Sunday, July 27, 2014

Dylan Matthews — A guaranteed income for every American would eliminate poverty — and it wouldn't destroy the economy

…going from the federal government being 21.1 percent of GDP to 22.6 percent or thereabouts is hardly a sea change. And yet that's, roughly, all it would take to eliminate poverty in America. 
So here's my takeaway: a negative income tax or basic income of sufficient size would, by definition, eliminate poverty. We still don't know if there'd be much of a cost in terms of people working and earning less. If there is, the effect is almost certainly small enough that a negative income tax can offset the lost earnings and remain affordable. The worst case scenario is that we eliminate poverty but see a modest decline in employment. The best case scenario is we eliminate poverty at even lower cost and don't see much of an effect on employment. That's a gamble I'm willing to take.
VOX
A guaranteed income for every American would eliminate poverty — and it wouldn't destroy the economy
Dylan Matthews

24 comments:

Dan Lynch said...

Thanks for posting this, Tom.

Though he was a little vague, I think Matthews was talking about a means-tested BIG or a negative income tax, as opposed to a universal BIG. Either could be made to work -- if designed carefully -- but the economics are different.

I favor a weekly means-tested BIG, for a variety of reasons. If I were poor, I'd hate to wait until the end of the year to receive a Negative Income Tax.

Seve141 said...

I favour a universal BIG and not a negative income tax.

Every citizen should be eligible to receive the BIG with claw back provisions in the respective tax laws. Yes, a means-test and an option to decline participation.
(The options / features are many)

The BIG would be arguably democratic and egalitarian both in theory and practice.

Neil Wilson said...

I always find it amusing that those people who support a wealth tax also tend to support a universal income.

The first one has no economic purpose other than to delete tokens which can be created at will. Therefore it is based upon the resentment felt by others because some people receiving tokens are perceived as not being worth them.

The latter requires a system where people don't resent others for receiving tokens while being perceived as not being worth them.

Human resentment is real and has eliminated all attempts at providing people without income with income. And that will continue to happen until you address the human need to see others pulling their weight properly.

Income guarantees are just as crazy an idea as rational expectations and efficient market hypothesis, and for the same reason. It doesn't take into account what humans are really like. Therefore it always fails.

People have to be perceived as pulling their weight. Otherwise they will politically agitate for a solution - as the furore over the 'wealth tax' demonstrates.

Schofield said...

"People have to be perceived as pulling their weight."

Indeed in eusocial species the Queen has to be a reproduction machine or a Walmart style Meeter and Greeter!

Bob said...

Turn it into a weekly lottery where everyone who plays, wins. That should address the hypocrisy of the perpetually resentful.

There is obvious resentment towards the unemployed, yet I don't see this translated into a political movement towards a JG.

The Arthurian said...

Neil, I wholly agree with most of what you said above. But this part is grotesque generalization:

A wealth tax has no economic purpose other than to delete tokens which can be created at will.

See, for example, Jerry

Matt Franko said...

"The studies found that the policy was beneficial to those getting the money, but tended to modestly reduce the number of hours they worked, and the amount they earned. "

But what work were the people doing in the first place? This might not be a bad thing...

We have to make sure the necessary jobs are being done, but there is a lot being done today that is not that necessary or even a good idea imo...

rsp,

Brian Romanchuk said...

The issue with the negative income tax or income guarantee is that it has to be taxed back from most people in the income distribution. This means that marginal rates have to be high at lower incomes.

Realistically, the issue is not whether self-reported or even officially measured work hours fall, rather whether people drop out of the "official" economy and move into the underground economy. People who know they are in an experiment are not going to act naturally, and they certainly would not report it.

As Neil Wilson argues above, this situation is not politically sustainable. People who are facing higher tax rates in order to subsidise people who are cheating the system are not going to be happy voters.

By paying people to work in a Job Guarantee, this sort of double-dipping is not easily done, since they are already showing up for work on the programme.

Anonymous said...

Isn't a wealth tax one of the least distortionary taxes?

Also, if you accept the idea that the burden of taxes is roughly proportional to wealth, isn't a flat wealth tax one of the most equitable taxes, as it tends to spread the burden of taxation evenly?

James said...

Human resentment is real and has eliminated all attempts at providing people without income with income. And that will continue to happen until you address the human need to see others pulling their weight properly.

The resentment isn't to do with people pulling their weight, it arises entirely from both the media, and politicians continuing to tell people that their taxes are funding benefits.

