By considering common concerns about the welfare system and basic income, a modified basic income could be delivered for a comparative cost as our current welfare system, eliminate poverty, support the working poor and middle class, and guarantee productivity from every able-bodied citizen.

Adult Benefit Amount $6,000 / year /person
Child Benefit Amount $3,000/ year / family
Adult Credit Phase-Out Level $17,000 / adult (138% of Poverty Line)
Adult Phase Out Rate $0.21 per dollar above phase-out level
Cost for Adult Benefit $650 billion
Cost for Child Benefit $110 billion
Actual Cash Cost (Government Spending) $400 billion
Tax Expenditure Cost (Tax Deduction) $360 billion
  1. Child Credit has no phase out
  2. Adult and Child Credits are available only to US Citizens only
  3. 500 hours of work or community service required for benefit
  4. Exemptions for school, training or disability
  5. Option to provide portion of benefit to care taking facilities i.e. homeless shelter or rehabilitation facility
  6. Working prisoners also eligible and are not charged for facilities
  7. $10,000 of wage income claimed on taxes also qualifies for benefit even with an undisclosed source.
  8. No legal retribution for claimed wages under $25,000
  9. Capital gains income do not count as wage income
  10. Eliminate federal regulations including medical insurance and minimum wage for employers with less than 20 employees to encourage more hiring to meet the requirements

 

The Problems of Poverty

The poor face a variety of problems, but they all stem from the same root: lack of capital. If the poor simply had the capital to deal with their basic needs and a little in reserve for the problems that come up, their lives and futures would significantly improve.

Some of the Problems the Poor Face:

  • Rent Affordability
  • Food Affordability
  • Medical Insurance
  • Medical Bills
  • Dental Insurance
  • Dental Bills
  • College Tuition
  • Job Training
  • Student Debt
  • Car Loan
  • Car Registration
  • Bus/Train Money
  • Car Insurance
  • Gas
  • Tickets and Fines
  • Bail Money
  • Drivers Fees
  • Car Impound Fees
  • Checking Account Fees
  • Payday Loans
  • Title Loans

 

Any one of these problems with a fiscal cost of only a few hundred dollars can have punitive consequences which cause ripple effects in a person’s life. Something as simple as being ticketed for a rolling stop, when you don’t have the cash to cover the ticket by the deadline, can spiral into a license suspension. The process to reinstate your license costs a few hundred more on top of what you already couldn’t afford, so you continue to drive to work in hopes of paying it off and that leads to a car impoundment. Without a car you can’t get to work and you lose your job, but now you have over a thousand dollars in fees to pay back, and no money to pay rent or food.

The poor face many cliffs of capital constraint over small sums of money that can put them in insurmountable holes. And the capital that is available to them comes with enormous strings attached in the forms of high interest or disproportionate collateral. People losing cars because of a $300 title loan is not uncommon. A few hundred dollars at the right time could eliminate a spiral of fiscal doom.

 

Basics of a Basic Income

The idea of a basic income guarantees a payment in regular intervals independent of a person’s circumstances. If a person is out of work they still will have some cash to pay rent, buy food, and pay for gas to search for a job. It allows a person at a low end job to afford training that would allow him to possibly progress in the future and not just use all of his money to simply survive. Simply put a basic income provides dependable capital that allows you to invest in your future and survive the unseen costs that may arise.

However, opponents of a basic income note two very important flaws: it is expensive and it provides a disincentive to work. Proponents generally propose around $10,000 per adult and with around 250 million adults in the United States that would cost $2.5 trillion and even if we replaced our current welfare system with a basic income that still leaves a gap of over $1.5 trillion. Also, if everyone was given a check that paid for their basic needs why work at all? And even if people didn’t just completely quit, they sure wouldn’t work much more than needed for a little beer money, productivity could plummet.

Academically and probably realistically the basic income would provide a myriad of benefits that would make up for its costs fiscally and to labor participation. It would encourage entrepreneurship, improve investment, give more power to labor, mitigate the damage of automation, support education, provide better health outcomes, revitalize dying communities, and many other things that a capital infusion at the ground level would encourage. However, $2.5 trillion dollars is a big gamble for a maybe and it will be difficult to pass in any government without certain assurances. There are experiments being run currently in Finland, Canada, and all over to prove that the benefits are worth the costs; however, I have a simpler solution. Why not simply mitigate the concerns directly?

