How Shall We Then Spend?
The Case for a Free-Market Welfare State
In the previous essay, Taxation, Government Spending, & the Free-Market System, we established that sovereign currency-issuing governments must not only have substantial amounts of debt but must also run deficits in order for their market systems to operate efficiently. If there is not a substantial public debt and deficit spending on the part of government, then there must necessarily be substantial debt and deficit spending on the part of the private sector, as the private sector must monetize debt in order to issue currency to make up for the fact that government has shirked its responsibility to issue currency.
We have, thus far, established that government going into debt and deficit spending does not require an increase in taxes, so my conservative-minded friends can rest assured that increased government spending does not require government to tax them more. Even the neoconservatives have adjusted their attitude towards public finance in recognition of reality, renouncing the fiscal conservatism of more traditional conservatives and recognizing that governments must sometimes run deficits to allow for economic growth. The American economy is the biggest economy in the world, which necessities that America also have the biggest government debt and the most deficit spending. The question, then, is not whether or not government ought to deficit spend but rather how shall it do so. Government must spend the new money into existence in order to get it into circulation. The question is how should the government get the additional money into circulation. How shall the government spend new money into existence so as to allow the economy to continue to function optimally? What, in particular, ought the money to be spent on?
The most obvious options are to (1) give the money to the financial elites and the corporations, (2) spend the money on means-tested welfare programs that benefit some people but not everyone, (3) spend the money on goods and services that benefit the whole populace, or (4) distribute the money out by sending an equal share via check or deposit to each citizen. In my estimation, we perhaps need to do a little bit of all of these, but our focus should be on options three and four.
Of these four option, the first and second — giving money to financial elites and corporations and spending on means-tested welfare — are the conventional methods used today, with the bulk of new money being issued via the former method and relatively little going to welfare. Giving the money to the financial elites and corporations increases inequality and allows those who are already rich to become richer. This, in my estimation, isn’t a very good option. Encompassed under the first option is spending the money on the military, as the money then goes to defense contractors and corporations with vested interest in the military-industrial complex. While we certainly need to spend some money on national defense, it would be unwise to spend too much money on such purposes as it would result in ever increasing militarism, surveillance, and potential for abuse.
The second method, while better than the first, is not the best option either. The new money created corresponds to new wealth generated by the private sector. The wealth represented by the new money is not magically created by the government but generated by the productivity of the people. It doesn’t quite seem fair to use this social wealth exclusively to benefit only a select few. And means-tested welfare is very problematic anyway, as it tends to discourage productivity and frequently fails to help the people who need it most.
I conclude that the third and fourth options — spending the new money into existence by purchasing goods and services that benefit everyone and distributing the money out by giving an equal share to each citizen — are the two best options and, therefore, ought to be the primary methods for spending money into existence. While we do need to spend on a variety of things, the bulk of our spending should be upon such things as these. This, of course, amounts to saying that we ought to use government spending to create a robust European-style welfare state.
Spending on Goods and Services
Spending on goods and services that benefit the whole populace includes, but is not limited to, spending on national defense. It is in our interest to be secure against invasions and terrorist attacks. However, giving too much money to the war machine and intelligence community has historically enabled and encouraged an aggressive foreign policy that led to blowback and resulted in less security for American citizens. The historical details here are the topic for another essay, but it is my conviction that too much military and national security spending tends to have disastrous results. Therefore, I think a disproportional amount ought to be spent on general welfare projects such as public works and universal healthcare.
Maintenance, repair, and updating of roads, bridges, and other infrastructure is in the best interest of all people. Thus, it is reasonable for the federal government to spend money on such things. It is also in the national interest to move away from fossil fuels and develop more sustainable energy solutions. Therefore, we ought to spend money on reshaping our economy in a more green and eco-friendly direction. Additionally, our healthcare system is a mess and in severe need of reform. Healthcare costs are unaffordable for most Americans, so we generally avoid trips to the doctor or dentist. 45,000 Americans die as a result of inadequate access to healthcare every year, while millions suffer as a result of the same. This could easily be fixed by the introduction of a very conservative universal catastrophic insurance or by a more liberal single-payer health insurance program. There is no reason that the richest country in the history of the world — a country that necessarily has to be spending more than enough to guarantee healthcare to all — should not have a system of universal healthcare.
