I’m not sure I follow your argument entirely. While your thought experiment is interesting for considering substitution vs. income effects, I believe UBIs are still far more costly than guaranteed incomes.
Yes, guaranteed, means-tested incomes have some costs due to substitution effects that UBIs don’t. People near the income threshold might work less or even quit the labor force to avoid losing benefits, potentially increasing program costs. UBI avoids this by giving everyone the same amount regardless of work.
However, empirically, these effects seem small. Studies on conditional transfer programs like Brazil’s Bolsa Familia and Mexico’s Progresa/Prospera show modest impacts on labor supply. Most find only slight reductions in work hours, if any. These aren’t strictly guaranteed income programs as they have some strings attached, but they seem to be good indicators of how people might respond to similar cash transfer programs. So while the OP overlooked substitution effects, real-world evidence suggests they do not seem nearly significant enough to make guaranteed income programs comparable in cost to full UBI systems.
Yes, guaranteed, means-tested incomes have some costs due to substitution effects that UBIs don’t. People near the income threshold might work less or even quit the labor force to avoid losing benefits, potentially increasing program costs.
This is not what I mean. Observe Kevin’s graph describing the guaranteed minimum income in section 1.1. Notice how the first two income brackets have the same total income. An individual’s total income consists of their factor payments (in this case their wage) and their transfer payments. The GMI is structured so that the the wage plus the transfer will always equal at least a particular total income (I’ll continue to use 50,000 as an example). This means that if your wage is 10,000 dollars a year, your total income is 50,000 dollars, and if your wage is 50,000 dollars a year, your total income is still 50,000 dollars. This means in practice that you receive none of the first 50,000 dollars of your wage, making it indistinguishable from a 100% marginal tax rate on those dollars. This is very unintuitive to many people, so let me elaborate:
If you get a raise of one dollar, by how many cents does your total income increase? Your effective marginal tax rate equals 100 minus that number. I pay a tax of 25%, so if I get paid a dollar, I take home 75 cents. In the GMI world, if I got paid a dollar, I would take home 0 cents, because my transfer income would reduce by one dollar. 100 minus 0 is 100, so the effective marginal tax rate equals 100%. You say:
people near the income threshold might work less or even quit the labor force to avoid losing benefits
This is an inaccurate description of the problem. There is no income threshold. EVERY wage earner in this scenario is paying that 100% tax on their first 50,000 dollars. And there is no losing benefits. Going from a 40k yearly wage to a 50k yearly wage does not cause the earner to “lose” anything. It just doesn’t cause them to gain anything, so they have no incentive to take on the marginal disutility of the extra work for nothing in return. If they quit the labor force, it’s not to avoid losing benefits, it’s because it’s not worth it to work for no pay.
The same problem remains in the more realistic scenario where the GMI phases out slowly, so that rather than the first two bars in 1.1 being the same size, the second one is slightly larger than the first. This is how most means-tested benefits work in the real world. Let’s say that the GMI now works by paying a transfer of 25,000 for the unemployed, and for every dollar of wages earned, the transfer reduces by 25 cents. Now, if you get a raise of one dollar, your total income increases 75 cents, and pay an effective marginal tax rate of 25% (ignoring all other taxes) on all income between 0$ and 100,000, after which point there is no more transfer money to take away, and you start receiving one dollar for every dollar more you get paid. This is a better tax, but it’s still a tax. It’s not cheaper than a UBI. The cost is the same.
Compare phase-out world to a world with a UBI paid for by a flat tax. In phase-out world, there is a flat tax of 20% (arbitrary number), and the transfer payments phase out at a rate of 25 cents a dollar, meaning that the effective marginal tax rate is 45% between 0 and 100,000 dollars a year (assuming they phase out for each dollar of pre-tax income, not post-tax), and 20% for all income after that. In the second world there is a flat tax of 30%, and the effective marginal tax rate is 30% for all earners. The UBI is not “much more costly” than the GMI, because if you add up all the “labor dollars that someone doesn’t get”, you get the exact same number either way. The only difference is that in UBI-world, the rich receive less total income, and in phase-out world, the poor receive less total income. The same holds if the transfer payments are paid entirely through non-labor income taxes.
