When the Welfare State Met the Flat Tax

Milton Friedman and Bernie Sanders both agree on the need for a universal basic income, but the devil is in the details.

Businessman walking on tightrope supported by stacks of coins

On June 5, 2.5 million Swiss turned out to vote on a proposal to make universal basic income (UBI) a constitutional right. The vote was the culmination of an intense, nearly four-year public debate that ranged from lofty matters of human dignity to wonky questions of optimal tax design. It seemed a UBI had a fighting chance to enter the mainstream, and the world tuned in. But then Swiss voters laid waste to the dream of a UBI, voting against it by a huge margin — 76.9 percent to 23.1 percent.

What happened? As recently as April, a poll found 40 percent of Swiss citizens intended to vote for a plan that would have provided every adult with 2,500 francs a month regardless of their income. However, extrapolating from the actual vote, less than 10 percent of Switzerland’s voting age population registered their support on the day it mattered.

The Swiss government’s repeated warning that approval of the basic income plan would warrant large tax increases clearly struck a chord with voters. But fear of higher taxes wasn’t the only problem. Widespread confusion over how the plan would be funded was symptomatic of deeper confusions over what the purpose of UBI is even supposed to be.

The Competing Visions of Universal Basic Income

Interest in UBI has grown steadily in recent years. Champions for a basic income can be readily found among far-left socialists and far-right libertarians. This can create the appearance of an emerging consensus. But agreement is superficial at best and a liability at worse. In reality, proponents from each camp tend to cite features of a UBI that are contradictory on their face, like rationalizing the welfare state on one hand, to summoning a dictatorship of the proletariat on the other.

On the left, basic income elicits visions of a “national dividend” modeled after the royalty payments doled out by resource-rich governments like Alaska’s. UBI has thus also been pitched as a complement to a sovereign wealth fund that would ultimately nationalize the entire retirement system.

The reverie deepens among so-called Modern Monetary Theorists, a heterodox school of macroeconomists who have long called for a government “job guarantee,” but who see in UBI the next best thing: an income guarantee. Some MMT adherents have even proposed paying for UBI with deficit spending as a kind of “helicopter money,” an unconventional form of fiscal policy that directly infuses cash into people’s bank accounts to act as a perpetual stimulus on demand. They call it “quantitative easing for the people,” but to most it sounds like a recipe for runaway inflation.

On the right, proponents like Charles Murray pitch basic income as a means of assuaging the modernity’s new economic and social underclass. Society is Coming Apart, or bifurcating along skills-based and other, more problematic cultural dimensions, including self-control and propriety. UBI, therefore, speaks to social conservatives who wish to pre-empt the fraying of the social fabric. As a bonus, a basic income has the potential to draw women out of the labor force and into the home, where their labor went uncompensated in the past.

Among libertarians, the case for UBI is more straightforward. As long as the state is providing public assistance at all, a basic income simply represents a less bureaucratic and nonpaternalistic way of doing so. The 80-plus means-tested programs that make up the reluctant welfare state in the United States would merely need to be abolished to offset cost. But while that may sound logical on paper, defeating the dozens of interest groups represented by those programs possibly makes this vision of UBI the least plausible of the bunch.

UBI is thus the natural corollary to a classic conservative hobbyhorse, the flat tax. It may as well be called the flat transfer. Unfortunately, like UBI, the flat tax has many supporters who extol its simplicity and pragmatism compared with the status quo, but who consistently underestimate the hoards of special interests ready to defend their corner of the tax code.

Ambiguity Aversion

“The Swiss referendum asked voters to vote on the principled argument, leaving both amount and funding to be determined by legislation,” wrote Jurgen De Wispelaere, founding editor of the journal Basic Income Studies, in his postmortem of the results. “This may put off some voters who are risk- and, above all, ambiguity-averse.”

Much like the drawing that can be seen either as a rabbit or as a duck (depending on how one’s eyes first settle on it), radically different camps look at UBI and see it as something that matches surprisingly close with their ideological priors, often to the exclusion of any other interpretation. And while the progressive and regressive facets of UBI need not actually be mutually exclusive, attempting to deduce the net effect is confounding. As a rule, whenever the symbolic meaning of a thing is in dispute, be it an optical illusion or a major policy proposal, we naturally shift from “seeing as” to “seeing that” — from seeing UBI as a tool for promoting human dignity, social cohesion, and full employment, to seeing that it is incredibly expensive (a third of the gross domestic product, in the case of the Swiss proposal).

Activists can make this dynamic worse by painting UBI with a simplistic and overly moralizing brush. Can simply giving everyone a cash infusion at regular intervals really be the panacea its proponents make it out to be, a one-step solution to a hodgepodge of the world’s social ills? Or does this not risk overselling a more-or-less smart idea, stoking skepticism and confusion in a public that generally knows when something sounds too good to be true?