Spending as an Automatic Stabilizer & Counter-Cyclical Measure
We ought to value economic stability and prosperity. The boom-and-bust cycle tends to create instability. This negative impact of recessions can be greatly reduced by government policy. Government spending during a recession can mitigate its effects. However, governments are notoriously bad at predicting recessions and taking action early on. If action is delayed, discretionary counter-cyclical policies will be much less effective.
John Maynard Keynes explains that once recessions set in, it can set off a deflationary spiral. The market won’t necessarily be self-correcting, so it may require government intervention to fix things. When there is a recession, enterprises can’t sell all of their products because aggregate demand is too low. Consequently, enterprises can’t turn a profit. Due to the economic downturn, employers will start laying off workers. Since workers are also consumers, this will cause aggregate demand to fall even more, exacerbating the problem further. The economy keeps going deeper into depression until the government intervenes to fix the problem. For example, the government ended the Great Depression by boosting aggregate demand. The government increased spending in order to fund U.S. involvement in WWII (government spending increased aggregate demand) and it raised the top marginal tax bracket, which induced employers to raise wages (higher wages also boosted aggregate demand). If what I have said here does not make sense to you, I recommend you click the hyperlinks on the words “aggregate demand” and “deflationary spiral” above to watch Khan Academy video clips that explain these concepts.
Direct Stimulus To Individuals
One proposal that is gaining traction is that of automatically increasing the supply of money by sending a check or deposit to citizens when unemployment increases — this would serve as a counter-cyclical automatic stabilizer. This idea is espoused by Claudia Sahm, the Federal Reserve Board Chief of Consumer and Community Development Research, in Direct Stimulus Payments to Individuals. This is also a key component of Michael Bennett’s platform as a presidential candidate.
The direct stimulus payments to individuals as an automatic stabilizer proposal suggests that rather than having legislators have to deliberate and decide whether or not to implement a stimulus package during a recession, you could just make it automatic so that the stimulus is done regardless of whether or not legislators recognize that a recession is setting in. The way to do this would be to tye disbursement of automatic payments to changes in the unemployment rate. This would prevent deflationary spirals from setting in, guaranteeing that all recessions would be relatively mild and that economic recovery will be quick.
“Making the payments automatic by tying their disbursement to recent changes in the unemployment rate would ensure that the stimulus reaches the economy as quickly as possible. A rapid, vigorous response to the next recession in the form of direct payments to individuals would help limit unemployment losses and the economic damage from the recession.”(Claudia Sahm, Direct Stimulus Payments to Individuals)
Typically, counter-cyclical measures like stimulus packages are enacted on a discretionary basis rather than an automatic basis. The problem is that economists and policy-makers are often bad at predicting recessions and frequently fail to enact such counter-cyclical measures until it is too late and the deflationary spiral is well underway. If the government were to enact such an automatic stimulus to individuals program, it would prevent big businesses and banks from failing and keep the deflationary spiral from ever happening. This means that such a counter-cyclical automatic stabilizer would actually guarantee that the government never has to bail out failing banks and businesses. It would also remove politics from the equation, as the stimulus would happen automatically and independently of the arbitrary whims of policy-makers.
Federal Job Guarantee
Another proposal is the federal job guarantee, championed by economists like Stephanie Kelton and Pavlina Tcherneva and politicians like Bernie Sanders and Alexandria-Ocasio Cortez.
