Where Would the Money for Universal Basic Income Come From?

Table of Links

Abstract and 1. Introduction

1. Current and past basic income experiments
2. Financing a basic income program
3. Finding alternative solutions
4. Conclusion, Acknowledgment, and References

3. Financing a basic income program

In addition to proving ineffective in the mitigation of unemployment, UBI comes at an exorbitant cost to taxpayers. Finnish failed Basic Income Experiment on only 5,000 people costs €20m in two years, according to its website, while Andrew Yang’s proposal UBI plan would require a hefty $2.8 tn every year (234 million American citizens above 18 years of age, according to Howden and Meyer (2010) to be provided with $12,000 annually), which would be more than half of the current $4.4 tn US budget in 2019. With an already massive budget deficit, the cost of UBI would translate into a greater burden borne by American taxpayers’ or further increase its national debt. We estimated that to grant a small sum of $1000 a month, most countries in the developed world would have to allocate from 35% to 50% of their GDP. Because of the massive funding required, UBI advocates suggest higher corporate taxes as well as new taxes on companies’ market capitalization, including IPOs and mergers. However, a study among OECD countries, as shown in Figure 1, implies that “[GDP(PPP)] declines by 1.3% for each 10% points increase in the [corporate] tax rate” (Kopits, 2017). Therefore, implementing a higher corporate tax to fund UBI is not economically efficient.

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\ Facing the difficulty of levying more tax for UBI, many countries especially developing ones, would choose to eliminate all existing means-tested welfare state programs and substitute them using a uniform UBI-styled grant to all citizens, such as the Indian Government’s recent proposal. If governments chose this approach, the consequences would be catastrophic. Reed and Lansley (2016) claim that handing out $392 (£292) monthly to every adult while eradicating existing means-tested programs would cause “child poverty to increase by 10%, poverty among pensioners by 4%, and poverty among the working population by 3%.” A potential explanation for this is, unlike means-tested welfare programs, UBI grants a fixed amount of money to all citizens uniformly, regardless of economic status. Since UBI also grants money to the upper and middle-classes, whose marginal benefit from it is minimal compared to disadvantaged ones who need welfare assistance the most, this approach is therefore irresponsible and unfair as money could have been targeted at needy people at a much greater quantity in the case of existing means-tested programs. Even if UBI is designed as an “add-on” and all means-tested programs are to remain, which would add a massive figure to the budget, the results are still quite disappointing “with a modest effect on poverty:” “[f]or working-age people[, poverty] decreases less than 2 points (13.9% to 12%), and among pensioners it declines only 1 point (14.9% to 14.1%)” (Reed and Lansley, 2016).

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:::info Author:

(1) Le Dong Hai Nguyen, School of Foreign Service, Georgetown University, 3700 O St NW, Washington, DC 20057 ([e-mail]).

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:::info This paper is available on arxiv under CC BY-NC-ND 4.0 DEED license.

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