Is a universal basic income or unconditional demogrant possible in the United States? (For the sake of specificity I have focused the question on the US, though the question is certainly interesting in all settings.) It seems that without some restructuring, the answer is no. But, in order to entertain the idea (and pushing politics aside), what programs could/would be cut in order to fund a reasonably sized basic income? What size of basic income could be afforded, if any? How would tax rates have to change?

Of course the answer depends on the size of the basic income. It would be interesting to see how the answer would change for multiple values.

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This is a good question. To be concrete, I think it's easier to pick a single number - this is arbitrary, but I'll go with the figure of $10,000 offered in the proposal by Charles Murray (one of the most prominent conservative supporters of a universal basic income). I'll assume that this is offered to every adult in the US age 18 and over, expanding slightly on Murray's 21 and over proposal.

This would be about 85% of the average poverty level for a single individual, just above 50% of the poverty level for a single parent with two children, and (at $20,000) about 85% of the poverty level for a family of four with two parents and two children.

The direct budgetary cost of this program, of course, is easy to calculate: it is the number of Americans age 18 and over, times \$10,000. There are about 245 million American adults currently, making this cost \$2.45 trillion. This compares to total federal government expenditures that are currently about \$4 trillion. (See this NIPA table for some figures.) Remarkably, the sum of "government social benefits" and "grants-in-aid to state and local governments" (the latter of which is almost entirely grants for social programs like Medicaid) is currently about \$2.4 trillion. Hence, to a first approximation, we could say that the federal government could afford the $10,000 UBI given its current budget if it eliminated all other existing transfers.

How plausible is this? Not very. More than 75% of the federal government's transfer spending is on three programs: Social Security, Medicare, and Medicaid. This spending is overwhelmingly concentrated on the elderly, with some also on the disabled (SSDI and Medicaid) and children (Medicaid). Taking away these programs and replacing them with the basic income, which is distributed evenly throughout the adult population, would surely leave these groups receiving far less in total than they currently do. This would be politically near-impossible to push through, and any sudden change would be dubious on policy and moral grounds too. (Even if one doesn't like the distribution of transfer spending embedded in these programs, millions of people have planned their lives around it.)

This is just one case of a basic point - which is that unless one plans to achieve massive savings through improved administrative efficiency or improved work incentives, any reallocation of the existing transfer pie will involve offsetting winners and losers. Since existing transfer recipients (aged, disabled, poor children, etc.) are targeted for a reason, such a shift may be quite painful. Moreover, any improvements in administrative efficiency are unlikely to be large enough to save much money; the more likely source of savings would be improved incentives, particularly relative to the dysfunctional disability system and perhaps current overspending on health care. But I haven't seen a case made that these would be anywhere near large enough to make a UBI work within the current budget without large losses to some existing party.

On a more positive note, I should mention that the headline cost of the UBI may not be quite as bad as it looks. Since the current tax-and-transfer system embeds very large implicit marginal taxes on some beneficiaries, it would be possible to replace these with higher explicit marginal taxes to claw some of grant back, without incurring additional distortions at the margin. That said, these high marginal taxes are heavily concentrated in certain segments of the population (e.g. single parents with children). The US tax-and-transfer system currently makes heavy use of tagging, which saves money at the expense of potentially perverse social incentives (conservatives have complained about incentives for low-income parents to avoid marriage for years). Doing away with tagging could limit these particular bad incentives and concentrated high marginal rates, but necessitate moderately higher marginal rates throughout the population.

Finally, if it is not realistic to eliminate existing transfers, we can think about how difficult it would be to establish a UBI through increased taxation. If (given the substantial existing transfers to the elderly) we limited the \$10,000 to adults below age 65, we are down to a population of about 200 million and cost of \$2 trillion. Since personal consumption expenditures are currently about \$12 trillion, (unrealistically) assuming a constant tax base these \$2 trillion could be raised through a 24% VAT with 70% coverage. This would be quite high, but not totally out of line with international norms. Furthermore, since current GDP is about \$17.5 trillion, and additional \$2 trillion in transfer spending (again unrealistically assuming constant GDP) would increase the US's overall tax intake as a share of GDP by 11.5 percentage points. This would make the US similar to the typical European country, still below states like Denmark, Sweden, and France with the highest taxation.

  • How about indirect effects? What would the effect of such an income be on consumption and tax incomes? Presumably, it would render the minimum wage redundant, which might increase employment? But a higher tax base would reduce consumption? – gerrit Jan 31 '15 at 19:34
  • Most salaries could be decreased by almost $10,000 (except for the lowest ones). This would be a huge saving for most employers. It may thus be politically acceptable to get a part of this back by taxing employers. – maxy Sep 27 '15 at 15:16

A new report by the Roosevelt Institute answers exactly that using a Keynesian, Stock-Flow-Consistent model calibrated to the US. According to their result, when distributional changes are considered, an UBI would considerably stimulate the economy. The Executive Summary reads:

How would a massive federal spending program like a universal basic income (UBI) affect the macroeconomy? We use the Levy Institute macroeconometric model to estimate the impact of three versions of such an unconditional cash assistance program over an eight-year time horizon. Overall, we find that the economy can not only withstand large increases in federal spending, but could also grow thanks to the stimulative effects of cash transfers on the economy.

We examine three versions of unconditional cash transfers: \$1,000 a month to all adults, \$500 a month to all adults, and a \$250 a month child allowance. For each of the three versions, we model the macroeconomic effects of these transfers using two different financing plans - increasing the federal debt, or fully funding the increased spending with increased taxes on households - and compare the effects to the Levy model’s baseline growth rate forecast. Our findings include the following:

  • For all three designs, enacting a UBI and paying for it by increasing the federal debt would grow the economy. Under the smallest spending scenario, \$250 per month for each child, GDP is 0.79% larger than under the baseline forecast after eight years. According to the Levy Model, the largest cash program - \$1,000 for all adults annually - expands the economy by 12.56% over the baseline after eight years. After eight years of enactment, the stimulative effects of the program dissipate and GDP growth returns to the baseline forecast, but the level of output remains permanently higher.

  • When paying for the policy by increasing taxes on households, the Levy model forecasts no effect on the economy. In effect, it gives to households with one hand what it is takes away with the other.

  • However, when the model is adapted to include distributional effects, the economy grows, even in the tax-financed scenarios. This occurs because the distributional model incorporates the idea that an extra dollar in the hands of lower income households leads to higher spending. In other words, the households that pay more in taxes than they receive in cash assistance have a low propensity to consume, and those that receive more in assistance than they pay in taxes have a high propensity to consume. Thus, even when the policy is tax - rather than debt - financed, there is an increase in output, employment, prices, and wages.

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