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.
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.