To put it another way, the effective marginal tax rate when a person moves from the bottom to the middle quintile is . . . 76 percent.
The blog post explains how he arrives at this. He is comparing incomes before taxes and transfers with incomes after taxes and transfers. The high implicit tax rate comes from the loss of eligibility for food stamps, Medicaid, and other benefits.
If you replaced all current low-income subsidies with a Universal Basic Income, you could come up with a more rational tax rate for people. Even if the current system doesn’t discourage work effort (although I suspect that it does), just the way that it retards upward mobility strikes me as wrong.
If UBI comes it will be on top of, not in lieu of, the current welfare state. Namely I don’t expect healthcare or social security to get touched. Every UBI I see assumes those programs can be raided to pay for it. I don’t buy it.
Ditto.
This reminds me of an oldish essay by the late Aaron Wildavsky, “If you can’t budget, how can you govern?” He made the point that Value Added Taxes didn’t substitute for income tax revenue in the countries where they were implemented–they mostly served to increment the percentage of GDP flowing to the government.
We need to do something about adverse incentives–I’m not convinced the UBI is the the solution. It’s more of a policy in search of a justification. If we had a a list of “100 great ideas to reduce adverse incentives,” would the UBI be at the top of the list?
It is possible to accept Mankiw’s analysis of the adverse incentives without making the leap to the UBI.
Should we actually implement the UBI, I advocate doing it in stages, one or two states at a time. Let’s start with a few states and see how it goes.
I could accept UBI if recipients were not allowed to vote.
I would accept UBI if recipients were strongly discouraged from reproducing.
See Prof. James Thompson’s review of Adam Perkins recent book _The welfare trait_. At his blog _Psychological Comments or reprinted at Unz.com
I agree that a UBI isn’t a good solution to the incentives problem, at the very least not an efficient one. Most of the country, most of the time, doesn’t need a UBI, so that spending becomes pure waste. I’d rather have targeted social welfare programs that have their own limiting factors which encourage people to get off of them.
Programs should be targeted towards life situations and, ideally, come with their own incentives to get off the program.
I’d replace Medicaid, the ACA exchanges, SCHIP, EITC, unemployment insurance, SNAP, TANF, etc, with the following suite:
1) Job Guarantee / Employer of Last Resort
– Available to all able bodied individuals, with wages structured based on the number of dependents, limiting factor is that, except for households with large numbers of dependents, wages are reasonably low
2) Disability Insurance
– Limiting factor is that it is only open to the disabled
3) Kurzarbeit
– German short work program, helps employers minimize involuntary turnover due to temporary economic situations, limiting factor is that it cuts both work hours and pay
4) Emergency Fund
– Fixed dollar fund (say, $24,000 or $36,000) which people can withdraw any amount, for any reason, up to $2,000/mo, limiting factor is the fixed size of the account; some portion of account values may be passed on to the emergency fund of heirs
5) Public Hospitals and Clinics
– Public providers of health care, limiting factor is fixed budget with explicit rationing of care, limiting factors are known rationing, allowing experience rating for private insurers, and required contributions at certain income thresholds, say $200/mo for singles above $50,000/yr and $500/mo for families above $100,000/yr.
Doing back of the envelope math, I’d expect this set to cost something like $1.4 trillion this year. Given 250 million American adults, that would finance a BIG of just $466/mo per person, with nothing for children. But if you had the above, the need for a BIG would disappear. A job above poverty line for your family is guaranteed. There is disability insurance. Health care. Emergency fund for contingencies.
I’m not sure “Marginal Tax Rate Inequality” is internalized or obvious. Ask people to explain what happens to their tax payments when they move into a different tax bracket. See if the answer is even close to basic theory.
For every $100 dollars earned using the share data from the WSJ article
Inc Spend Spend Relative
Share Share Dollars to Q1
Q1: 2.2 12.9 .28 1.0
Q2: 7.0 13.9 .97 3.5
Q3: 12.6 15.4 1.94 6.93
Q4: 20.5 18.6 3.81 13.6
Q5: 57.7 39.3 22.7 81
-Spend Dollars = Income Share * Spend Share
-Relative to Q1 = Spend Dollars()/Spend Dollars (Q1)
At the street level, $22 of spendable cash looks quite a bit different than $0.28. The right column inequality is what is seen. Q5 can spend 81x more than Q1, or 6x more than Q4.
The “shares and rates” argument is BS, invisible at the street level, and whiny. Those poor people get to spend a higher proportion of their paycheck than I do.
I don’t believe the UBI is necessarily a good idea however we living in a time:
1) How would you fix the issue of employers looking for low wage workers?
2) The reality is high school graduation rates is going up but it is felt there is a shortage of more vocational young labor. Most vocational training is not especially good and where is the private improving this? (This is area I think Betsy DeVos could be better but I don’t see any improvement here. I just see some derugulation for allowing poor secondary schools.)
Note I do believe the failures of young people are moving from better behaved High Schoolers to 18 – 24 year old.