If people are going to be denied the access to the land and resources that are necessary for a self sufficient life, then they must be paid a continual compensation for that loss.

Tom Hickey said...

"If people are going to be denied the access to the land and resources that are necessary for a self sufficient life, then they must be paid a continual compensation for that loss."

Right. IF the commons are enclosed by force (property law), then continual compensation for the loss of livelihood is required or either deprivation of life's necessities or some form of slavery is the result.

Greg said...

I agree with James that media and politicians fuel the resentment and also that a BIG might be able to be argued for by pointing out that many people have NO access to resources for self sufficiency by design.

Ive never really understood the level of resentment many have towards others that are "getting something for nothing." They can opt for the same welfare level lifestyle if they wish but they choose not to.......obviously cuz its NOT a very good life. I understand some resentment but the level is way out of proportion to the cost that those people are having on the system

Ive said it before but this mindset won't change until we break the DIRECT link between taxes and benefits.

Tom Hickey said...

Oh, and there is no natural right to ownership of property. Property is an artifact (as in "artificial") of imposition (seizure, enclosure), custom and law. Law involves enforcement.

Let's drop the myths.

Jan said...

Check out this:Guy Standing professor at the University of London on the emancipatory aspect of basic
Guy Standing explains why basic income is not just a question of income inequality. Basic Income is part of a process of social struggle against neoliberalism that the precariat class should take over. In this struggle, pilot projects such as the ones in India can help legitimizing the cause of basic income.income
https://www.youtube.com/watch?v=K3Zcw3Gz2PE

Guy Standing:
Why the precariat requires a basic income
https://www.youtube.com/watch?v=4WaA8zqjBSk

Brian Romanchuk said...

I am not saying that the level of resentment towards welfare state recipients is reasonable or justified. It would be nice if conservatives also targeted scams by businesses with the same zeal (some do, to be fair). But it exists, and is obviously is a powerful, as otherwise conservative politicians would not have exploited it that much over the past few decades.

Enacting a policy in the hope that somehow half of the political spectrum will disappear is not a great political strategy. Expending political capital on a doomed programme is a waste.

If the programme replaced other welfare state programmes which are sustainable politically (they have survived for decades after all) the risk is that the entire welfare state can be easily strangled by not keeping the guaranteed income indexed to average wages. Since the programme would probably generate resentment, such a strangulation would probably be inevitable on a time line of 10-20 years.

Roger Erickson said...

Neil: "Human resentment is real and has eliminated all attempts at providing people without income with income. And that will continue to happen until you address the human need to see others pulling their weight properly."

That seems over-simplistic, Neil. There are multiple ways around your proposed dilemma.

1) counter the media messages, mentioned above

2) trick people into accepting different perspectives (e.g., the lottery idea mentioned above)

3) Outcomes-Based-Teamwork. With a bigger consensus outcome in mind, most people do forget about intermediate performance criteria, and focus on aggregate outcomes. War is the classic example, but endless smaller examples also exist.

Seve141 said...

Brian Romanchuk said...
The issue with the negative income tax or income guarantee is that it has to be taxed back from most people in the income distribution. This means that marginal rates have to be high at lower incomes,


Realistically, the issue is not whether self-reported or even officially measured work hours fall, rather whether people drop out of the "official" economy and move into the underground economy. People who know they are in an experiment are not going to act naturally, and they certainly would not report it.

As Neil Wilson argues above, this situation is not politically sustainable. People who are facing higher tax rates in order to subsidise people who are cheating the system are not going to be happy voters.

.........

I don't think there are any intrinsic reasons to raise taxation rates at all. The BIG if universal, is taxed at a rate of zero. Of course there may arise public policy issues that the income tax system is used to address, but, honestly that exists now.

I'm not a political scientist, however, I would offer that there would be no overwhelming objections from across the political spectrum. Yes, there are always the fringe elements.

Matt Franko said...

"People who are facing higher tax rates in order to subsidise people"

If you can at the same time get people to realize "taxes for revenues are obsolete..." then that part changes too... it can no longer be thought of as a subsidy... people who would then face higher tax rates would face them due to Picketty-type reasons...

I think what would happen is that the tax system would be overhauled at the same time... probably we would reduce taxes greatly as they would no longer be necessary for revenue purposes...

rsp,

Brian Romanchuk said...

(response to Seve141)

The need to raise taxes is based on Functional Finance considerations, not on any governmental finance worries (although the government would have to rely on cooperation from the central bank).

In Canada (where I have seen proposed numbers), people have called for a BIG of $20,000 per year.