Because the “phasing out” of the transfer payments would not appear on the IRS’s balance sheet as being a tax, it’s easy to mistake the GMI as somehow saving money compared to the UBI, even while accomplishing the exact same distribution. This is the mistake of thinking like a tax collector and not like a planning demon. In the same way that it’s easy to produce seemingly valid proofs that 1+1=1 by hiding a division by zero, it’s easy to make money appear out of nowhere by hiding a tax in the transfer system. The 50,000$ GMI world and the UBI+100% tax world have exactly the same distribution, and therefore exactly the same incentives and exactly the same amount of total wealth. There is no dollar that someone has in one world, but not the second. But the second world looks more “expensive” because the government chooses to give money and then take it away rather than withhold it, so it looks like there’s more distribution going on than there actually is. When we look at it from the demon’s perspective, we can see that there’s no difference between giving someone something and then taking it from them, and giving them nothing. This is what I was trying to convey with my example of the one million dollar UBI plus head tax.
> However, empirically, these effects seem small.
The magnitude of the incentive effects is not relevant to the comparison between GMI and UBI. The key thing to understand is that the incentive effects of each are equivalent (if the GMI and UBI arrive at the same distribution). It’s the same effect both times: someone gains fewer cents when their wage is raised by a dollar.
> real-world evidence suggests they do not seem nearly significant enough to make guaranteed income programs comparable in cost to full UBI systems.
They are comparable in cost because they are the same cost. Part of the cost is just hidden with a means-tested system by taxing the transfer payment instead of the wage, giving it the appearance of saving society money, even though everyone’s total income still adds up to the same number.
Thanks for the answer; I think I understood your point better, but I still have a different view. You’re correct that guaranteed income can be described as a UBI with a 100% marginal tax rate on labor income up to a certain threshold. Both these policies are indeed equivalent in terms of incentives and have the same cost. However, this is quite different from the straightforward UBI that the OP was describing!
You also make a good point that most means-tested income programs are incentive-equivalent (or quite similar, though typically with more design details) to a UBI program with a less-than-100% marginal tax rate on labor income up to the threshold. This helps explain why we don’t observe such high substitution effects in practice.
That said, guaranteed income still tends to be much less costly than simple UBI. This becomes evident when comparing a low level of guaranteed income versus a low level of UBI [as defined by OP]. If you offer a guaranteed monthly income of 100 USD [or UBI + 100% marginal tax rate up to 100 USD of labor income] , some people might leave the workforce entirely, but very few would likely do so. This is much less costly than providing 100 USD to every person! The point at which their economic costs [fiscal costs + behavioral costs due to changing incentives] will be similar is largely an empirical question involving labor elasticity, reservation wages, etc.
Your claim here is that a tax on the lowest income tax bracket is “less costly” than a tax elsewhere which raises the same quantity of revenue. I don’t understand how or why this is supposed to be the case. First of all, even with your small transfer example, I’m not sure if I consider the incentives to be that minimal. If a student would have stood to gain 800 dollars a month if they got a part-time job, and now they only stood to gain 700 dollars, I’d expect them to be less likely to get a job. But that’s not even relevant. Compare the two situations which you claim differ in cost:
Both situations, as you describe them, involve a UBI of 100 USD per person per month. In both situations (we will assume), part of the cost is paid by a flat income tax (this isn’t how I think a UBI should be paid for, but it’s easier to understand this way). In America A, there is also a 100% marginal tax rate on the first 100$ of everyone’s monthly paycheck (making it equivalent to a 100$ monthly GMI). In America B, there is only the flat tax, which has to be higher. In both Americas, the tax system must raise roughly 30 billion dollars a month. In America A, every wage earner pays 100$ a month in taxes from the first tax. Let’s say there are 150 million wage earners. That’s 15 billion dollars raised by that tax. The flat tax must be at a rate to raise another 15 billion dollars then. Let’s say the total amount of labor income in the US is a trillion dollars a month. To raise 15 billion dollars from a flat income tax, you’d raise it by 1.5%. America 2 is the same but the flat tax needs to be raised twice as much, to 3%, because wage earners are no longer all paying 100$. I’m oversimplifying here but don’t nitpick me. The point is that it is not at all obvious to me that a 100% tax on the 0-100$ income bracket is “less costly” than a 1.5% raising of the income tax across the board. In monetary terms it’s obviously exactly as costly, just much more regressive, and If there were some reason that it WAS in some way less costly, then I would expect it to be even less costly to raise all 30 billion of the dollars from that same tax bracket, by putting a 200% tax on the first 100 dollars. And this would apply if you wanted to raise a tax for anything, not just a UBI. No one would propose such a taxation scheme to pay for a 15 billion dollar investment in green energy for example. It has no advantage.
