A case for universal basic income

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daniel-dorronsoro

6 min readMay 2, 2020

Throughout this crisis we have seen the government enact measures to send cash to most citizens; now the concept of universal basic income (UBI) is being thrown around. From one side we hear that it is prohibitively expensive and that you would have to pay 60% of your income in taxes, from the other side we hear that it pays for itself.

The purpose of this article is not to highlight the benefits, but rather to explore financial scenarios that portray the monetary impact to the population of the United States of America.

Current Expenditure Assumptions

Throughout this article we will be exploring two scenarios, one with a UBI of $12,000 per year per adult, and another with a UBI of $18,000.

For both scenarios it is assumed that federal government expenditure to Social Security (old-age, disability), Income Security Programs (supplemental nutrition assistance, child nutrition, etc.), and other income security programs are replaced by UBI. In other words, $1,600[i] billion dollars would be “saved”. Additionally, $400[ii] billion Social Welfare programs expenses from local and state governments would also be replaced.

For the $18,000 a year scenario it is also assumed that with the extra income citizens will be able to afford health insurance so $1,250 billion Major Health Care Program expenditures are avoided.

All in all, the $12,000 USD a year scenario assumes tax savings of $2,000 billion. On the other hand, the $18,000 a year scenario assumes tax savings of $3,250 billion.

Total UBI Cost Assumptions

Now for the total costs of the program we are assuming a population of 240[iii] million adults. This means that the yearly cost of the $12,000 scenario is of $2,880 billion, and $4,320 billion for the other scenario.

As a result, UBI would require additional taxes of $880 billion, and $1,070 billion for the $12,000 and $18,000 scenarios respectively.

Funding UBI

The creation of a UBI program will create a deficit in the government budget, which means that resources must be reallocated, efficiencies must be found, and that taxes must be increased. For the purposes of this article we assume that $150 billion of the increased needs for UBI will come from:

- Increased corporate tax: 1pp increase to the effective corporate tax can generate around $25[iv] billion in additional revenue

- Efficiencies: By eliminated many of the federal, state and local programs, managing costs will be reduced. Additionally, studies indicate that other costs might be positively impacted by UBI such as a reduction in crime[v].

- Reallocation of resources

But the remaining $730 billion in our $12,000 UBI scenario, and $920 billion from our $18,000 scenario, will probably need to come from income taxes.

Changing the income tax brackets

This is probably the most controversial aspect of UBI, our tax scheme must change, and yes this means a redistribution of wealth. And in order for this to be possible, the wealthiest households in the United States would have to pay a larger portion of their reported income in taxes.

For the purpose of this analysis we have chosen to optimize for bringing the most vulnerable households out of poverty, while minimizing the negative impact on the wealthiest households. This means that some households will return part or all of their UBI payment in form of taxes.

$12,000 a year per adult scenario

In the $12,000 UBI scenario our proposal would be to shift the tax brackets in the following way:

This new income tax bracket under UBI would represent an increase of 4.3pp to the effective tax rate. Under this scenario 90% of US Households would have an after tax income equal or greater than the no UBI scenario. 9.5% of the households would have an income that is affected by 5% or less, and the remaining 0.5% an impact of 6%.

*The graph above depicts the income after taxes for the no UBI and $12,000 UBI scenario for each gross income bracket.*

From the graph above we can see that households with a gross income of $160,000 or less will be positively impacted by UBI. While households with greater than $160,000 income will have a negative impact (not accounting for societal improvements).

$18,000 a year per adult scenario

In the $18,000 UBI scenario our proposal would be to shift the tax brackets in the following way:

This new income tax bracket under UBI would represent an increase of 5.3pp to the effective tax rate. Under this scenario 90% of US Households would have an after tax income equal or greater than a no UBI scenario. 2% of the households would have an income that is affected by 5% or less, and the remaining 0.5% an impact of less than 10%.

*The graph above depicts the income after taxes for the no UBI and $18,000 UBI scenario for each gross income bracket.*

*The tax brackets above are not optimized, nor are crafted by experts, but are rather used in an illustrative manner.

What does all of this mean?

From the brief analysis and journey depicted above there is one thing that is clear, a UBI program in a nation such as the United States of America is possible. This program would benefit in a direct manner 90% of the households, while the remaining 10% of the households would have a negative direct impact.

The word direct is referenced above multiple times because there are many indirect measures that would benefit 100% of the households that are not accounted for in these income after taxes scenarios.

These society wide benefits can come in several forms:

- Increased productivity[vi]: extra income will allow for more people to take care of their health, therefore allowing for more productive time. Additionally, more time can be focused on education which will also allow for increased productivity.

- Decrease in crime: having a better safety net for most of the US population means that there are less incentives for criminal activities, this means better safety, and could even show up as cost efficiencies.

- Increased entrepreneurship[vii]: having this safety net can also incentivize or allow people to take risks which in other scenarios they would not be able to take. This could increase the amount of new businesses which drives the economy forward.

But it is also important to highlight one of the drawbacks (or one of the most controversial points) of UBI, “freeloading”. Many believe that with this safety net, people will drop out of the workforce and abuse the free money. And even though studies show that some people do drop out of the workforce[viii], most of these are people that should not have been part of the workforce in the first place: the elderly, home caregivers, disabled, etc.

In the end, UBI promises economic gain for most, societal gain for all, but we must first ask ourselves, are we willing to part away from some of our income for this?