Better ways of organizing welfare payments: UBI, Negative Income Tax?

[dismalist]

A discussion of better ways for organizing aid to the poor has been ongoing on the Colleges in Dire Financial Straits thread, where it doesn't belong.

It's all about Universal Basic Income, or its frugal parent, the Negative Income Tax.

Briefly, the idea is to give everybody a certain sum as a substitute for other welfare payments, and tax earned income from the first dollar [Negative Income Tax] or perhaps only later dollars [Universal Basic Income].

I'll try to transfer some posts here in a felicitous manner. Probably won't woik.

If more people are eligible for welfare payments (even if it doesn't rise to "universal" levels), then the cost of welfare goes up unless payments are cut (the "peanuts" UBI scenario). The arithmetic doesn't change regardless of incentives or disincentives to work - and I agree poorly thought-out rules can create incentives for illegal work/disincentives for legal work (which is why I think time limits works better than means testing, and perhaps tying the amount and/or duration of payments to income tax paid).
The experience of places with de facto UBI is that a lot of people just cease to work - hence the reliance of Gulf states on immigrant labor, from maids to chefs to senior engineers to construction workers. The European welfare experience is much the same - for instance, pre-Brexit there was at least anecdotal evidence of places in northern England in particular with lots of young British adults living off the dole and businesses bringing in construction workers from Poland and farm workers from Romania. This was not illegal immigration, so it wasn't just a way of evading legal labor rules, but "new EU" citizens were initially ineligible for welfare payments.

The arithmetic doesn't change regardless of incentives or disincentives to work... 

The size of the average payment depends on us. That arithmetic we control. We can be generous or miserly, as we wish.

The incentive to work depends on the margin -- how much of an earned dollar the UBI or welfare recipient gets to keep.

To finance what some think the right way of handling the UBI is, namely everybody gets one, obviously taxes would have to rise pay those who currently do not receive welfare payments. But as has been pointed out, that would be a wash for middle class and up, and would depend on the tax code in the final analysis.

Let not the sum of UBI, whatever it turned out to be, distract from the property that it's a way of making some people better off without necessarily making anyone worse off.

If more people are eligible for welfare payments (even if it doesn't rise to "universal" levels), then the cost of welfare goes up unless payments are cut (the "peanuts" UBI scenario). The arithmetic doesn't change regardless of incentives or disincentives to work

This assumes the arithmetic doesn't involve any changes to the tax system. For instance, in Canada there is a "basic personal exemption" of $12k or something like that; income below that doesn't get taxed. With a UBI, it would make sense to eliminate that. So everyone gets the UBI, but every dollar of earned income is taxed.

The obvious point with a UBI is to adjust the tax system so that above some level, the UBI doesn't raise anyone's income above what it is now. (But again, for the sake of simplicity of  operation, everyone gets it; it's just that people with a high enough income will just opt for the UBI to be deducted from their taxes payable, rather than receiving a cheque in the mail.)

- and I agree poorly thought-out rules can create incentives for illegal work/disincentives for legal work (which is why I think time limits works better than means testing, and perhaps tying the amount and/or duration of payments to income tax paid).

Time limits still don't address the threshold effect. If a person on benefits gets an employment opportunity, unless it's high enough to make them better off than benefits do, there's no point. With a UBI, a part-time job is worth taking, and it starts paying taxes to offset the cost of the UBI. Seasonal work is also worth taking with a UBI. Someone with a disability who wants to try easing back into work can do so with a UBI. A new parent who has been on leave after the birth of a child can also try part-time work.

Time limits just continue the "all-or-nothing" problem of the current system, only with a doomsday clock.

The experience of places with de facto UBI is that a lot of people just cease to work - hence the reliance of Gulf states on immigrant labor, from maids to chefs to senior engineers to construction workers. The European welfare experience is much the same - for instance, pre-Brexit there was at least anecdotal evidence of places in northern England in particular with lots of young British adults living off the dole and businesses bringing in construction workers from Poland and farm workers from Romania. This was not illegal immigration, so it wasn't just a way of evading legal labor rules, but "new EU" citizens were initially ineligible for welfare payments.

Again, many of these problems are because it's all-or-nothing; unless work makes enough money to replace benefits, it's not worth doing at all. The UBI changes this completely so every dollar earned makes someone better off. (And every dollar earned generates taxes.)

So everyone gets the UBI, but every dollar of earned income is taxed.

That's the Negative Income Tax [NIT] version, the simplest, and the one I like best. UBI has a more felicitous name, but that's all. :-)

It's important to get the arithmetic irrelevancy out of the way:

Create an NIT such that the total money spent on welfare remains the same, and just for the sake of illustration, is given only to those people already on welfare. Those paying for welfare are no worse off. Those receiving welfare cannot be worse off, for they are receiving the same sum, by assumption. Some will now work, for it pays. They will be better off. Some of those may even pay income taxes which they didn't do before. Makes the rest of us better off.

