. Unfortunately, there would probably need to be significant ancillary spending on health care and seniors to make this type of BIG politically viable.

  2. Jesse says:

    I do like your approach much better than theirs. I would prefer to provide the money directly even if it is taxed back because I’d someone looses their income it would mean that they would still have the cash flow from the BIG immediately without application or paperwork. I like the flat rate approach. That way income would be deducted by the employer and it wouldn’t matter for most how many jobs or any other factor for what the deduction was.
    I would make it an amount by adult individual, with a somewhat increased amount if their status was custodial for dependant children. This would not discourage marriage or household formation and the biggest cost impact of having children is that you have them at all, while discouraging having lots of children to get more payout. A rate of 10 to 12k per adult with maybe 1/3 more for being a parent seems about right. If the rate is about equal to the top income rates now, the actual average tax rates are not too far off what they are now. Basically the BIG fills the area at low to medium income below the straight line that exists now. I have never understood why the current approach is to have high effective marginal rates at the top and the bottom, but lower in the middle. Spread out the marginal rates as consistently as possible.
    The other thing they missed was that by using a BIG and getting rid of a minimum wage, workers are far less likely to be automated out of a job, as their marginal cost to an employer would be less for the same end living standard.

  3. Effem says:

    Do current health benefits get replaced by a BIG? If so, this is problematic. If you spend your entire BIG and then get sick, society is simply not going to let you go without medical care.

    • ThomasL says:

      Yes, it does, and it is just one example of the biggest BIG risk, and that was the part I thought was most missing in this podcast (though I did enjoy listening to it).

      If we give $20K a year, expecting each person to use it wisely on housing and food–or healthcare–and instead one blows the money, has the BIG made a credible promise to leave one to the results?

      I rather doubt it has, which means the BIG just becomes one program among many.

      • Jesse says:

        This is only a question in the US. Not having a baseline public option may make a BIG unworkable without establishing something like that. They explicitly excluded Healthcare in the podcast discussion. Elsewhere the public health system would be kept intact and separate.

        • ThomasL says:

          Housing, food, etc. still show the same flaw (or at least risk). If I gamble my money, for example, and can no longer pay rent or buy food, is that it?

          You can exempt healthcare by assuming a universal healthcare program, but do you also have a universal housing program, a universal food program, and a universal {fill-in-the-blank} program?

          Once there are universal programs covering everything universally, is the BIG anything but pocket money?

          • Jesse says:

            This is why it should not be implemented in one shot. Experiment with how big an issue wasting the money is and see if providing effective gambling and addiction treatment mitigates it. Would it help to have smaller, more frequent payouts? Could some of it be put in a form like food stamps for food, housing and taxes (so if you have income you would offset the restricted portion first)?

      • Nikhil says:

        I believe in the podcast Munger said that the BIG plan he was talking about would not replace healthcare.

  4. JustinD says:

    My concern with the BIG is that it seems unclear what problem it is trying to solve, and to the degree that problem is identified, how a BIG would be the most effective way of solving the problem. Aside from that, once it exists, I presume it will be almost impossible to eliminate it, and additionally there will be continuing political pressure to increase the size of the grant.

    Suppose we want a BIG to ensure that all households will have a sufficient amount of income, and suppose that 20% of households need assistance to rise to an adequate minimum level. In that case, we could either spend (for example) $10,000 on each adult, we could spend $50,000 each on the adults actually in need, or (most probably), something in between $10,000 and $50,000 on adults actually in need, providing more to those truly in need while saving taxpayer money in the process.

    There just seems no optimal trade off for a BIG – a sufficiently large BIG is too expensive, and a sufficiently cheap BIG is too small. Consider Arnold’s proposal of a $10,000 grant – it requires a flat tax rate of 25% just to fund the grant, and nothing else the government does. As $10,000 is not enough to provide for medical care (and politically speaking, its far too low to replace Social Security), there will still need to be welfare state expenditures on top of this, along with defense, transportation, education, etc. Counting taxes at all levels of government, everyone will be paying 40-50% marginal tax rates, and that’s if you can convince progressives to go with a flat tax. Since most people won’t really need the $10,000, we get a lot of deadweight loss without much benefit.

    I don’t think a BIG is the only way to minimize the issue of high implicit marginal tax rates.

