The BIG misunderstanding about the cost of Universal Basic Income

Karl WiderquistOpinion, The Indepentarian

The cost of a Universal Basic Income (UBI) is often greatly exaggerated, because people are tempted to think the cost of UBI is the size of the grant multiplied by the size of the population. You can call that the “gross cost” of UBI, but it’s a gross overestimate of the real cost of UBI. It fact, it’s not a cost in any meaningful sense, because UBI is a “tax rebate” or “a refundable tax credit.” That is, UBI is a negative tax. People seldom call UBI a negative tax because that would invite confusion with a similar policy formally named “The Negative Income Tax.”

But in the more important generic sense, UBI is–and must be understood as–a negative tax. When you pay the government, that’s a tax. When the government pays you (without you having sold something to the government), that’s a negative tax. It doesn’t cost you anything for the government to give and take a dollar from you at the same time. If you want to know someone’s total tax burden, you need to subtract the negative taxes they receive from the positive taxes they pay.

Far more than any other policy, UBI involves the government taking money in taxes and giving it back to the very same people as a UBI.

A calculation of real redistributive cost of UBI requires subtracting all of that taking-and-giving-back to focus on the net increase in taxes on contributors (or net cuts in other spending) that will be necessary to support the net benefit to net recipients. The redistributive burden is the only real budgetary cost of UBI.

UBI’s net cost issue requires a careful explanation because the issue is almost unique to UBI, extremely important, and sometimes difficult to grasp. The issue occurs because UBI is both universal and in cash. Because it is universal, everyone receives it, even net taxpayers. Because it is in cash, people receive the same thing that they pay. Because it is both universal and in cash, people receive the same thing at the same time that they pay for it.

Most transfer payments go to people who are not at the time also paying taxes to support it. For example, almost no one both pays for and receives Unemployment Insurance, the Earned Income Tax Credit, Temporary Assistance for Needy Families, disability insurance, Medicaid, and so at the same time. The vast majority of people pay for Social Security at one time and receive it at another time. The net issue so important to UBI is negligible or nonexistent for all these policies.

About half of U.S. transfer payments are healthcare related and many of these do involve the same people both paying for and receiving benefits at the same time, but they pay in cash and receive back in something very different: health care. We need to know the cost of converting the cash into that healthcare. So the gross cost of healthcare spending is relevant, although we might be interested in its net redistributive effect as well.

UBI is fundamentally different from all of these policies because for the vast majority of people it works like a tax rebate. You pay taxes in cash and receive back cash at the same time. Suppose you buy something for $100, but you instantaneously receive back a rebate of $50. You do not have to budget for that $100. You have to budget for $50. That $50 is the only real cost to you of this policy. If we want to know the budgetary cost of UBI, we have to net out the enormous extent to which it functions as a rebate. Unlike healthcare spending, the gross cost has no budgetary effects at all. There is a limit to how much healthcare the government can provide you even if you are paying all the taxes for it. You only have so much purchasing power. Only so much of it can be converted into healthcare. But there is no limit to how much cash the government can give you as long as it taxes it right back. The government could give every single American $10 billion in cash without increasing prices—as long as it taxes back that $10 billion as soon as it pays it out. We need to get rid of any attention to this meaningless gross cost and focus on the one cost of UBI that matters: its net cost.

Here are some of the many examples of people mistreating the gross cost of UBI as if it were a real cost:

A google search will produce more articles making this error than I can count.

I recently made some simple estimates of the real cost of UBI in an paper entitled, “the Cost of Basic Income: Back-of-the-Envelope Calculations.” It’s currently under peer-review at an academic journal and available in un-reviewed form on my website. I found that a UBI large enough to eliminate poverty costs on $539 billion per year–less than 16% of its often-mentioned but not-very-meaningful gross cost ($3.415 trillion), less than 25% of the cost of current U.S. entitlement spending, less than 15% of overall federal spending, and about 2.95% of Gross Domestic Product (GDP).

