Universal Basic Income: Welfare for Capitalists — and Humans

As much love as there is for Universal Basic Income (UBI) right now, it’s useful to take a look at other post-work welfare options to provide more insights into the advantages and disadvantages UBI has to offer.

Types of Welfare

1. Making everything free for everyone, thereby eliminating money entirely.
2. Providing coupons or subsidies for a limited group of people, for a limited set of goods and services (such as food stamps and medicare).
3. Providing everyone with a limited income that they can choose how to spend.

Let’s talk about each of these in turn:

1. While the intent might be good, we’ve yet to find a way to get this to work — and a lot of people and countries have tried with various forms of communism. Besides providing no incentive to work, it also has no limits on consumption. Even in a future where robots create goods for us, we’ll still have to be environmentally responsible and not waste resources. So, you could try fixing this by implementing a coupon program…
2. Coupons are a bureaucrat’s idea of a good welfare program: spend a mind-blowing amount of effort creating a deeply flawed system to evaluate who is the “deserving poor,” then only help them with the parts of their life that you (playing God) think are worthwhile. Because the US has been using this type of system for so long, we have lots of great data on how broken it is. The uncertainty of future welfare income prevents people from investing in themselves (trapping them in a vicious poverty cycle). Because these coupons are earmarked for very specific purposes, those in the program are given no choice on how to live their lives, limiting their agency as humans and forcing them to expend much of their time dealing with administrative nonsense. And, their poor design is a blatant incentive to not get a job (reducing work rates and increasing effective tax rates on the poor to as much as 95% — more on that below).
3. UBI means providing every single citizen with a minimal, livable amount of money with no strings attached. This makes three significant improvements to the coupon system: it provides the stability required for self-investment, it provides the agency and simplicity to give people back control over their own lives and, if properly structured, would eliminate most of the anti-work incentive.

After looking at each option, it seems that there are three important factors to consider when evaluating welfare options for the 21st century:

Certainty in future income

Certainty enables self-investment. Nobody will enroll in college classes or start a business if they think they’ll run out of money in 3 months. And yet, those are exactly the sort of things we want people to be doing! But, existing welfare programs are complicated, with limited timeframes and strict requirements that constantly threaten your livelihood.

Freedom to spend

Coupon-type welfare program directors think that they know how to spend someone’s money better than that person does. But if you believe in free markets (or that humans have a right to free will), this is economically and morally indefensible.

Appropriate tax / work incentives

When you hear stories of people living off of welfare for years instead of getting a new job, what they fail to mention is how poorly designed current welfare incentives are. Right now, if someone on welfare tries to get a job, they’ll have up to 95% of their wages taken away from them (through what’s known as the marginal tax rate— accounting for both the tax rate, and benefits lost). For example, if you get a job that earns $23,000, you’ll suddenly lose around $20,000 in benefits from food stamps and federal housing assistance. No rational person would get a job that doesn’t pay them anything, so why would we expect any different? Fortunately, we can fix this!

Conclusion: Or, how we can fix welfare and prepare for the future

Universal Basic Income solves both the certainty and freedom problems — but, on its own, it DOES NOT solve the incentive problem. And yet, this is what most people (who are privileged enough to not be living on welfare, of course) worry about. If we give everyone a steady income, won’t they just stop working?

No! The trick is to design incentives such that you always earn money from doing additional work.

What could such a Universal Basic Income look like? Let’s take a look at an example: A tax credit where all citizens receive $20k a year. As you earn more money, the credits would be gradually reduced — for example, if you earned $30k a year, then you’d only receive $10k in credit (earning $40k total). By the time you earn $50k, you would receive no credit — but, you’d still be earning over twice as much as those not working. The marginal tax rate for this proposal is only 33% — MUCH more reasonable than the current system’s 95%, and plenty low enough to encourage people to invest in themselves, grow and find new opportunities.

Universal Basic Income would also eliminate the $153 billion spent annually supporting poverty-wage working families. Without any citizens below the poverty line, we could eliminate homelessness, reduce economically-motivated crime and have a healthier economy (since more people will be willing and able to buy goods), saving us billions of dollars from the unfortunate economic side effects of poverty. Not to mention that a properly-structured UBI program would create a much stronger incentive to work — while at the same time shrinking the government bureaucracy and allowing us to provide more, better coverage to more people.

That’s a win-win for both capitalists and welfarists!

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