Problem 1: Cost

Almost every basic income proposal I’ve encountered wants to provide an amount that can support most of a single person’s expenses. However, no man is an island the United States was built by cooperation and people are no different, they pool together their resources. The poverty line for a single person is almost $12,000, but the poverty line for a household of two is a little less than $16,000, and the poverty line for a household of 4 is only $24,000. A basic income for a single household to meet the poverty line would be $12,000, but for a household of 2 would only need to be $8,000 and for a household of 4 would be exactly $6,000. Therefore, I recommend a payment of $6,000 per adult. Young adults can usually find a friend or two to share expenses with. A 3 bed/2 bath house can be found in almost any area for about $800/month, often less. Three people living together would have $1,500/month from this version of a basic income. That would easily cover rent and utilities and leave them a little money left over for food and transportation. The poverty threshold for 3 people is less than $19,000 and the basic income of $6,000 for 3 people is $18,000. A $6,000 basic income would be more than enough in our growing sharing economy and the more people you share with the further your money goes.

Furthermore, basic income usually has some type of payment for children as well. There are about 75 million children in the United States. If every parent received $3,000 per child that would be an additional $225 billion. However, why give pay $3,000 per child, which is essentially transferring the wealth of smaller families to larger ones. Instead it makes sense to give a flat payment to mothers whether they have one child or ten. That essentially says the government will support you no matter the circumstances of your first child, but for a second child you need to have the means to support it on your own. By providing a flat per mother allowance that cuts the amount of payments about in half. A family of 3 with one child would receive $15,000 in benefits and only be $4,000 short of the poverty line, which between 2 adults can easily be made up even working only part time. A payment of $3,000 per mother/guardian with a child under 18 for the approximately 37.5 million people that meet that qualification would cost about $110 billion.

By lowering the payment amount for adults and children the cost for a basic income at this point would cost $1.61 trillion. That lowers the gap to a little over $610 billion significantly better than $1.5 trillion, but still that would be the size of the entire military budget. Further trimming might be required.

Fiscal Cliffs and Phase-Outs

The main objective of a basic income is to end poverty and support the working poor. A good cut off point would be the median wage which is about $30,000, but I’m feeling more generous and I recommend a cutoff point at the average wage which is about $46,000. However, the main problem with our current welfare system are the fiscal cliffs. If we cut gave the full payment all the way to the cut off and then unceremoniously dropped the benefit that would be a terrible negative tax for people earning more. So naturally there needs to be a phase out point that at the very least takes less than a dollar of benefits for every dollar earned after taxes.

So where do you begin the phase-out? The most generous place would be at the median wage, but that would be rather expensive since you would be giving 50% of Americans the full benefit. Taking inspiration from the Medicaid expansion which places their cut off at 138% of the poverty line, we can begin our phase out there which when using the poverty line for a single individual the phase-out would be around $17,000 per person. If the phase-out is linear from $17,000 to $46,000 the benefit would reduce by about 21 cents for every extra dollar earned over the phase-out limit virtually eliminating any disincentive for earning more.

Recalculating the Cost of the Trimmed Basic Income

About 71 million Americans earn less than $17,000 a year and at $6,000 per person that would cost approximately $428 billion. Another 41 million Americans earn more than $17,000 but less than the $30,000 (the median wage), which when considering the phase out would cost on average $4,165 per person for a total cost of $171 billion. Another 43 million earn more than $30,000 but less than $46,000 (the median wage) which when considering the phase out would cost on average $1,170 per person for a total cost of $51 billion. The total cost of this version of a basic income would be around $650 billion.

It makes more sense to separate the adult portion of the basic income from the child version because I propose that the child portion would have no income cutoff or phaseout. That would add a bit of the universality back to the basic income and would only cost about $50 billion more than we currently spend on the child credit. Adding up the $650 billion for the adult portion and the $110 billion for the child portion the total cost of this version of a basic income will only cost $760 billion.

