After being shelved for decades, the concept of “basic income” (aka “universal income”) has been trending lately. A number of countries in Europe have recently begun basic income pilot programs and voters in Switzerland will vote on a referendum that would mandate the government to guarantee $2,600 a month tax-free to every adult citizen and legal resident, and $650 to each child (for a family of 4, that equates to $78,000 annually).
If you’re not familiar with the concept, basic income would resemble some variation of the following:
- Every citizen is given a baseline income by the government.
- Basic income would replace most or all current social welfare systems.
- Income can be used unconditionally as pleased.
- Citizens can still supplement their basic income with employment income to further raise their standard of living.
Proponents of basic income typically raise the following theoretical benefits:
Current social welfare programs are inefficient, while basic income would virtually eliminate inefficiencies, saving taxpayers money.- Current social welfare programs create a disincentive to work because they can result in a cliff of benefit reductions as recipients get close to certain income levels.
- It would promote family health and population growth by giving parents the opportunity to cut back hours to raise their children.
- It would raise education levels by giving students an opportunity to subsidize their education costs and pay for basic living expenses while in school.
- It promotes a more diverse economy, by giving entrepreneurs an opportunity to get started and take risks.
- It promotes the general health and welfare of citizens by allowing then to pursue varied interests versus simply chasing income in jobs that they hate or are trapped in.
Those in opposition to basic income argue that:
- It creates a disincentive to work.
- Funding and affordability is not possible under current taxation levels.
While that concept may seem highly unlikely to happen in the U.S. in today’s political climate, our neighbors in Ontario are even testing a pilot this fall, and several pilots ran in Canada and the U.S. in the 1960’s and 1970’s, with promising results. The Mincome Project in Manitoba found it did not discourage people from working, except for two key groups: new mothers, and teenage boys who opted to stay in school until graduation. It also found an 8.5% reduction in hospital visits during the experiment.
Believe it or not, the United States has come closer than any other country to passing basic income. Richard Nixon was able to have the House pass it twice, but it was defeated by Senate Democrats (who thought the amount should be higher). While basic income sounds like a liberal idea, many conservatives and libertarians are proponents because it would theoretically reduce the size of government and provide less intrusion. Milton Friedman, a well-known free-market Libertarian economist, advocated for a minimum guaranteed income via a “negative income tax” in the early 1960’s, which was a precursor to basic income.
Would it work? Is it going to happen? Here are my thoughts…
The biggest argument against basic income is that it would create a big disincentive to work. And, indeed, basic income wouldn’t work if a good chunk of the population decided to permanently stay out of the labor market. However, in prior pilots, this just didn’t happen. Recently, polls in Switzerland indicate that only 2% of people would intend to stop working if the basic income referendum is passed. At the proposed basic income level, I have my doubts. However, at a lower level that modestly covers basic expenses, I see the “disincentive to work” argument as invalid.
I truly believe that almost all people want to do productive things with their time when given the opportunity (there are exceptions, but you have that now anyways). For some, maybe that means continuing in their current job, but it could also be furthering their education, improving their health for a period, taking time off to raise an infant, taking risks to become self-employed, changing careers, etc. If basic income becomes a reality, you probably will see some people leave really bad work situations immediately. But I’d suspect that most would later return to a better alternative situation before long. Basic income could serve as the grease to wheels of mobility so that individuals may pursue whatever they may like. I see that as an incredibly positive development (similarly, that’s why I’m such a big proponent of financial independence).
The basic income concept is incredibly intriguing because it is a simplistic and one-size-fits-all attempt to raise the social bar for everyone (not just those in poverty). The reality here in the United States is that we have slowly stripped away worker benefits over the last few decades and it is more challenging for people to economically advance (and they are left with no financial mobility to do so). Good paying pensions have become nearly extinct, health insurance coverage has declined while costs have risen, and pay has only recently rebounded after a decade of decline. Meanwhile, there has been a massive shift of wealth away from the common worker to the executive class and corporate vaults. Corporate profits are at an all time high, yet those profits are not being reinvested in the economy or in workers at the rates they once were. And worker productivity is at an all time high, while workers have realized none of the economic gains.
At the same time, more and more high paying jobs are being eliminated as a result of AI and automation. It may not be a question of “if”, but “when” we reach a level of catastrophic job losses that will never be replaced as corporations automate to eliminate jobs and boost profits. In order to keep a functioning society that doesn’t devolve into chaos, basic income may become a necessity. And that may be sooner than later. In other words, basic income could basically be inevitable if current trends continue.
Let’s watch what happens in Switzerland, Ontario, and elsewhere very closely.