  5. ColoComment says:

    I don’t like podcasts, so didn’t listen – maybe this is covered and if so, apologies.
    When calculating the taxpayer tab for all this BIG, who is paying the tax, be it flat or non-? For 2015, it’s estimated that slightly more than 45% of HOUSEHOLDS paid no federal income tax. (This October 2015 Forbes article mentions that estimating individual taxpayers v. household taxpayers is more difficult…..
    http://www.forbes.com/sites/beltway/2015/10/06/new-estimates-of-how-many-households-pay-no-federal-income-tax/#30055ed53cf4)
    So, if all these lower-income and/or needy and deserving people are going to receive a check for $X thousand dollars annually (indexed similarly to Social Security?), do all of the federal refundable (or not) tax credits go away? Will this BIG be paid for by a broader base than the current?
    Also, unless we’re willing to let people suffer the bad consequences of poor judgment, this is & should be a no-show concept. And we will never let people die when they could be treated, nor children starve when they could be fed. So, as someone said above, we’ll simply end up with what we’ve got now, plus BIG.
    Me? I would prefer to get government completely out of the business of welfare redistribution, and go back to “[p]eople 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.” …y’know, the way it used to be done.
    I can dream, can’t I?

    • JustinD says:

      I think the general sense is that a BIG, due to its size, would fully replace all tax credits, deductions, etc., so that the first dollar earned is fully taxed. If it wasn’t this way, the math outlined by Arnold wouldn’t work. Generally, I’ve seen a BIG combined with a flat rate tax as it produces a very progressive ‘effective’ tax rate across income levels, though presumably many advocates left of center would prefer continued used of progressive marginal tax rates.

      I’m fine with some level of federal ‘safety net’ spending, but it really should be exactly that – a safety net.

  6. The Original CC says:

    I was shocked by how much they downplayed the effects of high marginal tax rates. This issue applies both to poor people in the current system (even if their average tax rate is low — their marginal rate can be enormous) and higher-income people if they bump up the rates to fund BIG.

    And I was surprised to hear the host bring up the issue of the income effect (from taxes) possibly offsetting the substitution effect. Deadweight losses due to taxes are typically estimated using only the substitution effect. The income effect should be small b/c money that’s taken from taxpayer A and given to taxpayer B produces a positive income effect for one person and a negative income effect for the other.

    But I still love Mike Munger!! He’s a great guest on the show.

  7. Agree about negative income tax being same model as BIG. When I listened I thought it pretty clear Russ Roberts model of how BIG assumes a deductible equal to the BIG amount.

    Key quote: “And I think the main reason people want to give it to everybody is that, if you only give it to “poor people,” you have this immense cliff[?] problem. So, if you say, ‘Well, anybody who earns less than $25,000 a year gets $25,000,’ then you’ve–basically people who earn $30,000, or $27,000, they are working a huge amount to get $2000.”

    Let Y = net income, X = income, BIG = 20k. Then for X =BIG, Y = BIG + (X-BIG) * tax rate. Nobody would implement it this way, so it was annoying. Just trying to explain what I think was going on.

    • typo.
      For X = BIG, then Y = BIG + (X-BIG) * (1 – tax rate)

    • Octavian says:

      A major issue I have with BIG discussions is that everyone seems to assume that making the BIG a flat amount for everyone rather than just for poor people solves the problem of disincentivizing work.

      In fact, per the principle of declining marginal utility, a flat BIG still disincentifizes work, just not quite as much. A doctor who makes 500,000 a year isn’t likely to work much less if you offer to give him 20,000 a year for nothing, but someone who makes 20,000 a year working full time at a low wage job may still prefer to just live off the 20k and not work at all instead of working and making 40k.

      In order for a BIG to not disproportionately discourage poor people from working (thereby exacerbating ‘income inequality’ by causing more inequality in accumulation of experience and capital), the BIG would have to actually increase with income, perhaps plateauing at some point.

      • Jesse says:

        The extra tax payed in the lower end of the income fully offsets the BIG Grant for very high income people. There is no new disincentive at this point. The marginal rates might change a bit, the concept to is to keep a small even disincentive on everyone instead of making it severely lumpy like now.

  8. ColoComment says:

    Widely off topic, but the original Cummings piece is so wide-ranging that I’m not sure it could be corralled under one header, in any case.
    The flavor of it is caught in the quotes at Chicagoboyz.com — the entire piece is somewhat long but fascinating. I wondered what Arnold might make of it….

