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Basic Income Ballparking

August 4, 2015

Basic income/guaranteed income/universal income is the idea that instead of a myriad of welfare programs, why not just give everyone a fixed amount. Theoretically, you could end poverty for an entire country permanently without any of the distorting incentives, highly inefficient bureaucracy, paternalism, and people falling through the cracks of the current system. But how big could such a system be?

At the current levels of technology, the maximum amount of taxes per person seems to be around 15k per person. If a country has a very high tax rate, their economy will be smaller because of deadweight loss. The Laffer curve has been unfortunately politicized, but the fundamental point of high taxes causing deadweight losses is indisputable, the only question is what the exact point of maximum taxation is. Let’s say it’s 50% for the sake of argument, with a note that it is a controversial and disputed number.

So, let’s assume that at a 50% tax rate, income collected will be $15k per person, at 30% tax rate income collected will be $13k per person.

Income benchmarks
$15k is the full time minimum wage of $7.25.
$31,200 is full time earnings (2080 hours per year) at $15 per hour.
Poverty line for single households is $11,770 and for families of four is $24,250 ($6,062.25 per person).
Median personal income in the U.S. is $24,062.
Mean personal income is around $40k (sources differ).

The higher the basic income is, the fewer people will work. The people who leave the labor market will tend to be those with low wages. If you make 100k, you’re not going to quit to get a 10k basic income, but if you are working your butt off at minimum wage, it’s going to be a lot more tempting. When a high productivity worker leaves the economy, GDP and taxes collected drop a lot. When a low productivity worker leaves, they don’t move much. Thus, the higher the basic income is, the more the overall economy will drop.

Having said that, it is somewhat plausible that a low basic income may in fact raise GDP. If you think of labor markets as primarily matching markets where connecting workers to firms is difficult, having a basic income may allow workers to spend more time searching and even acquiring job skills before going into the labor market. If a basic income displaces other welfare and the minimum wage, firms will be much more eager to hire at the bottom of the labor market and thus low skill jobs will be more available. Remember that currently, the limit is firms hiring, not workers willing to work, and a basic income would flip that. It’s a balancing act, and there is no exactly right answer.

Federal Spending
2014 Budget was $3.9 trillion.
There were 73 M children, and 245 M adults in 2014. This means spending per person was $12,264.15 per person or $15918.37 per adult.
FY 2015 federal budget

America already has a huge national debt. Adding another jumbo program on top of our already huge government without serious cutbacks is not a sane option, even with substantially higher taxes. Maybe we’d be able to increase total tax revenue by 10% or so, but that’s really about all you can expect.

Welfare is already 63% of the federal budget, a large chunk of which is health care related. A basic income would almost require serious health care reform. America spends more than any other country on health care and our health care outcomes are mediocre. I am a Hansonian concerning health care policy, but I realize that this is an extremely uncommon view. But even if you accept the dominant paradigm of medicine, America has some pretty terrible regulations which basic microeconomics analysis would suggest have huge deadweight losses to society.

On the other hand, the reason why health care policy is so bad is because its stuck in a Olsonian collective action trap, where entrenched firms use their market power to collect rents and then channel those rents into securing political power which they then use to get more rents. The only plausible way out is a radical disruption of the whole sector by medical AI and a Silicon Valley style creative disruption of the entire industry. I don’t think that a standard political reform is possible of the health care sector, regardless of the will of the voters. In conclusion, let’s say for now, health care policy isn’t going anywhere and there won’t be any funds to allocate away from that.

Military is pretty much the only significant, non-transfer area of government expenditure. The U.S. spends a tremendous amount on the military in comparison to other countries, and although Americans enjoy our global domination and continual micro-wars, a large new welfare program would have to displace some military spending. If the U.S. shifted to a purely defensive military stance, we could cut spending by at least half, so let’s say an additional 10% of the government budget can be harvested from military cuts.

Social security. Ahh, the elephant in the room of welfare. It’s about 25% of government spending and it dwarfs all other non-health care related welfare. If you’re giving everyone a basic income, do you really need to have another program just for old people? Already, the whole thing will probably collapse in the next 20 years. You don’t really need disability insurance with a basic income, especially if that basic income would be higher than disability would give people anyway. The maximum SSI payments are around $700 now, which is $8,400 per year.

That seems low to me, but if that really is the amounts people are getting from the SSA, as long as the basic income is comparable to that, there shouldn’t be much political opposition to rolling the SSA and basic income together. Let’s say we can get 20% of government spending by eliminating overlap with the SSA.

Conclusion

High End estimate:
With massive health care reform and the elimination of separate governmental health benefits (medicare, medicaid, etc), and higher taxes, you could get that up to 15k x 60% = $9,000 per person per year. If the additional $3k would be sufficient to pay for the marginal health benefits, that might be a better option for people. In the scenario of radical reform and the use of AI doctors, personally tailored medicine with DNA analysis, and other sci-fish technologies, I could see that happening, but that’s just speculation.

Middle Estimate:
Some health care reform, current taxes, limited SSA cutbacks
13k x 40% (10% military cutbacks, 10% SSA cutbacks, 10% other welfare cutbacks, 10% health care reform) = $433 per month

With full SSA elimination, some tax increases, and/or more health care cutbacks, you could get it to $500 per month.

People could live on $500 a month, especially if they worked together with others to minimize their living expenses. While it would be half the level required to end poverty for individuals, it would be enough to end poverty for families of 4 or more. The $500 per month amount would only be a third of what an individual could make working 40 hours at the current minimum wage of $7.25, so labor market displacement would probably be minimal.

Low End Estimate:
Without welfare replacement, with higher taxes, without medical reform, and with only mild spending reform in other areas, you’d have $3k per person to work with (15k x 20%). $250 per month isn’t really worth getting excited about so a basic income without other welfare displacement would be pretty useless and miss the point of the program. Without health care reform, even a moderate illness would throw basic income recipients into abject poverty. Maybe it would be enough to replace food stamps and some other miscellaneous welfare programs, but that’s about it.

4 Comments leave one →
  1. August 4, 2015 9:32 pm

    Great post. I would give each adult US citizen $200/week but I would make all taxes individual and increase the tax rate to 40% on the first $500 earned to phase out the BIG quickly. Then the fed tax rate can go to 25% and go up from there. I would also eliminate all of SS, SSDI and minimum wage. Like you I think defense and Medical spending can be cut in half without hurting us.

    Dean Baker often proposes outsourcing some medical care to other countries. It is an interesting idea though it seems difficult to accomplish.
    http://cepr.net/publications/op-eds-columns/globalizing-healthcare

  2. August 5, 2015 9:20 am

    Another way to set the amount would be to decide what percent of federal taxes taken in should go to the BIG and divide the amount of money taken by the number of adult citizens and that would be the amount of the BIG. To deal with recessions you could use a 5 year average. I like that approach for SS even if we do not get a BIG.

    BTW this would replace TANF and SNAP. Also you could reduce funding for higher education. You also might be able to reduce funding for k-12 since we have increased spending per student by 3x since the 1960’s with very little improvement.

    • October 16, 2015 2:20 pm

      For macro reasons, I would prefer the BIG to be countercyclical rather than procyclical, even with a lag. I think a BIG would be a far superior way to distribute QE than our current system.

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  1. Basic Income vs. Welfare | azmytheconomics

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