...

Everyone now working has already escaped the trap part of the poverty trap with their labor. This shows what they prefer. There is no need to worry about increasing the welfare rolls by instituting a UBI.

It's important to get the arithmetic irrelevancy out of the way:

Create an NIT such that the total money spent on welfare remains the same, and just for the sake of illustration, is given only to those people already on welfare....

So not universal at all, then. Perhaps existing welfare programs could be made more efficient by consolidating them in some ways, yes, but that has nothing to do with UBI. Regarding "arithmetic" it doesn't escape my notice that it's only me here, not any of the proponents of UBI, who is crunching any numbers whatsoever (the fear of all sums? - the proponents don't come up with even a ballpark amount, perhaps because any amount would either be completely unrealistically expensive or would be a lot less than Americans on welfare are getting), rather confirming that it's an innumerate idea. The proponents of UBI are, on the other hand, moving the goalposts - first it was to be paid by existing welfare spending (althoug nobody clarified which welfare programs would disappear - would Medicaid? Head Start?), then by taxing all income, abolishing personal allowances, and now it's not "universal" at all.

No, no, the restriction is imposed in the mind just to get the arithmetic and the incentives separate and straight. It's a Gedankenexperiment.

The result is that at the present level of aid, no one is made worse off and some are made better off, as I said above.

If any one wishes to change the level of aid, get a law passed. Personally, I'm on the somewhat generous side, but I know that not everybody is.

And yes, which programs disappear matters. I'm guessing Medicaid and Social Security should stay, but all the rest should go.

Universal? That's just a felicitous name. For comparison start with the Negative Income Tax. People would get their transfer, but start paying taxes on the first dollar of earned income. [That's what I've been describing, with welfare payment held constant.] The UBI could be the same, but some people seem to have something less taxable in mind. People would only pay taxes on earnings above some value. Well, that requires an overall tax increase!

[Hibush]

Thanks, that woiked pretty good.

I'll perhaps chime in here with questions.

[Anselm]

Isn't the Earned Income Credit already a type of negative income tax?  It incentives people to work.

[dismalist]

Isn't the Earned Income Credit already a type of negative income tax?  It incentives people to work.

Yes, it is. And it is good!

However, it applies only to the employed poor, which I  guess is the reason it was politically palatable.

A Universal Basic Income or Negative Income Tax would apply to everybody.

[Parasaurolophus]

I don't think it matters much, provided it's enough for someone to live a decent life on (which the current system is not). Included in that 'decent life', to my mind, is a simple, non-means-tested means of distribution that doesn't restrict your purchases or your ability to receive gifts, that doesn't depend on you having less than a certain amount of money in the bank, that doesn't see-saw depending on what your other benefits (if there are any) are like, etc. I also think that a single system is a lot better than the crazy patchwork of inadequate programs that currently exist, many of which interact with one another to reduce your net takeaway.

All that hassle makes the current system prohibitively difficult for those who need it most to actually navigate it, and it incentivizes all kinds of crazy shit (like getting divorced to ensure that you don't collectively go over the Medicaid threshold; alternately, there's crazy shit involving third party card-issuers and declaring things to be loans or credit cards which clearly aren't, just so that someone can stitch barely enough together to get by). So much of what goes on violates the intent, if not strictly the letter, of the relevant laws--and for good reason, mind you, because otherwise you'd be royally fucked. But it also opens up a lot of opportunities for corporate profiteering at the expense of those who can afford it least.

[dismalist]

I don't think it matters much, provided it's enough for someone to live a decent life on (which the current system is not). Included in that 'decent life', to my mind, is a simple, non-means-tested means of distribution that doesn't restrict your purchases or your ability to receive gifts, that doesn't depend on you having less than a certain amount of money in the bank, that doesn't see-saw depending on what your other benefits (if there are any) are like, etc. I also think that a single system is a lot better than the crazy patchwork of inadequate programs that currently exist, many of which interact with one another to reduce your net takeaway.

All that hassle makes the current system prohibitively difficult for those who need it most to actually navigate it, and it incentivizes all kinds of crazy shit (like getting divorced to ensure that you don't collectively go over the Medicaid threshold; alternately, there's crazy shit involving third party card-issuers and declaring things to be loans or credit cards which clearly aren't, just so that someone can stitch barely enough together to get by). So much of what goes on violates the intent, if not strictly the letter, of the relevant laws--and for good reason, mind you, because otherwise you'd be royally fucked. But it also opens up a lot of opportunities for corporate profiteering at the expense of those who can afford it least.

Everything you say is fine, except the first clause: I don't think it matters much! The quality of life offered is the average payment. The incentive to improve life is offered at the margin.

