Beyond Basic Income: The Case for Integrated Cash Assistance
By: Ed Dolan
Tags: Poverty, Economics, Politics, Basic Income

I have written frequently in this publication and elsewhere in support of a Universal Basic Income (UBI). Even in its simplest form, — equal, unconditional monthly payments to all citizens — a UBI offers an unambiguous improvement over our current welfare system, both in fighting poverty and in encouraging work. However, it should be recognized that a simple UBI is just one member of a larger family of policies that would replace our current grab-bag of fragmented, in-kind welfare with a unified system of cash assistance.

The idea of replacing in-kind welfare with cash assistance is far from new. Decades ago, Milton Friedman argued for programs that give help “in the form most useful to the individual, namely money.” More recently, Charles Kenny cites examples from around the world in support of a simple policy recipe: “Give poor people cash without conditions attached, and it turns out they use it to buy goods and services that improve their lives and increase their future earnings potential.”

Once we focus on cash assistance, we find that there are many ways to give money away, of which a UBI is only one. This post looks at a UBI and its alternatives, including negative income taxes, wage subsidies, and child allowances. I will argue that rather than choosing among these canonical policy alternatives, cash welfare can best be optimized with a policy of Integrated Cash Assistance (ICA) that shares features of all of them.

A taxonomy of cash transfers

Let’s begin with a taxonomy cash transfer policies, based loosely on a recent NBER working paper by Hillary W. Hoynes and Jesse Rothstein. Their model focuses on five program parameters:

Eligibility. A transfer may be universally available or available only to those who meet certain eligibility standards, such as age, work status, disability, citizenship status, family structure, and so on.

Basic grant. The basic grant is the minimum payment an otherwise eligible person or household receives regardless of earned income.

Maximum benefit. The maximum benefit is the largest payment that an eligible person can receive.

Wage subsidy. A specified increase in payments per dollar of earned income over a specified range.

Phase-out. A schedule of benefit reductions beyond a set amount of earned income.

A Universal basic income: A universal basic income is the simplest form of cash benefit. A UBI provides an equal basic grant to every person, regardless of age, earnings, work status or any other personal characteristic, with no phase-out. Although the “U” suggests that a UBI would be available to everyone, some broad standards of eligibility, such as age or citizenship status, are nonetheless needed to define who was meant by “everyone.” For example, Democratic presidential candidate Andrew Yang’s Freedom Dividend would limit the basic grant to citizens of the United States over 18 years of age. A universal child allowance that specified a maximum rather than a minimum age could also be considered a form of UBI.

Advocates claim several advantages for such a UBI. It is administratively simple since there are no eligibility requirements to assess — no means testing, no evaluation of disability, no need to verify family status. It would substantially enhance work incentives if it replaced the high benefit reduction rates of existing programs. Its universality would make it maximally effective in combatting poverty, and at the same time, would minimize any stigma attached to accepting benefits.

Offsetting those advantages, as many critics point out, a UBI would be costly, since it would require paying benefits not just to the poor, but also to people with middle and higher incomes — an issue to which we turn next.

Phase-outs and negative income taxes. Some basic income proposals forego universality, adding a phase-out of benefits beyond a given level of earned income. In such a program, a household with no income gets a basic grant G. After total income reaches some phase-out point P, benefits are subject to a fixed benefit reduction rate R until they reach zero.

A negative income tax (NIT) is a special case of a UBI with a phase-out. In a NIT, the phaseout begins with the first dollar of earned income. A defining characteristic of a NIT is that benefit reductions continue beyond the break-even point, so that people with higher incomes pay money to the government as a positive tax while those with lower incomes receive a benefit, or negative tax.

Phase-outs address the biggest drawback of a canonical UBI — the high cost of providing grants to people whose earned income is already adequate. The trade-off is that along the phase-out range, beneficiaries face a significant work disincentive. The strength of the disincentive depends in part on the benefit reduction rate of the UBI or NIT itself, and in part on whether it replaces existing means-tested programs or is added on top of them.

If the program is a replacement, and if the benefit reduction rate is less than the combined rates of the replaced programs, then the net effect on work incentives will be favorable. However, if a UBI with phase-out or NIT is added on top of existing means-tested programs, it would increase disincentives. For example, if an NIT with an R of 25 percent were added to a nutrition program with a 30 percent reduction rate and housing benefits with a 40 percent rate, the combined rate would reach 95 percent, leaving hardly any incentive to work.