Related Posts:
Very interesting read – Especially the conclusion that basic income is inevitable! I don’t have thorough knowledge of basic income – Just knew the concept but didn’t know that countries are already running pilots. Your conclusion looks so logical especially if it is not creating disincentive to work.
If basic income is in place, who will do the minimum wage work? I don’t think anybody will be motivated enough to take up the minimum wage work? Is this not going to be a problem?
Well, keep in mind, any additional work/income is in addition to basic income (theoretically). So minimum wage workers will still earn added income (and prob. enough that the 2 combined equates to at least a living wage).
However, I do think that there would be lesser willing participants to take minimum wage jobs, which would drive up wages for those positions because it will be more competitive. The market would prob. balance out at higher wage levels.
Thanks for the reply Miller!
If the minimum wage increases, corporates may find it expensive to do business in that specific country and may move their business to countries without basic income in place which will result in job losses in the native country. This is assuming that minimum wage is a big chunk of organization’s expenses. If that’s not the case, my rational goes for a toss :-) Anyways, thanks for the healthy discussion!
Now that I am FI it doesn’t really matter but when I was not FI, I would have loved to stay in a country with basic income. In such a country, I could follow my true calling from day 1 which would have altogether eliminated my motivation to become FI :-) Interesting thoughts!!
Almost 100% of minimum wage jobs are retail/restaurant/sanitation and are location dependent. So they can’t move them overseas. And even if they did – would it be a big loss?
I disagree that it would be a disincentive to work. I’d still work, but I’d work at my craft and continue to teach yoga. As it stands now I work multiple jobs to do the one thing I love the most.
Kally – I think you misunderstood the post. The post says that basic income doesn’t result into disincentive to work. People still continue to work the way they used to!
Interesting read, but I’d like to better understanding how such a system is funded. Where does the money come from? What type of taxation levels are required to maintain such a system?
1% tax of all transactions would account for $4.45T. Total US transactions was about $445T. If it were 3% there would be $13.35T of revenue that could eliminate all current taxes at local, state, and federal. No personal income tax, no sales tax, no property tax, no corporate tax, no excise tax. The number is so small, but such a small rate could fund this, all federal funding, all local and state funding, and paying off our debt along with all other government debt.
This assumes no decline in trading volume from the tax, but trading volume declines dramatically when taxes on transactions are implemented. From an article on Bernie Sanders’ financial transaction tax idea (http://www.marketwatch.com/story/what-would-bernie-sanders-wall-st-tax-look-like-2016-02-14) “According to the nonpartisan Tax Policy Center, a 0.01% tax would reduce volume by 24% in the first year, with volume falling even further in the future.”
A 1% or higher tax would be 100 times larger than that and would therefore dramatically reduce volume. This makes sense, because no one would buy a short term bond yielding 1% if they had to pay a 1% transaction fee. A financial transaction tax could still be a good idea, but the revenue raised would be in Billions, not Trillions.
Currently only 62.8% of U.S. adults age 16 or over are employed (per the U.S. Bureau of Labor Statistics). In other words, about 95 million U.S. adults don’t work. If we pass this “free money for everyone” law, maybe we could reduce the labor participation rate to 50%! That would mean that each working adult would also have to fully carry the burden of another adult who is not working, plus both of their shares of all other government costs. You say that most people would still have an incentive to work, but wait until they see their income tax rates under this scheme.
Consider the $12,000 UBI. Let’s say minimum wage becomes $11/hr. So a person could make $22,880 working full-time. Let’s say we can either eliminate current tax breaks or have a flat-tax of 40%(or enough where the overall taxes are 40%) Let’s look at the 40% flat rate. After taxes that person would make $13,728 plus the $12,000 would make it $25,728. Which sounds better? Doing nothing and making $12,000 which for many wouldn’t be enough to get by or working and having enough when you combine the sources of income.
Of course the lower the working pay is the least incentive, but there are multiple approaches we need to look at.
Since I’m pursuing early financial independence, I’m already good at keeping my expenses down and would probably “retire early” if a basic income of over 1k a month was implemented. But that’s probably not typical. I like the idea mostly because it could eliminate the ridiculous maze of state, local, and federal programs and tax credits currently designed to support the poor and middle class. It doesn’t need to be implemented all at once either. We could start with a “proto-basic income” of $100 or $200 and see how many people stopped working, then gradually increase it, eliminating current tax breaks and welfare programs as we go (start with the mortgage interest tax deduction!)
Phasing in basic income is an interesting idea, Tom. Obviously, there would be lots of problems to be sorted out, but I think this could be the most realistic means of implementation that I’ve seen mentioned anywhere.