The job guarantee is similar to the direct stimulus payments to individuals plan, but it is targeted specifically to the unemployed and happens to be conditional. When the economy starts to go into a recession and the unemployment rate goes up, the direct stimulus plan cuts everyone a check to stave off the deflationary spiral. While direct stimulus could be targeted, it is hard to target it precisely to the unemployed or to those most in need. When the economy goes into recession and the unemployment rate increases, the job guarantee would simply give government jobs to any unemployed person who wants one. The job guarantee would guarantee everyone a minimum wage job with benefits. The job guarantee provides its participants with wages with which they can consume, which should boost aggregate demand and induce the private sector to create more jobs. The job guarantee jobs would be transitional, as they would only provide a minimum wage and people would seek employment elsewhere for better wages. By making the job guarantee jobs all minimum wage jobs, it helps prevent people from settling in and permanently taking a job guarantee job. Any other job you take will provide you better income than the job guarantee position. This plan is very much like the direct stimulus proposal, except the stimulus check now has strings attached — in order to get the payment, you have to take a job and work. The conventional direct stimulus is a subsidy, whereas the job guarantee is not. Additionally, the job guarantee program would create an employment floor and give workers more bargaining power relative to employers, as they could always quit their job and take a job from the federal job guarantee program instead.
I am not overly enthusiastic about the federal job guarantee proposal. There is a great deal of research and evidence demonstrating that the counter-cyclical effects of the job guarantee can be just as easily provided by the automatic direct stimulus proposal. The job guarantee would also have unproductive administrative costs associated, whereas the automatic direct stimulus provides “the most bang for your bucks.” By implementing an automatic direct stimulus via a negative income tax (which will be discussed below), you could also increase the bargaining power of workers relative to employers and target the stimulus to those with the most need, making the case for a job guarantee over direct stimulus fairly weak as an alternative. The best policy would be to impliment an automatic direct stimulus by way of a negative income tax. Additionally, job guarantee proponents assume that the bulk of job guarantee spending will be productive. As someone that has worked in government finance for more than a decade, I find this assumption to be extremely implausible. The job guarantee will definitely cost much more than a direct stimulus would — since it has higher administrative costs — and will likely have a lot of totally unproductive expenses involved which are unforeseen by the program’s advocates. The United States government is very good at doing cash transfers and notoriously bad at enacting more complicated programs, so it seems like an automatic direct stimulus would be the better option.
The only other argument in favor of a federal job guarantee over direct stimulus is that the job guarantee would also serve as a public works program — this is why proponents of the plan have linked it to the Green New Deal proposal. I am in favor of an increase in spending for public works in the transition to a more eco-friendly future, but I don’t think that the federal job guarantee will actually provide much towards that goal. In its nature as an automatic stabilizer, the federal jobs associated with the job guarantee will be temporary. It is designed to boost aggregate demand and lead to the prompt creation of more private-sector jobs. If the job guarantee actually reliably provided something significant towards public works, it would be an indication that the program had failed as a counter-cyclical measure or that job loss is a result of something other than ordinary cycles (e.g. automation, outsourcing, etc.). If jobs disappear due to sources other than recessionary pressure, it indicates that less labor is needed, in which case a basic income would be preferable to a job guarantee. In this instance, the job guarantee would just perpetuate the institution of wage-slavery in a world where less labor is actually needed.
Nominal GDP Targeting
In addition to these sorts of post-Keynesian automatic stabilizer policies (i.e. direct stimulus, Federal Job Guarantee) as means of preventing or heading off a recession, there is an interesting proposal put forth by market monetarists like Scott Sumner and David Beckworth to use a nominal GDP (NGDP) target in order to prevent deflationary spirals. Traditionally, monetarists have advocated an inflation target in order to avoid deflation. The monetarist approach focuses on trying to prevent financial crises from causing recessions in the first place, so that more traditional Keynesian tactics can be avoided. NGDP measures total spending in dollar terms. Spending is equivalent to income. If I have a dollar in income, then my employer (or someone else) spent a dollar. Thus, NGDP is equivalent to national income. Walter Heller and other Keynesian economists had criticized classical monetarism, in the tradition of Milton Friedman, for advocating an inflation target when there is no clear metric to use for such a policy. If your goal is to expand the money supply at whatever rate per year, which metric are you going to target? Should you be using M0, M1, or M2? The new market monetarist approach avoids this problem by targeting NGDP. Plus, an inflation target can make you miss the mark, whereas a nominal GDP target leaves less chance for error.
