Where Universal Basic Income is Headed in the Next Decade
By: Jake Batsuuri
Tags: Economics, Innovation, Statistics, Eudaimonia, Economy

Where Universal Basic Income is Headed in the Next Decade

A brief introduction to state wealth distribution

First Occurrence

It was 483 BCE, and the city of Athens was still rising to power. Athens had just overthrown a particularly painful monarch and for the first time in history established democracy in 508 BCE. Art, culture, political thought, and philosophy were all thriving in this city-state. Due to this fact, Athens had previously supported the Ionian revolt against the Persian King Xerxes rule. To set an example the Persian Empire was amassing an enormous army and navy to invade Athens and Sparta by land and the Aegean Sea. The chances of a Greek city being destroyed or annexed were ever-growing, as Xerxes drafted more and more armies into his force.

If Spartans valued action, the Athenians valued thought before action. Supposedly, it was this culture — the proclivity to value thought — that made Athens different than the rest of Greece. Their culture and values lead the nation-state to become the cradle of western civilization. Athens was the birthplace of democracy and a place that supported and encouraged many Greek philosophers and their ideas.

It was during this period, a massive new layer of silver had been found in Athens. There was thought by an Athenian statesman Aristides, to distribute the wealth of this silver deposit equally to every Athenian citizen. This may be the earliest written record of the idea of dividend distribution by the government. The additional surplus wealth could be shared between every citizen or used for some public good. The idea was dismissed by their government, as Themistocles the Athenian General proposed that Athens build warships to defend against the incoming Persian Invasion, with the wealth.

The Idea

Universal Basic Income or the more generic version Basic Income, is simply the idea of ensuring every citizen gets a basic income that covers their cost of living unconditionally. The Athenian statesman Aristides came up with the fundamental idea behind it before complicated economic policies such as Capitalism and Socialism. The fundamental idea being when a group of people must decide on a way to spend their collective wealth, distributing equally among each member is always one of the options, among many others.

A group of friends who just found money on the ground might do this. Corporate dividends are a way to share profits among owners of the company, so dividends also embody this idea. It's not unheard of for governments to distribute surplus revenue in a one-time payment, called Prosperity Bonus. These are all fundamentally the idea of profit-sharing or surplus wealth distribution. But when it comes to government — one of the biggest ways people organize themselves — this decision requires a bit more evaluation. As the size of the organizational group increases, more objectives and goals need to be considered.

The historical example also alludes to another important issue. When it is time to decide what to do with the surplus wealth, wealth distribution is only one of the many options. During times of war, the economic crisis the same money can be spent on the protection and health of society. Even during the non-crisis period, many economies now run on an incredible amount of public debt, in which the same money could be spent to reduce or eliminate. If there was an exemplary economy that didn’t have debt or obvious flaws to fix, there’s always economic development that requires the injection of money into the industry, education, business, research, and development.

Why now?

Recent spikes of unemployment due to the COVID-19 crisis have led to increased interest in Universal Basic Income. As mentioned earlier, during times of war or crisis nations often need to purchase more protection for themselves. But this is a time of economic crisis. The thing that is different this time is UBI is one of the ways that those economies can protect itself from economic collapse. If during a time of war, UBI would be a competing idea to national defense, now it seems like UBI could be a measure of national economic defense.

The US is voting on a stimulus package of 3 trillion this week, which is in addition to the over 2 trillion relief package enacted back in March, the largest emergency aid package in US history. While Canada provided 82 billion relief in March and plan to provide a 107 billion stimulus package to stabilize the economy and support Canadians through this time. Many federal governments are providing one time or short period financial relief to its’ citizens. These are not examples of Universal Basic Incomes, but what the relief payment does have in common with UBI is that they provide a basic income to individuals that are hit by the health crisis.

Definition

There are many, many versions of Basic Income, and while they are all about distributing wealth, they all have minute differences. Here are the different flavors of basic income:

Universal Basic Income

Citizen’s Dividend

Citizen’s Income

Basic Income Guarantee

Guaranteed Annual Income

Universal Demo-grant

A quick syntactical breakdown of all these phrases gives us three clues: universal, basic, income. “Universal” means that there is no welfare requirement on this payment, rich or poor alike, everyone gets this surplus payment. “Basic” alludes to the bare essential cost of living in that society. A full basic income is thought to be around the poverty line, while anything below is considered partial basic income. Lastly, “income” or “dividend”, encapsulates two ideas for two different perspectives, while the dividend idea says that some profits of the government should be redistributed equally into the citizen, the income label says that every citizen should have this income. To give you some grasp on this, the poverty line is $13,600 and $21,000 annually, in the US and Canada.

