A Discussion on Universal Base Income

Over the last three years, the US government has allocated more than $5 trillion for COVID relief stimulus in addition to regular budgetary expenses. Looking back, most economists agree that this amount was excessive and possibly not implemented optimally. However, one positive outcome is that it debunked the notion that the government lacks the funds to support a universal basic income. The $5 trillion could have provided every working-age American with $1,000 per month for the duration of COVID's significant impact on businesses, prompting questions about whether this would have been a more effective use of the funds. The idea of universally distributing money is not as far-fetched as it may seem,

and arguments in favor of a universal basic income are gaining traction once more. These proposals offer numerous apparent benefits that go beyond the mere concept of receiving free money. Some proponents of a UBI suggest that it could lead to reduced government spending and fundamentally transform the operation of modern economies.

Challenges go beyond the simple matter of determining the source of funding for universal basic income. Therefore, in order to have a candid conversation about the feasibility of this concept, it is essential to address several key questions. How do proponents of universal basic income suggest that nations finance payments to all their residents? What benefits does universal basic income offer compared to conventional welfare structures? Lastly, prior to receiving any unconditional payments, what are the issues that must be carefully evaluated before implementing such systems within our economies?

A universal basic income is a financial support system that provides money to all individuals in an economy with few exceptions. Typically, UBI proposals exclude payments for individuals under 18 years old or non-citizens of the country issuing the payment. Apart from those exclusions, every person receives the same amount, making it universal. Whether you are a full-time student, a working professional, or a multi-millionaire, you are eligible for UBI. The exact amount of this universal payment varies, with different proposals suggesting different sums in various countries and time periods. One of the most well-known proposals is Andrew Yang's $1,000 monthly payment, which formed the basis of his unsuccessful 2020 presidential campaign. While this $1,000 monthly payment may have different impacts on different individuals – from being unnoticed by a millionaire to supplementing the income of a working professional to enabling a student to study full-time without a part-time job – it exemplifies the versatility of the UBI model and how it justifies its substantial costs. The United States typically spends approximately half a trillion dollars annually on welfare through a combination of federal and state governments, based on data prior to 2020. This amount excludes Medicare and Medicaid, as proponents of a Universal Basic Income (UBI) do not propose replacing these programs. A considerable portion of this funding is allocated towards administering social services, including case workers, auditors, contact staff, managers, and other operational expenses associated with running a large-scale program like social security. If a straightforward automatic transfer to all individuals were implemented, much of this administrative overhead could be eliminated, resulting in significant cost savings.

There are three main issues with this argument. Firstly, the simple arithmetic does not support it. While the American government spends approximately half a trillion dollars annually on social security, implementing a universal basic income at $1,000 per month for all eligible citizens would cost at least $2.5 trillion. This undermines the notion of reducing administrative costs, as even if these costs were eliminated entirely, the additional expense of a UBI would far exceed any savings. The second problem lies in the universality of a universal basic income. Providing $1,000 monthly falls below the poverty line for single individuals with no other income sources, and becomes insufficient for those with disabilities, dependent children, or residing in high-cost areas.

There are certain problems with welfare systems in basically every country in the world that has them, administrative cost has just been the tip of the problematic iceberg.

But there is a reason that countries spend so much on making sure recipients are getting the right amount of money, and that's to make sure recipients get the right amount of money. You don't want people on welfare starving and you also certainly don't want people taking advantage of a system to get more money than they really need without contributing their fair share to an economy. But moral arguments aside, all this shows is that there really is no genuine plan for universal basic income that doesn't involve raising more taxes.

Most supporters of a UBI do acknowledge that it will need to be paid for with higher taxes across the board, particularly on higher income earners and businesses.

Depending on progressive tax brackets, this is normally proposed in such a way

that middle income households don't earn any more or any less than they would have

without the UBI. They might get an extra $12,000 per year, but they will pay an extra $12,000 a year in taxes because of the required increase in income tax rates. Of course, below income households, like those that may have been subsidized with traditional welfare systems, very little of the additional $12,000 in income will be taxed, meaning it does effectively subsidize their household budget. There is certainly nuance to the discussion that needs to be had around taxation to fund a UBI. Some advocates simply say that it should be funded with taxes levied exclusively on the extremely wealthy.