-Cru Coffee House, Beaufort, North Carolina, May 23, 2017

26 thoughts on “The BIG misunderstanding about the cost of Universal Basic Income”

  1. There is a huge mistake in this article. The author writes that there is no cost if the government gives you give back a tax you’ve paid. He claims if a person earning $100,000 pays $20,000 in taxes and the UBI is $10,000, that there’s no cost to the government if it gives him his UBI as a tax rebate; that is, the taxpayer pays $10,000 in taxes instead of $20,000. But that 10k the government gave back to him would have paid for tanks, medical research, roads, student loans, the FBI, etc., The government has no spare cash to give away. It already has to borrow to fund its spending. So the $10,000 will have to come from higher taxes somewhere. Multiply that 10k by all taxpayers who will receive the 10k rebate and you have a huge number. Where would it come from?

    1. You’re just making a mistake, Mike Flynn. Let my try to clear it up for you. Take a person at the breakeven point. He starts with $24,000. We taken $12,000 in taxes. We give him back $12,000 in UBI. He still has $24,000. This costs him nothing and it doesn’t preclude you of introducing your plan of taking $12,000 from him to use for tanks, medical research, roads, student loans, the FBI, etc. If you do your plan, his income goes down from $24,000 to $12,000. That really costs him something. You can do both at the same time if you want. The fact that he pays his own UBI in no way makes him less able to pay tax dollars for other things.

    2. I think Mike’s confusion might center around what costs we are talking about.

      When most people/papers talk about the “cost of a UBI,” they mean the additional cost of the policy, at least as far as tax burdens are concerned. So, the extra amount we’d need to come up with after existing taxes. This article is just saying that when most people think about this additional tax burden, they forget that part of that burden will be offset by the basic income. So, if my gross tax burden were to increase by $15,000 as a result of a UBI policy, but I got a UBI of $12,000, my total/net extra tax burden would really only be $3,000.

      The fact that my tax burden would only be $6,000 instead of $30,000 wouldn’t cost the government anything, though. They still can collect just as much taxes for tanks, roads, the FBI, etc. as they did before. We’re just talking about money from the new taxes that would be needed to pay for the UBI. This article is saying that those new taxes wouldn’t burden people as much as many studies say, because people would get part of the new taxes back in the form of the UBI.

    3. Sorry, I think the confusion is rather on the side of the reply, not the question.

      In the helpful example, we start with a person with 24.000 USD income and a tax burden of 12.000 USD. As spelled out above, these taxes are currently used for e g the FBI, roads, tanks etc.

      If now an UBI is introduced which will pay out 12.000 USD to this person, this additional financing can only arise from a reduction of the aforementioned expenditure with this amount, and there will hence be less money to spend on roads etc.

      Arguing that the net cost in this case would be zero therefore doesn’t make much sense.

      The only situation I could see where this type of net cost calculation would be relevant is where we start with a situation where nobody pays any tax at all – only then will the net cost represent the additional burden on the public finances.

    4. @ David H, you’re still trying to look at UBI in isolation from it’s financing. You’re ignore the New taxes that the person pays when UBI is introduce. You can’t introduce UBI with out some new taxes on somebody or it will cause rampant inflation. If (as in your example) a person starts out pay 12K in taxes, then gets a UBI of 12K, and no new taxes, the next cost of this person’s UBI is, 12K, as you suppose. But if this person pays 6K in new taxes to support UBI, the net cost of this person’s UBI is only 6K. If this person pays 12K or more in new taxes to support UBI, the net cost of their UBI is zero. Only people who receive more in UBI than they pay in the new taxes necessary to support it impose a cost on taxpayers. That is the only relevant opportunity cost.

  3. Karl, there are some comments by Leximize and Mark Conrad on that santacruz article that bear reading.

    One of the concepts I’m toying with is the concept raised here: (article does NOT take into account the *net* outlay that you mention) https://anonymole.wordpress.com/2017/05/17/ubi-is-not-the-solution/

    In there I try to examine why UBI is needed. And one of the reasons, I think, is that the lower 3/4’s of people just don’t (or can’t) invest. The wealthy ALWAYS invest. If we could get everybody else investing somehow in the productivity gains of the country’s future — then maybe we can solve some of this inequality that way too.