Why target nominal GDP rather than real GDP? Well, because nominal income can be much more important than real income from a macroeconomics standpoint. Since contracts are negotiated in nominal terms, nominal income affects one’s ability to pay off debts. If my income gets cut in half, I won’t be able to pay my mortgage even if my purchasing power quadruples because the real income increase doesn’t affect contracts previously negotiated in nominal terms. Sure, more real income through deflation means that I can purchase more food and more commodities with less money, but my mortgage, car payment, and insurance bill won’t adjust. In fact, I’ll effectively be forced to pay more in real terms towards my debts. This is the rationale for nominal GDP (NGDP) targeting. If you target NGDP and make it increase at, let’s say, 5% per year, then you make it less likely that people will end up defaulting on their loans or being unable to honor existing contracts. This makes it extremely unlikely for a financial crisis to cause a recession. You may have an external shock (e.g. pandemic, hurricane, riots, etc.) that causes a recession, but monetary policy would become far less likely to cause a financial crisis that leads to an economic downturn. And the beauty of such a monetarist approach is that it can be done algorithmically and automatically, so that human discretion is removed from the equation.
With the Great Depression, we saw a “deflationary spiral.” The conventional wisdom has been to have an inflation target to guard against deflation. However, deflation isn’t a bad thing if it is caused by economic growth. Scott Sumner points to the example of China and Japan in the last couple of decades. They both had zero percent inflation, but it didn’t cause a problem in China and it did cause a problem in Japan (hence that speculation about whether Japan would resort to negative interest rates). China’s deflation was a result of economic growth, not a currency contraction, and China had rising nominal incomes, whereas Japan did not see a rise in nominal incomes. Since China had rising nominal incomes, people could more easily pay off their debts; but Japan didn’t have the benefit of rising nominal incomes, so the economy was negatively impacted.
If the Federal Reserve or central bank sets a nominal GDP target, creating an algorithm to decide when to automatically pursue an inflationary policy, then it could prevent most recessions from ever occurring. This market monetarist approach seems like a very good idea. We should do this on the front end through monetary policy at the Fed, but there should also be a backup in case something goes wrong. On the back end, through the Treasury, we could do something like Claudia Sahm’s automatic direct stimulus proposal. Have a computer watch the market for certain indicators and when the indicators show we are entering into a recession, automatically start sending out stimulus checks (which could even be targeted to people filing for unemployment).
The market monetarists would want to avoid the Sahm direct stimulus approach because there is a risk of it becoming inflationary if the economy recovers and the velocity of money picks up quickly. If that were to occur, you would need to pull the money back in to stabilize the economy. With NGDP targeting, monetary policy is done through more conventional means, where there are matching assets that the Fed can sell to pull the money back in if they need to in the future. With the Sahm proposal, it requires more complex solutions to prevent runaway inflation if that becomes a problem because the Fed does not have any control over tax policy. This highlights the fact that tax policy is monetary policy. Government spending is money creation, while taxation is money destruction. In a debate with Milton Friedman, Walter Heller made this observation: “That is a none-too-subtle way of bringing me to the point that we need to bend every effort to make fiscal policy — and particularly tax policy — more responsive and flexible. Indeed, if tax rates can be adjusted quickly and flexibly to ebbs and flows of aggregate demand, the penalties for errors in forecasting would be correspondingly reduced. We must find a way to make tax rates more adaptable to economic circumstances….”(Monetary vs. Fiscal Policy: A Dialogue, Milton Freidman & Walter W. Heller) Is it really wise to have a system, like ours, designed so that the monetary authority doesn’t have any control of fiscal policy, when fiscal policy is part of monetary policy? I would argue that the Fed, under certain conditions, with the approval of Congress, and in conjunction with the IRS and Treasury, should be able to automatically adjust income tax rates by a certain amount based on an algorithmic indicator and not based on human discretion.
