Proposals
for a Universal Basic Income (UBI) in the US have cropped up in political
discourse since the 1960’s, with supporters from both the Democratic and
Republican parties. Most recently, Democratic presidential candidate Andrew
Yang has proposed a “Freedom Dividend,” a UBI of $1,000/month for every
American adult. Before Yang, scholars including Milton Friedman and Charles
Murray have advocated for various forms of UBI. Supporters argue that universal
cash benefits from the government would address at least one of three policy
dilemmas: economic inequality, technology replacing human workers, and transfer
program inefficiencies.
In 2017, an AEI working paper by Will Ensor, Anderson Frailey, Matt Jensen, and Amy Xu, entitled “A budget-neutral universal basic income,” set out to calculate a budget-neutral UBI, funded by repealing benefit and transfer programs, such as Medicare and Social Security, and base-narrowing features of the individual tax system, such as deductions and credits. Assuming that minors receive half the UBI amount as adults and based on data from 2014, the AEI working paper found that these changes could fund a UBI of $6,894/year for individuals under 18 and $13,788/year for individuals 18 or older.
| Major Repealed Tax Provisions | Major Repealed Welfare and Transfer Programs |
| Credits – Child Tax Credit – Earned Income Credit Deductions – Standard deduction – Itemized deductions – Above-the-Line deductions |
– Social Security – Medicare – Medicaid – Veteran’s Benefits – SNAP – Student Assistance – Supplemental Security Income |
Much has changed in the tax code and in social program spending since 2014, notably the enactment of the 2017 Tax Cuts and Jobs Act (TCJA) and the growth of numerous benefits programs. TCJA introduced provisions modifying some credits and deductions, including the elimination of the personal exemption, the expansion of the standard deduction and child tax credits, and the introduction of a cap on state and local tax deductibility. Meanwhile, the total cost of federal benefit and transfer programs grew by more than 20% between 2014 and 2020. Because of these major changes, we reran the numbers from the AEI working paper to calculate the budget-neutral UBI amount for 2020. The complete list of tax, welfare and transfer programs repealed is available here.
| 2014 BI (per year) | 2020 UBI (per year) | |
| Under 18 | $6,894 | $7,923 |
| 18 and older | $13,788 | 15,8545 |
This scenario would
have widely varying impacts on tax units across the age and income
distribution. In general, the budget-neutral UBI would be detrimental to those
at the very bottom and the very top of the income distribution, and beneficial
to those in the middle of the income distribution. In particular, tax units
earning less than $10,000 per year in wages would see their after-tax income plus
benefits decline by an average of $12,316, after accounting for the UBI. This
decline is driven by the repeal of benefits and transfer programs because those
at the bottom receive more benefits and transfers (on average, $31,815 per
year) than other income levels. Tax units earning wages higher than $1,000,000
per year are also hurt by this scenario because of the repeal of certain tax
provisions, such as itemized deductions and the qualified business income
deduction. Under this scenario, those at the top would pay, on average,
$101,249 more in income tax per year. For tax units earning between $10,000 and
$1,000,000 per year, this scenario would increase their after-tax income plus
benefits by between $5,000 and $14,000 per year.
To examine the impacts of
this policy on different age groups, we split the population into tax units
whose individuals are all younger than 65 (“tax units u65”) and tax units with
at least one individual 65 or over (“tax units o65”). For tax units u65, this
policy scenario would benefit every income bracket on average except for those
earning wages over $1,000,000, as a result of the changes to the tax code
discussed above. For tax units o65, this policy would hurt the average tax unit
in every income bracket because of the value of Social Security and Medicare
for the elderly. Across the income distribution, tax units o65 receive at least
$31,000 in benefits and transfers per year and the UBI amount per tax unit is
not high enough to offset this loss in benefits.
To model the effects of
the budget-neutral UBI, we leverage three open-source models incubated by OSPC:
Tax-Calculator, Tax-Data, and C-TAM. We use Tax-Calculator, a microsimulation
model of the federal individual income tax code, and Tax-Data, a project that
prepares microdata for Tax-Calculator use, to estimate the revenue impacts of
repealing the base-narrowing feature of the individual income tax code
discussed above. To model the effects of repealing benefits programs, we rely
on CPS data and the C-TAM project to correct for the chronic underreporting of
welfare and transfer program participation. Finally, we combine results from
the two analyses to examine which tax units would benefit from a budget-neutral
UBI and which wouldn’t, after accounting for the loss in benefits and
additional taxes paid.
Our complete source code and assumptions can be found here on GitHub.
The post Exploring a budget-neutral UBI appeared first on American Enterprise Institute – AEI.