Among the notable proposals are suggestions such as implementing a top marginal tax rate of 70% for individuals earning over $10 million annually, as well as introducing a wealth tax that would claim a percentage of an individual's net worth exceeding a certain threshold, typically in the tens of millions. Another proposal, which may be seen as more rational, involves eliminating the preferential treatment of long-term capital gains and instead taxing those profits at the same rate as any other income. Currently, when a billionaire sells their company for a substantial sum, they are taxed at a rate of 15% on that income. If these tax regulations were altered, they would face a tax rate of 37% on the majority of those profits. Alternatively, if a 70% tax rate on income exceeding $10 million per year were to be approved, they would be subject to that rate. The common argument against these proposals is that high taxation could dampen entrepreneurial drive and discourage investment. The concern is that individuals may be less inclined to take the risk of starting a business or making investments if the best-case scenario involves surrendering a significant portion of their income to the government or seeing their investment returns gradually eroded by a wealth tax. Although it may seem reasonable at first glance, the argument is just as weak as the one suggesting that a Universal Basic Income (UBI) would eliminate the need for costly welfare administration. People will still be willing to take the risk of starting their own businesses and making investments because the potential for high returns will remain, regardless of the tax rate. No one will forego the opportunity to start a $100 million company just because they have to pay $37 million or even $70 million in taxes instead of $15 million. In any case, they will be financially secure for life. The only way to completely discourage the pursuit of profits is to impose a tax rate exceeding 100%, a proposal that is clearly not being seriously considered by anyone.

One argument that could be considered more reasonable is that if taxes are raised significantly, affluent individuals who have the means to do so might opt to relocate to another country. This is a more challenging prospect for American citizens as their tax obligations persist unless they renounce their citizenship. However, for citizens of other countries, this is a factor that warrants genuine consideration. A scenario where many individuals choose to reside in nations with lower tax rates could lead to reduced overall tax revenues despite the higher tax rate. While capital flight, as it is termed, is typically exaggerated, the rise of remote work in recent years has brought this issue to the forefront. With many individuals no longer tied to a specific location, the possibility of tax-related migration has become more relevant. 

Is it possible for governments worldwide to improve their taxation of the extremely wealthy? Certainly. At the very least, they should be subject to the same tax rates as the working class. However, governments need to understand that wealthy individuals have various options, and pushing too hard for taxes can have negative consequences. Implementing a Universal Basic Income (UBI) would require a significant amount of funding, which could only be sustained through tax increases, likely burdening many wealthy individuals who are already paying substantial taxes. Generating enough revenue to support such a program would be challenging, potentially leading governments to accumulate more debt in the short term to cover the shortfall. While this may not be a major issue, particularly for the US due to its status as the world's reserve currency, the question remains: would it be justifiable?

What would a UBI do for the economy? It would certainly increase consumer demand.

If everyone had an extra $1,000 in their pocket every month, that's an extra $1,000 that they could spend at businesses who could pass that $1,000 onto their suppliers, investors or employees. This is the basic idea of all economic stimulus. More money in the economy means more consumption, more investment and more employment, all other things being equal. But it also means more inflation, Inflation is honestly the biggest problem with a UBI, bigger even than the problem of how to fund it. Injecting that much money into the economy outside of a major economic downturn is simply going to cause demand-pull inflation. Now, a counterargument to this inflation problem is that if tax increases fully offset UBI expenditures, then the government won't actually be conducting expansionary fiscal policy. They will just have more money coming in and more money going out. Now, if this argument was true, it would also mean that the stimulus benefits we explored earlier would be undone because on average everybody wouldn't have an extra $1,000 in their pocket every month, they would have nothing extra.

The argument presented here is that a Universal Basic Income (UBI) could have a positive impact on the economy. While the average amount of money distributed by the government may not increase, the redistribution of wealth through increased taxes on the wealthy and direct payments to lower-income households could stimulate economic activity. High-income individuals who pay more in taxes may not significantly change their lifestyle, while lower-income individuals who receive additional income could experience a significant improvement in their financial situation. This redistribution could lead to increased spending by lower-income households, potentially offsetting any decrease in spending by the wealthy. Overall, the implementation of UBI could result in a shift towards higher consumer spending and inflation, despite initial skepticism about its effectiveness. 

A Universal Basic Income (UBI) is often suggested as a remedy for the challenges posed by automation. As machines increasingly outperform humans in various tasks, we must contemplate our future course of action. The UBI serves as a valuable tool for exploring and addressing significant issues prevalent in modern advanced economies, such as wealth inequality, welfare systems, global capital mobility, and the potential consequences of widespread job automation. While extreme approaches exist, ranging from laissez-faire indifference to the idea of providing free money to everyone, the optimal solution likely lies somewhere in between. Despite the uncertainty surrounding the adoption of a UBI system like the one proposed by Andrew Yang, the mere discussion of such ideas in a serious context like a presidential campaign has raised awareness and prompted consideration of more feasible alternatives. Economists, like everyone else, cannot predict the future with certainty. However, it is crucial to continually examine new methods to enhance the economic well-being of individuals, regardless of the direction the world takes. If you currently use a brokerage service, have you ever questioned why you chose that particular one? Many individuals may have selected their brokerage without much deliberation, perhaps out of habit. While any investment is better than none, it is essential to be mindful of how broker fees and hidden charges can significantly impact the overall returns on your investments over time.