It seems to me that a social dividend or universal basic income would actually fit well into this market monetarist framework. Such a policy would be a good idea from a monetary perspective. You could very easily use such a program to help guarantee a constant and steady growth in nominal GDP. You could simply increase the size of the dividend by a certain percentage each year, with the rate of increase varying based on market indicators but following an established and predictable formula. Of course, you wouldn’t want this to be the primary mechanism for meeting the NGDP target unless Congress were to grant the Fed some control over tax policy or take other measures, through Congress, to make tax rates flexible so that they adjust automatically to the ebb and flow of market forces. A social dividend, used in this way, could prevent most recessions. And the impact of recessions that result from pandemics and natural disasters could be greatly mitigated by supplementing the social dividend with direct stimulus payments (targeted to people who become unemployed) automatically whenever indicators suggest that the economy is entering into a recession.
This sort of market monetarist approach is simpler and more foolproof than the so-called Modern Money Theory (MMT) proposals. A major problem with MMT is that, following Minsky, it assumes that markets are inherently unstable and that monetary policy can’t help on the front end, so they recommend cutting taxes and increasing government spending on the back end after the recession starts. They ignore the fact that many recessions are actually completely avoidable. The market monetarist NGDP targeting, on the other hand, would guarantee us the most stable economy possible, and minimize the instances where a back-end automatic stabilizer would even be activated. It seems to me that some mixture of Scott Sumner’s approach with Claudia Sahm’s would be optimal. Claudia Sahm’s direct stimulus proposal works off of the same principle as Hyman Minsky’s Federal Job Guarantee proposal but is infinitely easier to pull off. There’s a lot of bureaucracy, administration, and logistics that would go into pulling off a Federal Job Guarantee and conservative administrations would constantly be trying to sabotage it.
Additionally, so-called Modern Money Theory, though not without its virtues, has a clear political agenda and often relies on sophistry to advance that agenda. A lot of what MMT is about is saying “taxation doesn’t fund spending” to mesmerize policymakers into not raising taxes on the rich. While a balanced budget is a bad idea and it is true that you don’t need to tax one dollar for every dollar spent, it is also true that taxation is a primary way of offsetting spending and that massive spending increases on the part of government do require increased taxation to prevent runaway inflation. For instance, the MMT claim that Medicare for All would require no tax increase and would offset itself is simply untrue. It would, perhaps, be deflationary and self-offsetting for the first year or two, but would require broad-based taxes to fund it in the long run. The reason the MMT folks like the Federal Job Guarantee (FJG) proposal and hate Universal Basic Income is because the nature of the first does not require any tax increase. The FJG gives you an income when you lose a job, and puts you to work in order to boost production, offsetting itself (theoretically, at least) by boosting real GDP and creating some deflation to offset the inflation that would be caused by printing new money to pay the beneficiaries of the FJG program. A Universal Basic Income, on the other hand, would not be self-offsetting, so you would have to raise taxes somewhere or cut spending somewhere else to offset it. And this is really the MMT objection to UBI — they don’t want billionaires to be taxed and they don’t want spending to be cut elsewhere!
Spending To Eliminate Poverty Through A Basic Income Guarantee
In the previous essay, I used the example of a subway station and explained how the subway can issue new tokens without causing inflation as long as the subway has the capacity to honor all the tokens at their current value. If the tokens are worth one ride on the train, issuing new tokens will not devalue them unless the subway issues more tokens than it has the capacity to honor. Similarly, government can spend new money into existence as long as it does not exceed the capacity of the economy to meet the demand. When there were people who lacked access to the train because they did not have enough tokens while the train had plenty of room for everyone, the subway station simply needed to issue additional tokens to meet the demand. No inflation or devaluation of the tokens resulted. When we look at the current economy, we see a real parallel to this. There is an over-abundance of food. Grocery stores throw out tons of perfectly good food every day. There is more than enough food to feed everyone who currently goes hungry. The problem is not a supply issue but a distribution issue. At the same time, there are countless vacant homes alongside homelessness. The supply of food and of homes is sufficient to meet the needs of the people, but there are certain people who lack sufficient amounts of money to purchase these necessities. The obvious solution is for government to simply end poverty directly by giving poor people money.