Fantasy or Reality

The first fictional record of a guaranteed income was referenced in Thomas More’s Utopia. The novel was written as a satire. The morphology of utopia is often mistaken as “Eu-topia” a good place, while the correct translation is “Ou-topia” or “No-where”, emphasizing its distance from reality. Utopia is a fictional city-state where everything is ideal. In this Utopian state, there is the seductive thought of universal income and no unemployment. Maybe it’s this connection to this novel, where the critics of UBI got the idea that universal basic income is a pipe dream — purely fictional, a theoretical concept that lives in people’s heads that could never work in practice.

There are countless dystopian novels and films that depict what our societies shouldn’t be, and for the most part, we all agree with what society shouldn’t be. A common trope in those novels is how what looks like a utopia on the surface can hide sinister machinations under the surface, therefore rendering the utopia, a dystopia. In the few utopian novels, there’s no such agreement. Everyone’s version of utopia might as well be different. If we all have to coexist and all our goals and dreams are different, that renders utopias non-universal and therefore pointless.

Modeling to Understand

Everyone loves the idea of receiving money. Until the moment we discuss where it's coming from. Take a country like Canada, it's not so big that you lose grasp of the many different numbers that represent the country, also it’s comparable to many other countries, it's not a superlative on anything. It doesn’t have the most people, it’s not the biggest economy in the world. It’s also not the worst on anything. Its an average developed economy if you will.

The Canadian government gets about $330 billion in revenue annually, from sales taxes, income taxes, corporate taxes, and other earnings. Then it spends that money by covering operational costs, national defense, social welfare payments, healthcare, education, public infrastructure, debt charges, essential services, economic development, and environmental protection. All of these expenditures are necessary. To implement a basic income to its citizens while holding everything constant, it would need to increase its revenue substantially, likely from income and corporate taxes.

Before any changes, as it stands, the government of Canada spends about 29% of its revenue on major transfers to persons, this encapsulates such things as old age security, employment insurance, child benefit, social assistance, and so on. This represents about $100 billion a year. But it only goes out to a section of the population. To provide all its citizens with basic pay of $21’000 every year, the government would have to come up with 425 billion dollars of additional revenue. A 228% increase.

We might get some efficiency from removing children from this equation and also reducing the couple’s cost of living to be less than 2 people’s living costs since they often can share a living space and other economies of scale. This may reduce the increase from 228% to 200%.

Given that children do not contribute as much to taxes and retired people who may pay taxes on their investment income and not too much on labor income, the stress on working-age people becomes greater. Under this very simple model, we would then effectively double every person’s and company’s income tax payment. For every tax bracket, the entity would pay double what they used to. On the higher tax brackets, where effective tax rate maybe 33%, the new system would demand 66% into taxes.

There are other ways of reducing this cost, for example, the money paid out directly to people was about 100 billion. There is a way to structure the UBI so that the UBI is in replacement of current social welfare, not in addition to current social welfare.

On a global comparison, countries like Germany and Denmark have the highest progressive taxation systems that cap out at 45% to 55%. While 66% is unheard of, it’s also not impossible. Especially provided that there’s the inherent “everyone will have basic living costs covered” premise. But is $21’000 a year, really enough?

Predictions

If you are a doctor that earns $300’000 a year, and your effective tax rate is about 50%, you still have $150’000 a year left. If you are an engineer that earns $100’000 a year, and your effective tax rate is about 40%, you would still have $60’000 a year left.

How would these individuals feel about their hard-earned money being spent on people who are sick and unable to earn, retired people, people who could work but are not willing to, people who may hide their income, people who are changing their careers and taking up schooling, people who take care of their kids?

It is important to consider these feelings about people because it would influence how they vote. Given that voting-age adults may have a clear understanding of their career’s earning potential, it becomes clear there are several incentives to consider.

If someone knows their earning potential for their chosen career is low, it’s in their interest to vote for Universal Basic Income. While a high earning individual who knows they will primarily be paying into this system might not vote for a UBI, as it significantly reduces their net income. Then there are average people who might net about zero in terms of paying into taxes and receiving UBI, because the government may implement negative income taxes to reduce the cost of transactions and remove certain moral hazards. Meaning certain average earners might not have to pay any taxes. Since these individuals are not affected as much financially, they might have more questions like:

Does this system impact people’s willingness to work?

What kind of social benefits are there to Universal Basic Income?

Would this system really save the economy during this crisis?

Would certain individuals spend this income on alcohol and drugs?

Can UBI help alleviate structural unemployment created by automation?

Does UBI support gender equality?

If everyone gets above the poverty line payments, does that mean we eradicated poverty?

Has this idea worked before in experiments and trials?

Before we make a prediction on how our voters might vote, we will explore these questions in detail.