    1. Yes, at its core, a UBI is a tool for reducing income inequality. It’s needed because capitalism creates unfair income inequality so we need the UBI to fix this one key defect of capitalism.

      The reason capitalism creates unfair inequality is because of capital — the ability of private property to produce “free” income to whoever owns it. They don’t have to work, they don’t have to do anything, but their private holdings provides free income for them.

      Under capitalism, the only way to become super rich is to hoard lots of capital — to keep others from owning it and collecting some of that free rent. If you own a block of land in Manhattan, you are super rich, because it produces tons of free income for whoever owns it.

      That’s what investors do. Mosty. They compete to be the best hoarder. The most aggressive, most nasty, most selfish people, tend to do well in this game, a whoever does well, ends up owning massive amounts of the fixed assets of our economy.

      If the only way to get income, was to sell your labor, then the economy would be fair. But if you can get free income for being the best hoarder, there is nothing at all socially fair about it.

      The economy needs investors. And we must pay them for doing their jobs. BVut what we don’t need, and most fix, is that the investors should have NO RIGHTS to the free income, their investments create. That “free income” should be a public shared resource — aka, the UBI.

      We don’t want average people doing the investing. We want them to have an equal share of the rent income investments create. We want the best investors in society doing the investing, and we want them to be paid THE SMALLEST INCOME POSSIBLE, to get them to do that job.

      The way a UBI will work is that it will tax all the effective “free rent” out of the economy, and share those “free rents” with everyone in our society. What is left after taxes, will be “fair pay” of labor — such as the true labor cost of hiring a top investor.

      We need a UBI, because capitalism has serious social problems, which must be fixed to make society a better place. And though capitalism has always had this weakness, the problem is getting much worse as automation rises and converts larger shares of the total economy, from labor income (the good income) to capital income (the problem income).

  5. I would really like to get a proper grasp on this, but I find it hard to do so.

    Please be patient with me, I’m not particularly stupid by most standards, just as dumb as the average person, but I just cannot get it. How then can this idea convince a majority of the people it needs to make it a reality if many of them will be as confused as me?

    A simpler and much clearer way of explaining this is really needed. Sorry, but a “UBI for Dummies” book isn’t yet available, as far as I know.

    Can you help me understand?

    1. Yes @Mark Lockett, I can help, but I’ll need your help first. Your question is too vague. You’re basically asking me start over, say the whole thing again in some different way. What parts did you understand and not understand? Where did I lose you? Where do you think you’re strong and weak? Can you help?

    2. I believe that what he’s saying is that the cost of UBI is offset by UBI itself. This is basically a more palatable means of direct wealth distribution, as the rich would pay more in the taxes needed to fund the system than they get from the system, and the poor would get more from it than they would pay for it. With an appropriate tax structure of course.

      However, I don’t actually get how this is an argument for UBI as a whole, or rather, how it fits in with the quality of life improvement that is supposedly supposed to go to everyone. Seems like this implementation would just have the same welfare-trap effect as traditional means-tested forms of welfare. Interested in a response, I have to do a presentation on this for school and am very interested.

      1. Hi,

        Having richer people pay for basic income doesn’t necessarily degrade their quality of life. For someone who can afford two houses, three cars and vacations abroad, a little bit extra to finance a basic income for everyone (yes, that person also receives it, although, for her, the balance is negative) will not affect her lifestyle much.

        Best,

    3. @Side Meat On: It’s not an argument for UBI. It’s a statement of what UBI costs, one of the things we need to know as we make the decision to have UBI. The argument here is not specific to this method of financing UBI. Any UBI program that doesn’t cause rampent inflation will involving both a UBI and higher taxes, but those taxes will be paid by people who get the UBI, and that will offset part of the cost of those taxes. That difference is the true cost of UBI. That’s what we need to know.