There are several different ways to do a basic income guarantee, so we ought to examine a few of them here. However, before we do that, let’s look at some of the arguments and justifications for basic income. The first and most obvious argument is that America is the richest country in the world and has the capacity to eliminate poverty through a basic income, therefore justice mandates that it ought to do so. Poverty can only be tolerated when it cannot be eliminated. When poverty can be eliminated, it ought to be. And since the government has to spend money into existence anyway in order to allow the economy to function optimally and grow, it makes sense to target some of that spending at eliminating poverty. The next argument, popularized by Thomas Paine in his tract Agrarian Justice, recognizes that the introduction of the institution of private property deprived people of free access to land and natural resources, which all people had access to under natural conditions prior to the emergence of government and the monopolization of land. In Paine’s estimation, society and the beneficiaries of the institution of private property owe reparations to all people who have been deprived of free access to land and natural resources. Then, there is the pro-labor argument for basic income. If people are given a basic income, it increases their bargaining power relative to their employer, as they can now seek new employment or go on strike without fear of losing their whole income. Finally, there is the recognition that outsourcing and automation are eliminating jobs and, therefore, that we need to provide for those who are displaced by the outsourcing and automation that are generating new social wealth. Therefore, it makes sense for the new money spent into existence by government — money which represents this increase in social wealth — to be spent on subsidizing all those people who lost their jobs. And, since automation can be expected to continue, up to the point where eventually most jobs will be automated away, it seems inevitable that we must move towards a universal basic income, where government simply pays all citizens a dividend sufficient to live on.
Now that the rationale and justifications for basic income have been briefly covered, let’s examine some of the ways that such a plan can be implemented. You could (1) have a minimum income guarantee, where you pay just the people who need it, (2) have a universal basic income, where everyone gets an equal check or deposit, or (3) a negative income tax where you apply a subsidy rate — a negative tax — to people who make less than a certain amount per year. Let’s examine each option.
Minimum Income Guarantee
With a minimum income guarantee, government simply gives money to people who fall below the poverty line and do not have a sufficient level of income to survive on. Suppose that the government determines that everyone needs a minimum income of $1,000 per month to be able to afford basic necessities like access to food, water, and shelter. If you have no income, government gives you $1,000. If you have income but your income is less than the minimum income floor ($1,000 per month), the government makes up the difference. If you already earn sufficient income, the government does not give you anything. The minimum income ends up serving as a direct subsidy for the poor. The following illustrates what a minimum income might look like for a random group of people.
With this minimum income policy, poverty is completely eliminated and everyone is guaranteed a basic subsistence level of income. However, it has several defects and is not the best way to implement a basic income. First, it has the same welfare cliff problem as conventional means-tested welfare and ends up discouraging productivity. Looking at the chart above, let’s assume that Bill works part-time while Cash doesn’t work. Under this sort of minimum income proposal, Bill no longer has any incentive to work. He will make the same amount of money if he quits working as if he continues to work. Being productive and working does not add to his income at all. Cash has no incentive to start working unless he can find a job that will start off paying him over $1,000 per month. And George might see that all of his work only slightly increases his income above that of the minimum income floor, so he may decide to stop working altogether and just take the $1,000 check from the government. This is a problem that conventional means-tested welfare also has. Consequently, I cannot wholeheartedly support a minimum income guarantee.
Universal Basic Income (UBI)
With a universal basic income, all people get a check or deposit of the same amount. Not only do people below the basic income floor get money, but so does everyone else. The scenario with basic income can be illustrated as follows:
By opting for a universal basic income rather than a minimum income guarantee, we avoid the welfare cliff problem and do not create any disincentive to work. With a universal basic income, you will always make more money if you work more. There is no scenario where you are better off if you quit working.