I’m not sure I follow your argument entirely. While your thought experiment is interesting for considering substitution vs. income effects, I believe UBIs are still far more costly than guaranteed incomes.
Yes, guaranteed, means-tested incomes have some costs due to substitution effects that UBIs don’t. People near the income threshold might work less or even quit the labor force to avoid losing benefits, potentially increasing program costs. UBI avoids this by giving everyone the same amount regardless of work.
However, empirically, these effects seem small. Studies on conditional transfer programs like Brazil’s Bolsa Familia and Mexico’s Progresa/Prospera show modest impacts on labor supply. Most find only slight reductions in work hours, if any. These aren’t strictly guaranteed income programs as they have some strings attached, but they seem to be good indicators of how people might respond to similar cash transfer programs. So while the OP overlooked substitution effects, real-world evidence suggests they do not seem nearly significant enough to make guaranteed income programs comparable in cost to full UBI systems.
For reference, I think these papers from an Annual Review UBI symposium are quite good: https://www.annualreviews.org/content/journals/10.1146/annurev-ec-11
Let me explain my first point more clearly.
This is not what I mean. Observe Kevin’s graph describing the guaranteed minimum income in section 1.1. Notice how the first two income brackets have the same total income. An individual’s total income consists of their factor payments (in this case their wage) and their transfer payments. The GMI is structured so that the the wage plus the transfer will always equal at least a particular total income (I’ll continue to use 50,000 as an example). This means that if your wage is 10,000 dollars a year, your total income is 50,000 dollars, and if your wage is 50,000 dollars a year, your total income is still 50,000 dollars. This means in practice that you receive none of the first 50,000 dollars of your wage, making it indistinguishable from a 100% marginal tax rate on those dollars. This is very unintuitive to many people, so let me elaborate:
If you get a raise of one dollar, by how many cents does your total income increase? Your effective marginal tax rate equals 100 minus that number. I pay a tax of 25%, so if I get paid a dollar, I take home 75 cents. In the GMI world, if I got paid a dollar, I would take home 0 cents, because my transfer income would reduce by one dollar. 100 minus 0 is 100, so the effective marginal tax rate equals 100%. You say:
This is an inaccurate description of the problem. There is no income threshold. EVERY wage earner in this scenario is paying that 100% tax on their first 50,000 dollars. And there is no losing benefits. Going from a 40k yearly wage to a 50k yearly wage does not cause the earner to “lose” anything. It just doesn’t cause them to gain anything, so they have no incentive to take on the marginal disutility of the extra work for nothing in return. If they quit the labor force, it’s not to avoid losing benefits, it’s because it’s not worth it to work for no pay.
The same problem remains in the more realistic scenario where the GMI phases out slowly, so that rather than the first two bars in 1.1 being the same size, the second one is slightly larger than the first. This is how most means-tested benefits work in the real world. Let’s say that the GMI now works by paying a transfer of 25,000 for the unemployed, and for every dollar of wages earned, the transfer reduces by 25 cents. Now, if you get a raise of one dollar, your total income increases 75 cents, and pay an effective marginal tax rate of 25% (ignoring all other taxes) on all income between 0$ and 100,000, after which point there is no more transfer money to take away, and you start receiving one dollar for every dollar more you get paid. This is a better tax, but it’s still a tax. It’s not cheaper than a UBI. The cost is the same.
Compare phase-out world to a world with a UBI paid for by a flat tax. In phase-out world, there is a flat tax of 20% (arbitrary number), and the transfer payments phase out at a rate of 25 cents a dollar, meaning that the effective marginal tax rate is 45% between 0 and 100,000 dollars a year (assuming they phase out for each dollar of pre-tax income, not post-tax), and 20% for all income after that. In the second world there is a flat tax of 30%, and the effective marginal tax rate is 30% for all earners. The UBI is not “much more costly” than the GMI, because if you add up all the “labor dollars that someone doesn’t get”, you get the exact same number either way. The only difference is that in UBI-world, the rich receive less total income, and in phase-out world, the poor receive less total income. The same holds if the transfer payments are paid entirely through non-labor income taxes.