The entire $760 billion would not count as government spending a significant portion of it will be tax deduction (formally called tax expenditures by the government) which do not count against government spending and would bring the cost in line with the current welfare system. About 50 million people earn less than $10,000 which mean a tax liability of about $1,000 and an adult credit refund of about $5,000. Another 40 million earn between $10,000 and $20,000 for a tax liability of about $2,500 and an adult credit refund of about $3000. Between the phase-out and increasing tax liabilities the rest of income ranges would about break even. The child credit would be the full amount for approximately half of the families. That means the actual government spending would only be about $400 billion and the other $365 billion would be in the form of tax expenditures. These numbers align well with our current welfare system.

 

Problem 2: Workforce Participation

Academically a basic income is guaranteed regardless of what you do or don’t do. Obviously, that is going to be a tough sell to a large portion of Americans regardless of how many studies you run proving that most people will not simply take the free money and doing nothing. The solution is simple add simple requirements that don’t require much administrative effort to check. There is precedent the welfare reforms of 1996 added work requirements to most government benefits. Doing so to a basic income would taint the guarantee, but they can be minimal enough so that virtually everyone is still guaranteed a payment and it guarantees that everyone who receives it is productive.

I recommend requiring 500 hours of work or community service with a certified nonprofit or government agency per year (less than 10 hours a week) with exceptions for school, training, and disability.  I also recommend that adults who are being looked after for homelessness or addiction can have part of their basic income given to facilities that are taking care of them. Furthermore, working prisoners would also eligible for this benefit and do not have to pay caretaker fees.

I also recommend that anyone who claims $10,000 of wage income (not capital gains) on their taxes and pays the full FICA amount (15.3%) and any other applicable taxes on that claimed income also meets the requirement. However, this would require a law change that allows people to claim income without reporting where it came from to ease their concerns of legal retribution. Capping the amount of income whose source doesn’t have to be disclosed at $25,000 should alleviate concerns of criminal organizations making massive amounts of money legitimate. This would increase tax revenue as money that has been going unreported to avoid taxes or for other reasons will be reported so that they can claim the basic income payment.

The requirements, eligibility, phase out, and distribution would be determined during the income tax filing. Since these payments would count as a credit, tax liabilities would be taken care of before the basic income was refunded. Everyone would pay FICA on any earnings as well as income tax. By tying the basic income to income tax filings it also ensures everyone files their taxes and can give an accurate representation of how much the program will cost.

Although these requirements are very light and it should be very easy to meet at least one of these for anyone, one of the major concerns for proponents of basic income is that jobs will become more and more scarce making a work and even a community service requirement hard to fulfill. To alleviate this concern, I would recommend eliminating all non-tax related federal regulations on business smaller than 20 employees. That would eliminate the minimum wage and health insurance requirements for small companies. Approximately 18% of wage earners work for companies with less than 20 employees. Allowing those businesses to hire people at any wage and to not worry about stifling federal regulations would encourage entrepreneurship and hiring. Some might worry that without regulations those firms could cause harm in their prospective industries; however, they would still have to comply with state and local laws and their size prevents them causing too much damage.

With these requirements and recommended law changes the basic income would not only help alleviate poverty, help the working poor, further support the middle class, it would also encourage entrepreneurship and ensure that every able-bodied citizen was a productive member of society. This form of basic income would end poverty and guarantee productivity. Surely no matter your political allegiance you can find a use for that.

Sources:

http://familiesusa.org/product/federal-poverty-guidelines

https://www.census.gov/quickfacts/table/PST045216/00

https://www.ssa.gov/oact/cola/central.html

http://crfb.org/blogs/tax-break-down-child-tax-credit

http://sbecouncil.org/about-us/facts-and-data/

https://www.cbo.gov/publication/52410

http://fivethirtyeight.com/features/universal-basic-income/

http://waysandmeans.house.gov/wp-content/uploads/2015/11/WM-Welfare-Chart-AR-amendment-110215-jpeg.jpg

https://www.census.gov/data/tables/time-series/demo/income-poverty/cps-pinc/pinc-01.html

 

 

 

 

 

 

 

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