A common objection to universal basic income is that it doesn’t make sense to give money to everyone regardless of need. Conservative-minded individuals may prefer targeting welfare to those in need. If one wants to target the basic income, so that it only goes to those who truly need it, the best way to do this is to simply impose a tax that takes back the basic income from those who are already wealthy. The following chart shows what happens when you implement a universal basic income offset by a 5% income tax.
In this scenario, the universal basic income is targeted to those in need, just like the minimum income is, but the welfare cliff that we encountered with the conventional minimum income is avoided. You’ll notice that everyone comes out ahead, except for Flockafeller and Richy McWealthy, both of whom had their entire basic income confiscated via taxation. These two individuals are so wealthy that they don’t need a basic income, so the universal basic income offset by taxation simply takes back the basic income from those that don’t need it. Such an income tax is not really the best way to do the offsetting and targeting — there are certainly better types of taxation that could be used for this purpose — , but our point was merely to illustrate how most universal basic income plans are actually minimum income guarantees in practice but without the defects.
There are better forms of taxation that can be used to offset universal basic income. Let’s suppose that the universal basic income is implemented in conjunction with a 10% value-added tax (VAT), where staple items like food and clothing are VAT-exempt. This is like the proposal of presidential candidate Andrew Yang. We might end up with something like the following:
People on the left often oppose the idea of a value-added tax because it is regressive. However, when staple items are exempted and it is combined with a universal basic income, the VAT becomes a progressive tax. With a UBI+VAT plan, such as Andrew Yang’s Freedom Dividend, the wealthy end up paying the bulk of the taxes while the poor and middle class are subsidized. This may be a bit hard to recognize due to the complexity of the above chart, so let’s continue this same example and extract just the relevant information to determine how much each person benefits. We can illustrate this in the following, more simplified, chart:
The benefit overall is calculated by subtracting the VAT paid from the basic income received. You will notice that the people with the least income receive the greatest benefit overall — their income is subsidized. At the same time, the people who make the most money receive the least amount of benefit, and the wealthy actually end up paying so much more in taxes that their whole share of the universal basic income ends up being confiscated and taken back and they ultimately end up with a negative subsidy (i.e. increased taxes). In spite of objections to the contrary, Andrew Yang’s value-added tax proposal is quite progressive.
Negative Income Tax
A negative income tax is a scheme for implementing a minimum income (or basic income guarantee) through the mechanism of the existing income tax system. This particular plan was popularized by Milton Friedman. This looks a lot like the Earned Income Tax Credit (EITC) that currently exists, except a negative tax rate — or subsidy rate — would apply to people with incomes below the minimum income floor. Under a negative income tax, people making less than a certain minimum amount would be subsidized. An income tax system with a flat 25% income tax, a 50% subsidy (negative income tax) rate, and a $3,000 per month exemption would guarantee a minimum income of $1,500 per month. Such a scheme would yield the following results:
Samuel Hammond has suggested that framing universal basic income as a negative income tax may be the best way to go about it. People who don’t understand the mathematics and accounting behind the standard universal basic income are often afraid that it will cost too much. Since the universal basic income is offset by taxes, the real total cost of UBI overall is much smaller than the initial price tag. Rather than having in-and-out transfers, the negative income tax is simplified so that no transfer is shown when a UBI would show a credit offset by a debit and balancing to zero. In reality, universal basic income and negative income tax cost the same.
One interesting thing about the negative income tax is that it makes clear how a basic income or minimum income guarantee can also serve as a counter-cyclical automatic stabilizer. If the economy starts slipping into a recession and unemployment starts increasing, government automatically starts cutting checks to the people who have lost their jobs. This has a direct stimulus to individuals as a counter-cyclical automatic stabilizer built in. The negative income tax could prevent a deflationary spiral from being able to occur and would ensure that the economy recovers quickly whenever it experiences a downturn. Of course, how effective it would be at this is contingent on the particular details of how the minimum income is implemented.