    Cummings’s thoughts on experts, campaign management, how people arrive at vote decisions, the closed thinking of the Brit government and “IN” people and more — it’s a smorgasborg of ideas about the political realm.
    http://chicagoboyz.net/archives/54645.html

  9. Slocum says:

    One of the biggest problems I see with a universal BIG is that it would simplify and de-stigmatize dependency. Right now, programs are for poor people and there’s still some shame involved in living off handouts rather than earning your own way and disapproval from others when they see people who could be self-supporting buying food with EBT cards. And signing up for the various programs available is not simple or automatic, so that introduces some friction also.

    A BIG changes that entirely. Since everybody, rich and poor, get the same BIG payments, then there’d be no stigma involved, and no effort required to apply. Whether or how much you want to work to supplement your BIG vs how much you’d prefer thrift and a lot of leisure time would be nothing more than a lifestyle choice. This guy and his family:

    http://www.mrmoneymustache.com/

    Live pretty well on $25,000/year in cash, combined with a lot of home production. The $25K comes from investments from savings, but it would work just as well with a $25K BIG (better, really, since investment returns are less certain).

    Another problem — a BIG would create an incentive for people to remain in (or move to) areas with few opportunities but a very low cost of living. We already see this with multi-generational SSDI dependent families in Appalachia:

    http://www.nytimes.com/2012/12/09/opinion/sunday/kristof-profiting-from-a-childs-illiteracy.html

    And BTW, wouldn’t the BIG also reinforce the disincentive for marriage among low income folks (e.g. wouldn’t a single man and an unmarried mother with kids qualify for a larger total BIG than the same married couple with kids)?

  10. Kevin L says:

    If anybody wants to visualize the line Arnold described:

    https://s3.amazonaws.com/grapher/exports/ia3iqjyr09.png

  11. Walter Clark says:

    My biggest objection has become my biggest reason for support. It is what Charles Murray pointed out about the responsibility of relatives and the reward for charity givers. (Use Google: Murray “Universal Basic Income”)

    My initial objections concerned the relatives or charity givers would be disincentivized to help because BIG is available.

    His view, as I see it . . .
    Those that waste it away in alcohol or other bad choices, cannot use as an argument for yet more aid, their helplessness. They cannot use themselves as hostages. The reason is because they are not helpless: they have another check coming. Without this financial guarantee, it is only their potential ability that makes them not helpless. The problem with using their potential ability as the mechanism that allows any incentive to work is that their skill set or ability to learn a new skill set is impossible to identify. Anyone could convincingly argue they have nothing; no ability. But with Basic Income Guarantee, it is extremely obvious to the helper and the one in trouble that he is not helpless. Unlike welfare today, recipients will be unable to express their entitlement on anyone. Since there is no other government aid available, and because relatives and charities are not monopolies, relatives and charities have discretion to impose conditions on the recipient. (Discretion, because if the recipient doesn’t like it he can go to some other relative or charity.) There is thus an obligation to do what they are told by the relatives or charity. The threat is thus seen by the recipient to be circumstances and not the provider. Not only are they motivated to jump through all those hoops but they can’t help but feel appreciation.
    It is thus imperative that government never go beyond Basic Income Guarantee with any sort of safety net. Alas, the politics of insisting on that restraint may be impossible.

  12. Maximum Liberty says:

    I don’t think a negative income tax as historically implemented has been the equivalent of a basic income guarantee. Historically, things like the earned income tax credit have matched earned income at some ration until some threshold of income. For example, the earned income tax credit gave a refundable tax credit equal to 34% of earned income up to $8,050 (in 2006, according to the Wikipedia page). Past that threshold, nothing happens for a while (until 16,800 of earned income, according to the same page), then it gets phased out at 15.98% of earned income exceeding $16,800, so it is fully phased out at dollar $34,001.

    By contrast, a basic income guarantee never increases with income. Typically, it is some flat amount that might vary for children, or by household status, or even by disabled status or whatever, but not increasing by income.

  13. Andrew' says:

    I only have a meta-comment. I just don’t get the interest and rationale for the basic income, and yet it generates a lot of interest even here. That means to me it is going to be reckoned with. What am I missing?

  14. Floccina says:

    I think you have to give it adult individuals or else you discourage marriage and pay people to have children.
    $10,000/person seems plenty to me see here: http://earlyretirementextreme.com/how-i-live-on-7000-per-year.html.

    I think people will even work in the taxed economy, if you tax the BIG away at 50% (at least 35%). Yes, you encourage untaxed work but that is a problem at higher levels of income too, often wives of high earners do the math and decide to work for in home production and consumption.

    Maybe people would be more likely to turn people in for not reporting their income if there were a BIG.

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