What the basic income movement needs now more than anything is focus and humility: the focus to unite conflicting visions and reduce the noise of peripheral policy debates, and the humility to set realistic expectations in pursuit of achievable political outcomes.

Will History Repeat Itself?

Writing for Newsweek in 1968, the economist Milton Friedman made the following comment on the large and growing support for a negative income tax, a close cousin to UBI:

The negative income tax … is a striking example of an idea whose time has come. … The widespread interest is remarkable. But the appearance of growing agreement — of support for a negative income tax by the right and the left, by businessmen and professors, by Republicans and Democrats — is highly misleading. In large part, it reflects the use of the same term to describe very different plans.

Like a basic income that phases out through taxes, a negative income tax would guarantee a minimum income for the poorest while being substantially cheaper than a UBI. Nonetheless, as Friedman’s column describes, the negative income tax faced a distressingly similar problem of competing vision 50 years ago as the one haunting UBI today.

A kind of negative income tax nearly came to be under Richard Nixon in the form of the Family Assistance Plan. After passing the House in 1970, it died in the Senate amid debate over its generosity and deeper purpose. If a UBI were to make it that far today it would likely suffer a similar fate.

Yet this history provides a way forward for basic income advocates. The earned income tax credit (EITC), enacted in 1975, followed in the spirit of Nixon’s welfare reform, but was decidedly more modest. The value of the tax credit starts at zero and increases as a family’s earnings go up, plateaus, and then phases out. The EITC, therefore, doesn’t provide a “guaranteed minimum income” to those without work, so much as a subsidy on earned wages in a way that incentivizes greater work. Nonetheless, the EITC is an integral part of the existing welfare system. It is credited with lifting 6 million people out of poverty and lessening the severity of poverty for 21.6 million more, many of whom are children.

The EITC provides a promising framework for creating a true basic income guarantee. All that’s needed is to boost the EITC’s generosity, extend it to childless households, and raise the initial credit from zero for zero-earners to some positive “basic income” minimum. While not exactly a UBI in the Swiss sense, it would get most of the way there, cost substantially less, and build off a system already familiar to lawmakers and the IRS.

An Experiment in Humanity

A 2011 World Health Organization report describes the recent trend toward direct cash transfers as a “quiet revolution” in development aid. “There is growing evidence that transfers can help people escape chronic, often intergenerational poverty,” the authors wrote, noting that “while the evidence base for cash transfers is better than for many other policy areas, it is also uneven.”

Discussions of UBI tend to gravitate to first-world use cases. We talk about how it might help starving artists and working-class heroes. But the most promising application of UBI is not in Switzerland or in the United States; it’s in fighting extreme poverty in developing countries. While there’s ample evidence that direct transfers work, much remains to be learned.

No true UBI has ever been implemented and studied on a long-term basis. Experiments in the 1970s came close by testing the effects of a negative income tax against control groups around the United States, but the programs were short term and hardly universal. A 2008 basic income pilot in Nambia found positive results, but quickly ran out of money in the face of harsh criticisms over methodology.

A new generation of researchers are hoping to change that. Sam Altman, president of the famed start-up accelerator Y Combinator, made headlines recently by announcing the launch of a small UBI pilot project in Oakland, California. But the most intriguing initiative of all is being organized by GiveDirectly, a nonprofit charity that sends unconditional cash transfers to the mobile phones of recipients in Kenya and Uganda.

The rationale for testing UBI in poor countries is twofold: Not only does it do the greatest good for the greatest number, but it affords the possibility of running a truly large-scale and long-term experiment in humanity. With a fundraising goal of $30 million, GiveDirectly tentatively plans to reach over 4,000 households in 48 rural villages, providing 75 cents per adult every day for 13 years. Those households will be compared with two control groups of similar size that will each receive a basic income but for only 1.5 years, and one for which the daily payment is only 25 cents per adult.

While it may sound paltry, 75 cents a day for a year adds up to one-third of Kenya’s annual per-capita GDP — a stark reminder that alleviating grinding poverty and providing for basic needs have always been the underlying inspirations for a universal basic income. Policy wonks and activists have since lost their heads in a cloud of esoteric debates that come at the cost of a unified focus on helping those in dire need.

Fortunately, the Swiss referendum results, while sobering, have not slowed the momentum behind UBI. France, the Netherlands, and Canada are exploring basic income pilot programs of their own, and a recent European Union-wide survey found 64 percent of respondents were in favor of the idea. Meanwhile, welfare reform seems back on the agenda in the United States, as dissatisfaction with the current patchwork of programs has come to a head.

The only question remaining is whether supporters of a basic income will be able to unite around a common, political tractable vision, or continue to incite confusion in the pursuit of ideological purity.

Photo credit: GARY WATERS/Getty Images

Samuel Hammond is director of policy and welfare studies at the Niskanen Center in Washington, D.C.

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