Wednesday, March 01, 2017

U.S. is rich, but maybe not wise, enough to introduce guaranteed income

Guaranteed minimum income or basic/unconditional/universal income is a policy in which a country pays every citizen (that's at least in the "universal" case) a certain fixed amount of money.

It's an alternative, and in my view far more efficient and natural, method to deal with welfare, poverty, tax exemptions per taxpayer, and many other things. It's basically equivalent to the negative income tax that was defended by Milton Friedman (and tested in North America in the 1960s and 1970s) – click at the link in this sentence to see his arguments in favor of it (I basically share all of his thinking).

The rule is simple. At least when the income is small enough (modifications may reflect progressive taxation), a citizen that earns \(X\) dollars per year will pay\[

R \times X - BI

\] to the government. It's a simple linear function. When the result is negative, the government pays something to the citizen (his income tax is negative, if you wish). In particular, if the citizen earns nothing, he will still get \(BI\) dollars (it stands for "basic income") a year from the government. On the contrary, the high earners pay the percentage \(R\) of their income.

Special exceptions should apply when \(X\lt 0\). People who make a "loss" should better not be refunded too much (or at all), otherwise people would start to invent tricks how to report a loss.




Finland recently started an experiment in which it pays some €500 a month to some 2,000 selected lucky people. India considers this paradigm to fight poverty, too.




Elon Musk defended the universal guaranteed income and said that it's a natural policy societies will be pushed to because of automation. Bill Gates disagrees: America can't afford to give the money for free. It has to reserve the money for the selected ones who need it more than others. That's what he said at Reddit.

I think that just like in his proposed robot tax, Gates is just wrong. America not only can afford to give the money for free (even India is thinking about the concept) but it is already doing so.

Various people – including Musk, as I mentioned – are taking this policy out of the context and present it as a proposed solution to a particular problem such as poverty, unemployment, unemployment due to robots, or something else. I think that this way of thinking revolving around a privileged "victimized class" is just wrong, biased, non-systemic, and it is basically a Marxist fallacy.

It's clear that this system would affect lots of things – the money that unemployed and very poor people get or can spend (replacement for welfare), formulae that determine how much low earners and high earners pay. It's wrong to focus on one "class" of the people or something else. Instead, the power of the linear formula at the top is that it fairly interpolates between all kinds of people and their "classes".

As Milton Friedman emphasized, the subsidies for the unemployed are motivating them not to work. You can get all the wonderful money – but only if you don't do a damn thing. Does it make sense? Should the government work hard to make sure that these people don't work at all? That they're not exploiting anything about their potential? I don't think so. This condition "you can get something from us but only if you're completely useless and you carefully preserve your uselessness" is absolutely irrational.

The linear function at the top is monotonously increasing. So if you work a little bit more, you will be better off than if you don't work at all. It makes sense for the individual and it makes sense for the society. On top of that, as Friedman says, an unemployed person may increase the amount of work and income gradually.

In practice, I do believe that the U.S. could afford a $500 basic monthly income for everyone (perhaps reduced to $300 for kids below 12) which means $6,000 per citizen and per year – regardless of the financial situation. With this setup, he would be paying 25% income tax from all his income, without any additional exemptions. High earners would therefore pay 25% of their income. Due to the $6,000 gift every year, the low earners would effectively pay much less than 25%. The critical point at which you wouldn't pay and you wouldn't be paid would be four times $6,000 i.e. if your income is $24,000 a year.

The zero earners would be getting $6,000 and that could be a totally decent amount for any person without special needs to survive just fine. Most pensioners and many working people in my country and others manage to live from a slightly smaller amount of money. New very cheap housing and places to dine could be built to make sure that the basic income really is enough for everybody. On the other hand, the government could afford it. If you just compute how many subsidies for the unemployed it would replace, and if you replace the income taxes, you will see that the government's budget would be fine. Also, it would encourage the people to increase their involvement in the work process – regardless of their income level or situation and without any barriers.

In my setup, the corporate tax could be 25%, too. I tried not to pick too low taxes to feel sufficiently certain that the U.S. budget wouldn't deteriorate, at least not dramatically. But I believe that this simple setup would improve the U.S. economy and the revenues so that the tax rate could be lowered and/or the guaranteed income could be raised.

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