The Cato piece cited in the WSJ article provides an interesting rundown of all the transfers and subsidies to low-income people. But it is not at all clear exactly how much each low income household currently receives. I am not sure it provides a sound funding basis for a federal UBI. To get to $1 trillion in additional transfers and subsidies they include things like student loan forgiveness and state and local matching funds, either of which would provide a stream of revenue that could be redistributed via an UBI. For 2011 they add up federal transfers and get $1,772,500,000, dividing that by the 118,000,000 households in the US in 2011, I get about $15,000 per household. If you want to go with only low-income households, in 2011 there were about 47,459,000 households in the bottom two income quintiles and you would get about $37,348 per household. If you could actually consolidate all the federal transfer programs into one UBI program, these numbers might sell. Of course, an even bigger benefit than that derived by the increase in utility afforded low income people by substituting strings-free cash for bureaucratic folderol would be eliminating the bureaucratic class that administers these programs and their disproportionately large political influence. Realistically though, we are not about to turn Medicare into a cash grant program. To make a UBI work additional revenue would be necessary. Preferably funded on a pay as you go basis that did not contribute to additional unfunded liabilites and debt. This revenue could be generated in a number of ways. The US could follow the rest of the world and charge an across-the-board goods and services tax (through a VAT, or whatever else you want to call non-tariff taxes on imports) on imported goods rather than subsidizing imports through punitive taxation on US domestic producers. And the tax base could be extended to include the roughly half the economy in tax-exempt loopholes. A separate income tax rate of say 40% on earnings from tax-exempt entities like federal, state, local, and 501(c) organizations, would recognize the share of the value of the tax exemption captured by their employees as well as give these individuals some skin in the game, creating an incentive to control run-away government spending. These new revenues should be good for about $500 billion or so a year. Limit the new tax revenues to redistribution via the UBI and you might have a winner.
There are three big problems with UBI:
1. To preserve quality of life at the low end and keep EMTR low-ish would require extending subsidies far into the middle class and significantly higher marginal rates at the high end. This is fairly easy to demonstrate by even simple geometric arguments (areas under the triangles and all that). You lower the impact of high rates one one class, but then you have to pay the impact of the effect of higher rates on another, and it’s not clear at all whether that’s a net benefit overall. Countries with extremely high rates at the high end are not exactly encouraging examples in this regard.
2. As Charles Murray – Mr. In Our Hands himself – has conceded, even if one could take down the whole welfare state and replace it with UBI, one has the problem os special interest politics with concentrated benefits and dispersed costs. There is no political mechanism to avoid these programs coming right back into existence on top of a UBI in the same ways they arose in the first place by throwing more resources at particular sympathetic clients and constituencies when the UBI is argues to be inadequate.
3. Which it will be, because, duh, a very huge number of people lack good judgment and self-discipline and are going to spend the money badly on vice instead of on conventional welfare goods and services. People cringe at outright paternalism but that’s trying to avoid reckoning with the ugly reality and the fact that we can’t expect a future UBI democratic society to besust ainably callous ot the obvious destructive consequences of such a system, because, “Hey, it’s their own damn fault, they had all the money they needed to get healthy and educated, but they blew it on booze,” is not resistant to typical compassionate virtue signaling.
Finally, it’s worth pointing out that matters of social status (shame, stigma, etc.) and the sheer annoyance and difficulty of dealing with the various welfare systems is a kind of “tax” which doesn’t get reflected in ordinary ‘legible’ income statistics. When someone earns more income and affords the same goods and services as before, but pays his own way and maybe can escape some of the “economic captive audience” community, there is an underappreciated boost in status, pride, and life satisfaction, all of which is utility and none of which is taxed.
And that’s a good thing! It looks like very poor people go untaxed, but they are taxed socially, and it’s the relaxation of that social tax that provides some of the motivation to work more, and try for higher paying jobs. If we are going to try to reduce the “welfare claw-back” tax rate, then in the alternative we could try hard to increase the dole-dependency social stigma tax rate, to provide similar extra motivation, and to quote Matt Yglesias, “it wouldn’t cost us a dime.”
The effective marginal rate was lower when there was social stigma on unearned income.
Was there a stigma on dividends and capital gains??
No.
But there seems to be now. That’s a good point. The stigma on welfare-type unearned income has gone away while the stigma on dividends and capital gains has increased.
UBI was just tried and stopped after 2 years in Finland.
https://www.ft.com/content/3148cb5e-4c80-11e8-8a8e-22951a2d8493
What has not yet been seriously tried is a Jobs Guarantee, possibly like what the young socialist is proposing, possibly like the Levy Institute wants.
Better to offer a job to all who now get gov’t money, and always make it more money than they now get.
Let different states implement it in different ways, including paying young mothers to be day care assistants, old age assistants, education assistants, car repair assistants, plumber assistants … whatever scheme the state converges on.
But the “free, no-strings money” from the gov’t should slowly be ending. More need more incentives to get on the first rung of the “work your way up OUT of poverty”, rather than any kind of UBI – Make Poverty More Comfy.
The accounting might be made to look persuasive, but UBI does not look like a reversible error, if error it be.