Upward Mobility

“Switzerland will decide on June 5 whether to pay its citizens a basic income to replace welfare benefits … Economists like it because unlike welfare benefits, basic income does not phase out if people work. As a result, there is no abrupt disincentive at various income levels the way there is with so many government assistance programs.”
Chris Low, Chief Economist, FTN Financial.

The Swiss vote failed, but it’s still a good idea. Surveys suggest that there are millions of American welfare recipients who would like to take a job but simply can’t, because their benefits would be cut off. There’s no way that an entry-level job can pay enough to cover the loss of benefits. It’s like having a tax rate that exceeds 100%.

Milton Friedman first proposed the “negative income tax” in 1962. It exists today as the Earned Income Tax Credit, although it was added to our 80 means-tested social programs instead of replacing any of them, as Friedman wished. In recent years the Universal Basic Income has been championed by Charles Murray at the American Enterprise Institute, who would give every adult American a stipend for health care and $10,000 a year, and then dump our entire welfare state.

Business Insider says “In 2012, there were 179 million Americans between the ages of 21 and 65 (when Social Security would kick in). The poverty line was $11,945. Thus, giving each working-age American a basic income equal to the poverty line would cost $2.14 trillion.”

That sounds like a lot, when our all-time record tax collections for 2015 were $3.25 trillion. But we could reduce our welfare outlays by the amount of the checks we write to welfare recipients. It would also be “a wash” for middle and upper-income taxpayers, who would pay higher taxes to offset the checks they receive. We’d give more to lower-middle-income taxpayers, but more people would work— at a time when the labor participation rate is plumbing 35-year lows.

The Bureau of Labor Statistics says that 62.8% of “adults” (aged 16 and over) are now working;  down from 65.7% in June of 2009, when the last recession ended.

Workers would leave the disability and welfare rolls, and as they climbed from entry-level jobs to mainstream employment they would become taxpayers.

Politifact asserts that a mother with two young children in RI can receive $26,000 in benefits even if she isn’t able to get subsidized housing. If she takes a job she’ll have to pay for babysitting and transportation, FICA, and other taxes and expenses. She’ll have less time with her children, and less time to sleep. It won’t make sense to walk away from $26,000 in benefits unless a new job is going to bring her a lot more than $30,000 a year.

If, on the other hand, $10,000 of her benefits is a guaranteed income that she won’t ever have to give up, it’s going to be much easier for her to take a $26,000 job—that eventually leads to a $36,000 job.

.                                                               — John Lumbard, CFA

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