      On the second issue, UBI does not have a poverty trap because you don’t lose UBI as you make more money. You might pay taxes on the money you make, but for any incremental increase in income, that’s very small compared to losing your UBI, the way people lose Unemployment Insurance, Public, Housing, Medicaid, etc. as their income goes up.

  7. Hello, Hello, No need to study gobbledegook, the process is simple;
    *THE GOVERNMENT supplies EVERYONE, rich-poor, young-old, brown-pink, clever-dull, tall short, with a Living allowance that cannot be banked but must be spent within a certain time or cancelled. It is Fiat money. Just as banks write out cheques as loans without physically withdrawing the amount from a safe so the government issues Living Allowances. No inflation because the money is replaced by goods or physical labour.
    People are being conned. Let the banks serve the rich and the government serve the people.

  8. Hey I get what your saying most of it at least. And I highly support UBI but Is it more of a policy than an financing thing? I see it more as a social policy than a fiscal policy. I think that’s what people have to understand even though money is involved and since it is universal. The taxes plays itself out and make it free for everybody. That’s the key it is such an radical idea and so transformative that people can wrap their heads around people basically getting money with no cost. Lol because people have created an idea that we can have a policy with no cost. If that makes sense lol it’s amazing though i love this idea

    1. Dear J,

      “No cost” means “at a neutral cost”, which means that what it (the policy) gets in taxes, is merely redistributed for those below a certain income threshold.

      Basic income is mostly about redistributing income.

      Cheers,

    2. It might not be “a finance thing,” but it has a cost. It as to be financed or it will cause hyperinflation and collapse. People are right to ask how much it costs, and we have to make sure its feasible. Not all programs we’d like to create are financially feasible, but we can show Basic Income is.

  9. 1. Mr. Yang also has another good idea regarding the raising of politician’s pay, but limiting their political corporate tenure, thus reducing lobbyist influence on “our” politicians.

    2. Previous technological developments, societal trends and world-wide adoption has benefited Bill Gates & Jeff Bezos in building their empires. There are real-world costs to this development, and a huge redirection of wealth up and out of the local communities. They are highly leveraged, federally subsidized and powerful entities.

  10. If an individual receives $12 in UBI and is taxed $12, the cost to the government is indeed zero. Zero is also the amount of benefit the individual receives.

    If person A (the “rich” person) is taxed $36 and receives $12 in UBI, the cost person A is $24. The remaining $24 is used to pay for two people to receive UBI, the cost to the government is still zero.

    So, ultimately to pay for UBI all benefits must be offset in new taxes? (Especially given the desire to avoid inflation)

    Doesn’t that lead us right back to a massive tax increase of several trillion dollars?

    1. I was with you until you said, “lead us right back to massive tax increase of several trillion dollars.” No, it leads in the opposite direction, the destination is: rich people (the person A’s in your example) do not receive any net benefit from UBI. The net benefit goes to people at the low end of the income distribution. UBI is a net cost to people at the high end of the distribution. Most of the gross cost is people paying themselves–higher income people pay all of their own UBIs and more; most lower pay some of their own UBIs, but not all of it. The difference is the amount net benefit to the net beneficiaries and it is equal to the net cost paid by the net contributors.

      Think about an example of 5 people

      person income UBI taxes net benefit / -net cost

      1 0 $20K 0 $20K

      2 $10K $20K $10K $10K

      3 $20K $20K $20K 0

      4 $60K $20K $30K -$10K

      5 $80K $20K $40K -$20K

      Totals $170K $100K $100K +$30 / -30K

      The “gross” cost is $100K, but most of that is just people paying themselves. The net benefit to net beneficiaries is $30K, and that’s the same as the net cost to net contributors, -$30K. The net cost is only three-tenths (30%) of the gross cost.

      –Karl

  11. How would this look from a policy perspective in terms of steps? The government will still need to hand out 3 trillion dollars, so what exactly is the funding mechanism? Is it a 50% marginal tax rate like you talk about in your paper, because that part was a little muddled.

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