Tuesday, July 12, 2016

A Quick Note on a Universal Basic Income

Consider an economy in which average income is $50,000 but with much income inequality. To provide a social safety net, two possible policies are proposed.

A.  A universal transfer of $10,000 to every person, financed by a 20-percent flat tax on income.

B.  A means-tested transfer of $10,000.  The full amount goes to someone without any income.  The transfer is then phased out: You lose 20 cents of it for every dollar of income you earn.  These transfers are financed by a tax of 20 percent on income above $50,000.
 Which would you prefer?

I have seen smart people argue as follows: Policy A is crazy. Why should Bill Gates get a government transfer? He doesn’t need it, and we would need to raise taxes more to pay for it.  Policy B is more progressive. It targets the transfer to those who really need it, and the transfer is financed by a smaller tax increase levied only on those with above-average incomes.
But here is the rub: The two policies are equivalent.  If you look at the net payment (taxes less transfer), everyone is exactly the same under the two plans. The difference is only a matter of framing.