Universal Basic Income, Its Pros and Cons With Examples

Should Everyone Get a Guaranteed Income?

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A universal basic income is a government guarantee that each citizen receives a minimum income. It is also called a citizen’s income, guaranteed minimum income, or basic income.

The intention behind the payment is to provide enough to cover the basic cost of living and provide financial security. The concept has regained popularity as a way to offset job losses caused by technology.

Plans differ on who receives the income. Some would pay every citizen, regardless of income. Others would only pay those who are below the poverty line, whether they are working or not. One proposal would pay just those left jobless due to robotics, a plan that 48% of Americans support.

The government sends the check, but plans differ on who funds the income. Some plans call for a tax increase on the wealthy, while others say corporations should be taxed.

The Purpose of Universal Basic Income

In 1967, Martin Luther King Jr. said a guaranteed income would abolish poverty. That means reducing income inequality as well.

Economist Milton Friedman proposed a negative income tax. The poor would receive a tax credit if their income fell below a minimum level. It would be equivalent to the tax payment for the families earning above the minimum level. 

In 2018, Facebook co-founder Chris Hughes outlined his plan in his book "Fair Shot." He argues that U.S. workers, students, and caregivers making $50,000 or less a year should receive a guaranteed income of $500 a month. “Cash is the best thing you can do to improve health outcomes, education outcomes and lift people out of poverty,” Hughes said.

Hughes’ guaranteed income is financed by taxes on the top one percent. It would work through a modernization of the earned income tax credit.

To Hughes, it's the only solution to an economy where “a small group of people are getting very, very wealthy while everyone else is struggling to make ends meet.” Hughes said automation and globalization have destroyed the employment market. It’s created a lot of part-time, contract, and temporary jobs. But those positions aren’t enough to provide a decent standard of living.

Mark Zuckerberg and Bill Gates agree. They argue that automation has fundamentally changed the structure of the U.S. economy. Sir Richard Branson said a guaranteed income is inevitable. Artificial intelligence will take too many jobs from people. Elon Musk said robotics will take away most people’s jobs, so a universal income is the only solution.

The snapshot below shows some of the program's many pros and cons that exist for countries who wish to implement a basic income.

Pros

  • Workers could afford to wait for a better job or better wages.

  • People would have the freedom to return to school or stay home to care for a relative.

  • The "poverty trap" would be removed from traditional welfare programs.

  • Citizens could have simple, straightforward financial assistance that minimizes bureaucracy.

  • The government would spend less to administer the program than with traditional welfare.

  • Payments would help young couples start families in countries with low birth rates.

  • The payments could help stabilize the economy during recessionary periods.

Cons

  • Inflation could be triggered because of the increase in demand for goods and services.

  • There won't be an increased standard of living in the long run because of inflated prices.

  • A reduced program with smaller payments won't make a real difference to poverty-stricken families.

  • Free income may disincentivize people to get jobs, and make work seem optional. 

  • Free income could perpetuate the falling labor force participation rate.

  • It would be difficult especially in the US to get legislation passed because of stiff opposition to handouts for the unemployed.

Detailed Advantages

An unconditional basic income would enable workers to wait for a better job or negotiate better wages. They could improve their marketability by going back to school. They could even quit their job to care for a relative.

It would remove the problem with existing welfare programs that keep people “trapped in poverty.” If welfare recipients make too much, they lose food stamps, free medical care, and housing vouchers. This is a form of structural inequality that prevents the poor from getting enough wealth to better their lives.

Current welfare programs are also complicated for administrators and recipients. A simple cash payment would cut down on bureaucracy. It would replace housing vouchers, food stamps, and other programs.

The simplicity of the program means it would also cost governments less. Cash payments that went to everyone would eliminate costly income-verification paperwork. Conservative Utah Senator Mike Lee told the Heritage Foundation, “There’s no reason the federal government should maintain 79 different means-tested programs.” Only applicants with low incomes qualify for means-tested programs.

Some countries are concerned about falling birth rates. A guaranteed income would give young couples the confidence they need to start a family. It would also provide workers the confidence to bid up wages. From a macro viewpoint, it would give society a much-needed ballast during a recession.

Detailed Disadvantages

If everyone suddenly received a basic income, it would create inflation. Most would immediately spend the extra cash, driving up demand. Retailers would order more, and manufacturers would try to produce more. But if they couldn't increase supply, they would raise prices. Higher prices would soon make the basics unaffordable to those at the bottom of the income pyramid. In the long run, a guaranteed income would not raise their standard of living.

A guaranteed income that’s enough to eliminate poverty would be too expensive. In 2012, there were 179 million working-age adults. It would cost $2.14 trillion to pay each of them $11,945 (the poverty level) each year. But it would replace existing welfare programs that cost $1 trillion a year. So it would add $1.2 trillion to the deficit, or 7.5% of the total economic output that year.

To save money, some programs would not pay as much. But research shows that payments of a few hundred dollars aren't enough to make a real difference in the lives of the poverty-stricken.