Because the “phasing out” of the transfer payments would not appear on the IRS’s balance sheet as being a tax, it’s easy to mistake the GMI as somehow saving money compared to the UBI, even while accomplishing the exact same distribution. This is the mistake of thinking like a tax collector and not like a planning demon. In the same way that it’s easy to produce seemingly valid proofs that 1+1=1 by hiding a division by zero, it’s easy to make money appear out of nowhere by hiding a tax in the transfer system. The 50,000$ GMI world and the UBI+100% tax world have exactly the same distribution, and therefore exactly the same incentives and exactly the same amount of total wealth. There is no dollar that someone has in one world, but not the second. But the second world looks more “expensive” because the government chooses to give money and then take it away rather than withhold it, so it looks like there’s more distribution going on than there actually is. When we look at it from the demon’s perspective, we can see that there’s no difference between giving someone something and then taking it from them, and giving them nothing. This is what I was trying to convey with my example of the one million dollar UBI plus head tax.
> However, empirically, these effects seem small.
The magnitude of the incentive effects is not relevant to the comparison between GMI and UBI. The key thing to understand is that the incentive effects of each are equivalent (if the GMI and UBI arrive at the same distribution). It’s the same effect both times: someone gains fewer cents when their wage is raised by a dollar.
> real-world evidence suggests they do not seem nearly significant enough to make guaranteed income programs comparable in cost to full UBI systems.
They are comparable in cost because they are the same cost. Part of the cost is just hidden with a means-tested system by taxing the transfer payment instead of the wage, giving it the appearance of saving society money, even though everyone’s total income still adds up to the same number.
Thanks for the answer; I think I understood your point better, but I still have a different view. You’re correct that guaranteed income can be described as a UBI with a 100% marginal tax rate on labor income up to a certain threshold. Both these policies are indeed equivalent in terms of incentives and have the same cost. However, this is quite different from the straightforward UBI that the OP was describing!
You also make a good point that most means-tested income programs are incentive-equivalent (or quite similar, though typically with more design details) to a UBI program with a less-than-100% marginal tax rate on labor income up to the threshold. This helps explain why we don’t observe such high substitution effects in practice.
That said, guaranteed income still tends to be much less costly than simple UBI. This becomes evident when comparing a low level of guaranteed income versus a low level of UBI [as defined by OP]. If you offer a guaranteed monthly income of 100 USD [or UBI + 100% marginal tax rate up to 100 USD of labor income] , some people might leave the workforce entirely, but very few would likely do so. This is much less costly than providing 100 USD to every person! The point at which their economic costs [fiscal costs + behavioral costs due to changing incentives] will be similar is largely an empirical question involving labor elasticity, reservation wages, etc.
Your claim here is that a tax on the lowest income tax bracket is “less costly” than a tax elsewhere which raises the same quantity of revenue. I don’t understand how or why this is supposed to be the case. First of all, even with your small transfer example, I’m not sure if I consider the incentives to be that minimal. If a student would have stood to gain 800 dollars a month if they got a part-time job, and now they only stood to gain 700 dollars, I’d expect them to be less likely to get a job. But that’s not even relevant. Compare the two situations which you claim differ in cost:
Both situations, as you describe them, involve a UBI of 100 USD per person per month. In both situations (we will assume), part of the cost is paid by a flat income tax (this isn’t how I think a UBI should be paid for, but it’s easier to understand this way). In America A, there is also a 100% marginal tax rate on the first 100$ of everyone’s monthly paycheck (making it equivalent to a 100$ monthly GMI). In America B, there is only the flat tax, which has to be higher. In both Americas, the tax system must raise roughly 30 billion dollars a month. In America A, every wage earner pays 100$ a month in taxes from the first tax. Let’s say there are 150 million wage earners. That’s 15 billion dollars raised by that tax. The flat tax must be at a rate to raise another 15 billion dollars then. Let’s say the total amount of labor income in the US is a trillion dollars a month. To raise 15 billion dollars from a flat income tax, you’d raise it by 1.5%. America 2 is the same but the flat tax needs to be raised twice as much, to 3%, because wage earners are no longer all paying 100$. I’m oversimplifying here but don’t nitpick me. The point is that it is not at all obvious to me that a 100% tax on the 0-100$ income bracket is “less costly” than a 1.5% raising of the income tax across the board. In monetary terms it’s obviously exactly as costly, just much more regressive, and If there were some reason that it WAS in some way less costly, then I would expect it to be even less costly to raise all 30 billion of the dollars from that same tax bracket, by putting a 200% tax on the first 100 dollars. And this would apply if you wanted to raise a tax for anything, not just a UBI. No one would propose such a taxation scheme to pay for a 15 billion dollar investment in green energy for example. It has no advantage.