[mamselle]

Glad to see this thread!

It may be helpful to clarify which countr(y)(ies) one is referring to, so it's clear what is meant by "the system" in any given setting, also.

If I understand things correctly, the US and Canada both approach things differently in specific ways, and the UK, France, etc. have other systems as well.

M. 

[Parasaurolophus]

Glad to see this thread!

It may be helpful to clarify which countr(y)(ies) one is referring to, so it's clear what is meant by "the system" in any given setting, also.

If I understand things correctly, the US and Canada both approach things differently in specific ways, and the UK, France, etc. have other systems as well.

M.

True. I'm talking about the US, which is the only system with which I'm familiar (I've said elsewhere that my partner and I have been closely involved with helping her mother navigate these waters).

My understanding is that Canada's approach isn't great, but I'm not overly familiar with our particular failings.

[dismalist]

Glad to see this thread!

It may be helpful to clarify which countr(y)(ies) one is referring to, so it's clear what is meant by "the system" in any given setting, also.

If I understand things correctly, the US and Canada both approach things differently in specific ways, and the UK, France, etc. have other systems as well.

M.

Not countries, Mamselle, programs. The problem with existing welfare programs -- everywhere --is means testing. If I earn more than $x per month, I get kicked out of many, many benefits. So, why should I earn more than $x, where x often equals zero.

The US is particularly bad with its myriad of welfare programs. Europe is more consolidated, but still means tested.

Thus, take current payments. Give them to the current recipients, but allow them to earn more, and tax them at a reasonable rate rather than 100%.

Same total cost to us, the recipients are no worse off, but it pays them to earn money and pay taxes. So they are better off.

If people are allowed to keep some or all of their earned income without getting taxed [a UBI?] general taxes would have to rise.

[mamselle]

OK, thanks.

That helps.

M.

[Parasaurolophus]

Not countries, Mamselle, programs. The problem which existing welfare programs -- everywhere --is means testing. If I earn more than $x per month, I get kicked out of many, many benefits. So, why should I earn more than $x, where x often equals zero.

While I agree that means testing is a serious problem, I'm not sure that I think that's why. If I've understood you correctly, you think it's mostly a problem with incentives. Now, I agree that the steep cliff-edness is a problem (although I think that's a problem with leaving people in the lurch; I'm not so sure about the incentive side of things although, as I mentioned, it definitely encourages weird stuff like divorce--but I'm not sure that's the kind of incentive you're talking about, either).

But I would argue that it's also a gatekeeping problem, in that the various measures make it a lot harder for people to enlist for the programs for which they would actually qualify. People don't have all kinds of spare time during the workday to go down to the benefits office to line up get themselves set up and verified and all that crap, or to declare a change in their circumstances--including that they received a birthday gift worth $40. All for what, in the end, comes out to $40 in SNAP benefits, or whatever.

It's also just grossly inefficient because people's circumstances change throughout the year, so you have people qualifying for a program for a few months, being disqualified for a few more, then qualifying again, etc.--all of which increases the possibility of errors in your file, which take months of queuing up at the office to sort out (if you even have the patience to stick it out that far). In the meantime, not only are you no longer receiving the benefit, you've probably been charged for "wrongly" collecting it at some earlier point, and the charge is huge for someone who's relying on benefits in the first place.

All that is probably a feature rather than a bug, though. Sigh.

Universalizing the benefits and then taxing them away from those who don't need them seems vastly preferable to me. But--and this is important--not if your taxes aren't automatically deducted from your pay (for those who aren't self-employed). Because otherwise, you'd wind up with scads of people unable to pay a giant tax bill at the end of the year, and that would just increase immiseration rather than reduce it.


What you definitely can't have is something like what Andrew Yang was proposing a while ago, because (1) it's nowhere near enough money (it was less than you could expect from all the extant benefits combined!), and (2) if you were dependent on benefits, it would have significantly reduced your payouts from most other benefits, thus leaving you worse off. (The funding mechanics were also stupid, but I've forgotten the details now.)

[dismalist]

You're talking about entry to a welfare program. Fine! And, less paperwork with a Negative Income Tax. Just file a tax form [1040 EZ]!

All this is about exit.

The incentives are work incentives, with or without a divorce! :-) A negative income tax will not cause divorce.

I don't know the details of Yang either. I think he was insinuating that everybody get's a bundle of cash and gets to keep all of it even if he's earning money. That, of course requires an overall tax increase.

[marshwiggle]

Glad to see this thread!

It may be helpful to clarify which countr(y)(ies) one is referring to, so it's clear what is meant by "the system" in any given setting, also.

If I understand things correctly, the US and Canada both approach things differently in specific ways, and the UK, France, etc. have other systems as well.

Among other things, the variations between countries will depend on the other government services provided in those countries including healthcare, childcare, education, old age pension, etc.