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Basic Income vs. Welfare

July 14, 2016

There is a lot of misinformation and unrealistic expectations about basic incomes/negative income taxes/universal incomes/guaranteed national incomes (I will call it basic income in this article, but all the terms above are equivalent). Basic income is not magical, nor is it radically different than other welfare programs.

How is it different from normal welfare?
The fundamental difference between a basic income and normal welfare is that basic income does not try to control the decisions of the poor. Basic income is not conditional. It does not stop if a recipient does not look for a job, is not disabled, gets a part time job, decides to spend the day writing, painting, or getting drunk. It consists of cash, allowing the poor to spend money how they see fit rather than trying to force them to buy particular things, such as healthy food or crappy apartments. Instead of getting food stamps, the equivalent money could be spent on food, or anything else the poor person wants.

It’s no surprise that basic incomes are popular among libertarians and left wing liberals. Libertarians don’t want the government to control anyone’s behavior, and left wing liberals don’t view poverty as being primarily a problem of poor people’s behavior.

The disadvantage is that the poor make politically unpopular and often short-sighted decisions. The poor drink more, have more children out of wedlock, are more likely to be unemployed, drop out of high school, take payday loans, buy lotto tickets, and a host of other behaviors that are not prudent. Causality runs both ways: poverty causes bad decisions and bad decisions cause poverty.

What welfare program places no behavioral requirements whatsoever on its recipients? Social Security. It’s the exception that proves the rule. People don’t think of senior citizens as inherently immoral and they are high status. Furthermore, they aren’t expected to be productive, so their immoral behavior doesn’t affect society as much. Thus, Social Security recipients are not drug tested, they don’t have behavioral requirements (such as job searching), and they have no restrictions placed on them as to what they are allowed to spend the money on.

I investigated the cost of basic income and find that it would be affordable (but very expensive) at around $500 per person per month. That’s about half the poverty line, so it wouldn’t end poverty, but it would eliminate severe poverty and deprivation. Yes, it’s an expensive program. Yes, it would require the government to cut other spending, especially other welfare spending. It would not totally destroy the budget or have any other apocalyptic effects.

Health care is the wild card of American poverty. America has a uniquely bad health care system that is neither free market nor government. It’s got the worst traits of both systems, with uneven coverage, high prices, lack of information, lack of incentives, lack of competition, slowed innovation (relative to free market), and financial traps for the poor. Basic income would not address this problem. No plausible level of basic income would allow people to afford decent health care without major reforms or some other medical welfare program.

Behavioral Impact
Many articles argue that a basic income would dramatically reduce employment, but a basic income wouldn’t necessarily discourage working any more than our current system. There are two factors to consider: substitution and an income effects.

Income Effects
As people get richer, they usually chose to work less. For example, if someone won the lottery, it wouldn’t be unreasonable for them to quit their jobs. However, basic income would probably be at or below the poverty line, so such a life would be quite austere.

The people leaving the labor force for such a lifestyle would be those with very low earnings potential or a high disutility of work. For society, having a large number of people who don’t earn much quit the labor force does not reduce total production or tax revenue very much. At higher incomes, quitting to take a basic income would not be an attractive proposition.

Substitution Effects
A lump sum transfer does not affect marginal incentives, however the basic income needs to be paid for by taxation. There’s no way a society can give everyone a net amount of money, since that money has to come from somewhere. Therefore, on average, just like any other welfare system, the amount of money received will be slightly negative (because of costs of redistribution/administration). In practice, those who are poorer than average will get money, and those who are richer than average will pay money. It is likely that if a basic income were enacted, the government wouldn’t transfer income to everyone, but instead would transfer it only to people whose income fell below a certain point. Otherwise, you’d just wind up giving people money and taking it right back. As Social Security is a sort of “basic income for the old”, they would probably not get any additional money.


Under our current tax/welfare system, the poor often face higher marginal tax rates than the rich. Let’s say there’s a welfare program that gives you a benefit worth $2000, but you have to earn less than $10,000 per year to get it. If you make $9999, you have a huge incentive not to work a few extra hours and lose that benefit. If you add up all benefits like this across federal and local programs, there are some areas where the poor are marginally taxed at almost 100% of additional income.

CBO marginal_tax_1

Even if a basic income were taxed back at a high rate, as long as it replaced welfare programs with higher marginal tax rates, the net effect would be to lower marginal tax rates on the poor and get rid of poverty traps.

2 Comments leave one →
  1. February 22, 2017 7:31 am

    I stopped reading when you described Social Security as welfare. Social Security is an insurance program. It’s purpose is to ensure that citizens have their basic needs met when they are too old continue working, regardless of what life has thrown at them. I am 71 and have paid my Social Security premiums every month since I was 16 years old. Respectfully, please don’t tell me I am on welfare.

    • March 1, 2017 10:20 am

      I didn’t mean to imply that taking social security is a bad thing. If you’ve paid your taxes, you should get the benefits that are due. Welfare is normally seen as negative in situations where it means the recipient has been lazy or imprudent. Welfare can be an insurance program too. Many people who need welfare have had life throw more than their fair share of troubles at them. I know a woman whose husband died suddenly of cancer after she gave birth to her fourth child. She was on welfare all her life. I would never say that was shameful or wrong, but neither will I refrain from calling it welfare.

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