If everyone received a free income, it could remove the incentive to work hard. Oren Cass, a Senior Fellow at the Manhattan Institute, says it would make work seem optional. Many recipients might prefer to live on the free income rather than get a job. They would not acquire work skills or a good resume. It could prevent them from ever getting a good job in a competitive environment. It could reduce an already-falling labor force participation rate.

Lastly, such a plan would be difficult to get passed in the United States. Most people are opposed to handouts to those who don't work. For that reason, many already oppose welfare and even unemployment benefits. Even raising the U.S. minimum wage has been difficult, despite the widespread belief that hard workers should be rewarded.

Guaranteed Income History in the U.S.

In 1968, President Johnson's administration launched a test of the negative income tax in New Jersey. It found that welfare recipients received a higher payment from that program than they did from the standard income tax. A higher-paying program was tested in Seattle and Denver.

Results showed reduced incentive to work. It also broke up families, since husbands and wives no longer had to remain together for financial reasons. The administrative costs were very high for both programs. 

The earned income tax credit is a form of guaranteed income. It provides a percentage tax credit for every dollar of earned income up to a maximum credit. Since the credit increases along with income, it promotes the incentive to work. But as the income reaches a maximum level, the tax credit phases out and decreases. That creates a disincentive to earn more. A 1990 study revealed that 40% of benefits were paid to families who weren't eligible for the EITC.

Current Examples in the U.S. and Other Countries

Alaska has had a guaranteed income program since 1982. The Alaska Permanent Fund pays each resident an average of $1,200 a year out of oil revenues. Almost three-fourths of recipients save it for emergencies.

In 2017, the Hawaii state legislature passed a bill declaring that everyone is entitled to basic financial security. It directed the government to develop a solution, which may include a guaranteed income.

In Oakland, California, the seed accelerator Y Combinator will pay 100 families between $1,000 and $2,000 a month.

Stockton, California, is planning a two-year pilot program for fall 2018. It would give $500 a month to 100 local families. It hopes to keep families together, and away from payday lenders, pawn shops, and gangs.

Chicago, Illinois, is considering a pilot to give 1,000 families $500 a month.

Canada is experimenting with a basic income program. It will give 4,000 Ontario residents living in poverty C$17,000 a year or C$24,000/couple. They can only keep half of their income from any jobs they have.

In 2017, Finland began a two-year experiment. It gave 2,000 unemployed people 560 euros a month for two years, even if they found work. The recipients said it reduced stress. It also gave them more incentive to find a good job or start their own business. The Finnish government was supposed to extend the trial to employed workers in 2018. Researchers wanted to see if that would help them get better jobs, as well. But the Finnish government scrapped the expansion before it began. It is exploring other social welfare programs instead.

A pilot program in Utrecht, Holland, pays 250 people 960 euros a month.

In 2017, Kenya announced a 12-year pilot to benefit 6,000 villagers. They will receive a $22 monthly payment on their smart phone equivalent. It will double some residents' income. They must remain in their town. MIT economist Abhijit Banerjee will monitor the results.

Scotland is funding research into a program that pays every citizen for life. Retirees would receive 150 pounds a week. Working adults would get 100 pounds and children under 16 would be paid 50 pounds a week.

Taiwan may vote on a basic income. Younger people have left rural areas in search of decent wages. Some have even left the country to look for work. A guaranteed income might keep them from emigrating. It would also help the senior citizens left behind who live in poverty. The country only spends 5% of its gross domestic product on welfare programs. The average for developed countries is 22%.

Under the proposal, the government would pay NT$6,304 per month for children under 18 and NT$12,608 per month for adults. It would cost NT$3.4 trillion, or 19% of GDP. To fund it, Taiwan would levy a 31% tax on earnings above NT$840,000 per year. As a result, the program would raise the incomes of two-thirds of the population. The richer third would lose NT$710 billion.

In 2016, Switzerland voted against universal income. The government proposed paying every resident 2,500 Swiss francs per month.

Economists Kalle Moene and Debraj Ray propose a payment system tied to a country’s economic output. They suggest 10 to 12% of GDP go directly to the universal income payments. The benefit is it would automatically rise with national prosperity and inflation.

It's too soon to tell if these pilot programs will work. The universal income's simplicity makes it an attractive alternative to welfare programs. But its proponents haven't suggested solutions to its several potential issues.

The Bottom Line

The idea behind universal basic income is to provide everyone with a minimum living wage, whether they are employed or otherwise. UBI was proposed to address the present and future job losses stemming from technological innovation.   

UBI is still experimental in several countries, including the United States. In fact, the government’s EITC is a form of guaranteed income.

UBI’s proponents see it as an answer to a fundamentally changed employment market. A guaranteed income would ensure financial security, allow financial freedom, remove the “poverty trap”, and support more path choices.  

Its detractors, on the other hand, call it as a lazy solution. They argue in favor of inflation and the consequential lowered living standards. They also see UBI as dole outs, likely to worsen America’s decreasing labor force participation rate.

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