Household income is around $70,000-$80,000 per year (average) - before tax.

Since there are 1 adult households, let's assume that is $30,000 per household.

This means that the BIG income is an augmentation of pre-tax income of more than 30%. The price level would have to jump by about 30% in order for things to balance. (Although strong nominal income growth may lower the unemployment rate, this would only increase real capacity by a few percent.)

Good luck convincing politicians to implement a policy that raises the price level by 30% in a nation of retirees who have a high voting turnout. Additionally, the inflation has wiped out 30% of the purchasing power of the BIG.

If you indexed the BIG, a 30% annualised inflation rate would easily spiral out of control.

A small BIG could be implemented ($5,000 per year?), and the inflation consequences would be much less dramatic. But what use is such a small programme?

Matt Franko said...

Brian if the price of a Big Mac rose 30% then the people could just stay home and make themselves their own sandwich for lunch...

and then the "fast food" places would probably go out of business but are they really needed anyway? Or are they needed because everybody is racing around between work and household commitments and have no time in a day for meal prep...

Households would probably go to one car per household instead of 2 (reducing demand)...all sorts of changes would take place...

Some supply increases would certainly take place...

I'm suspicious of how the mainstream assumes that a general income increase like this would automatically lead to a general price increase... the math seems very monetarist to me like: "more dollars chasing same goods... blah, blah..." very naive/simplistic imo... not realizing it is about price not quantity under our current monetary system..

Like the climate change people thinking that if the ice cap melts then only the sea level just rises...

rsp,

Anonymous said...

Brian Romanchuk: "If you indexed the BIG, a 30% annualised inflation rate would easily spiral out of control.

"A small BIG could be implemented ($5,000 per year?), and the inflation consequences would be much less dramatic. But what use is such a small programme?"

Why be defeatist? First, if you are going to implement a BIG, start small. Second, if possible, start during hard times, like now, so that inflation will not be the immediate result. Third, raise taxes. The top rate could easily go to 70% without ill effect.

So, depending on the country, a BIG of $5,000 or the equivalent right now, without raising taxes, could probably be absorbed. It might raise inflation a bit, but that would be a good thing.

Then people could see the advantages of a BIG. Then it could gradually be increased, along with tax rates to combat inequality and keep inflation in check.

BTW, I am not a fan of BIG, but now would be a good time to implement one. And a JG and BIG are not mutually exclusive. Implement both, on a relatively small scale, and see how people like them. Now is a good time, because the benefits would be apparent.

Brian Romanchuk said...

In response to:

Matt Franko,

Yes, the real economy would adjust to higher nominal incomes. If the BIG was small, it could be adjusted for in the current environment with prices not reacting much ("there is excess capacity", speaking roughly). But a big BIG could possibly unhinge the price level - it is safe to ignore inflation in the current environment, but a big inflationary shock would force people to start thinking about inflation. And if people start to get an inflationary mindset, the price level rise could overshoot the 30% back-of-the-envelope figure I used.

Bill - Although my attitude is probably somewhat too dour, I am unsure whether it would be a good strategy to expend political capital on a small BIG.

I would note that I live in Quebec, which is probably the highest tax jurisdiction in North America. This colours my views.

There is a strong view that Quebec tax rates are near their effective upper limit, based on the experience with the Quebec underground economy. People point to higher historical statutory marginal rates, but no one was actually stupid enough to pay taxes at those posted rates. The modern income tax system does a better job of getting the effective tax rate close to posted rates.

As a result, my personal views are biased by this situation. This is less applicable to the lower tax United States.

Tom Hickey said...

There's no good way to solve this without adjusting capital/labor share ratio so that labor shares in productivity gains. Otherwise, it's growing income and wealth inequality, a have and have-not society, and a growing underclass caught in permanent poverty.

This means taxing economic rent, which entails returning to a classical conception of economics and jettisoning the neoclassical approach and its offspring. Neoclassical economics was designed as a reaction to the classical challenge of rent, and especially Karl Marx and Henry George. The neoclassical approach in which every one get "what they deserve," that is, their contribution in terms of marginal product, is pure propaganda for the rich. It was from the get-go and still is.

Tax away economic rent.

Anonymous said...

@ Brian

I do not believe that a BIG is a political possibility in the US, but I do think that if we are going to implement one, the time is now, and that it should be small, for both cultural reasons (the self-reliance ethic) and economic reasons (the fear of inflation, as well as the risk of an actual spike in prices).

As for high taxes in Quebec, I have never lived in a high tax place, so I sympathize.