Wage subsidies. A wage subsidy is any policy that offers benefits that increase as earned income increases, at least over some range. Although a properly designed UBI or NIT could provide greater work incentives than current means-tested welfare programs do, wage subsidies could do even more.

In a pure wage-subsidy program, nonworkers would receive no benefit. Starting from there, workers would receive a subsidy at a rate S, say, 50 cents for each dollar earned, up to a maximum. Beyond some level of income, the benefits are phased out. To avoid strong disincentives to work, the benefit reduction rate might be lower than the original subsidy rate, say just 25 cents per dollar earned, until benefits reach zero. The phase-out might begin immediately after the maximum benefit is reached, or there might by a range of incomes over which the subsidy remains fixed before the phase-out point begins.

The biggest wage subsidy program now in effect in the United States, the Earned Income Tax Credit (EITC), follows the general pattern we have described — a subsidy for each dollar earned until a maximum is reached, then a flat spot, and then a range over which benefits are phased out. EITC benefits depend not only on earnings but also on the number of dependent children in a household, with very limited eligibility for those with no children.

As is apparent, the big problem with this design is that it encourages work for those just entering the labor market, but discourages those who are subject to the phase out. Under current EITC parameters, negative incentives affect many workers at the critical point where they are just emerging from poverty to self-sufficiency. The disincentive effects of the phase-out are amplified by that fact that the EITC is added on top of other means-tested welfare program, rather than replacing them. The resulting combined benefit reduction rates can be quite substantial.

A 2015 report from the Congressional Budget Office provides a detailed discussion. One example in the report is based on a hypothetical family of one parent and one child living in Pennsylvania in 2016. In addition to the EITC, the family is eligible for TANF, SNAP, Medicaid, CHIP, and cost-sharing subsidies for health insurance. The example also takes into account payroll and income taxes, so that above a break-even level, total disposable income is less than earned income. For this family, positive incentive effects are strongest for incomes ranging from 30 to 55 percent of the poverty level, where household disposable income rises by as much as $1.40 for each dollar of earned income. The weakest work incentives occur in a range from 115 to 127 percent of the poverty level. There, the family gains only 20 cents in disposable income for each dollar earned.

Combining canonical types into Integrated Cash Assistance

The previous section described three canonical types of cash assistance policy, defined in terms of five key parameters. A universal basic income features a substantial basic grant with broad eligibility. A negative income tax adds a phase-out, which that may begin immediately or at a set level of earned income. A wage subsidy has no basic grant, but instead, pays a bonus per dollar of income earned by low-wage workers.

Although the three canonical policies are often treated as distinct alternatives, there are strong reasons to think that an Integrated Cash Assistance program that combines their features might work better than any would alone. Such an ICA would have the following elements:

A universal basic grant G that goes to all eligible adults, regardless of their employment status.

A universal child allowance that increases the total amount of cash received by an amount C for each of N children.

A wage subsidy S per dollar earned, up to a maximum amount M.

A flat range of income over which total benefits received — basic grant plus child allowances plus wage subsidies — is held constant

A phase-out point, after which total benefits are reduced at a fixed rate R per dollar of earned income until benefits reach zero.

Such an ICA would resemble the current welfare system in some respects. It is already the case that families without any income can receive certain benefits, such as food stamps, Medicaid, and TANF, as well as certain child benefits. The EITC already offers a wage subsidy to low-income workers with children. And benefits for all of these programs are subject to phase outs. However, the ICA described here would differ from the current collection of welfare policies in fundamental ways:

All benefits, including the wage subsidy, would take the form of monthly cash payments, rather than in-kind benefits or annual tax credits.

The basic grant for adults would be universal. It would not depend on work status, family status, or other personal characteristics. (Eligibility rules would needed with regard to citizenship and residency.)

Child credits would be paid to parents or guardians in name of the child, and would automatically follow the child in case of a change in family status. Any agreements for joint custody would have to include a cause specifying the division of child benefits. Child benefits would not depend on the work status, marital status, or other personal characteristics of the parents or guardians.

In order to avoid punitive disincentive effects, a single, uniform phase-out rate would apply to all benefits received by a household. For example, if the phase-out rate were 25 cents per dollar of earned income for a single individual, total benefits for a family — including wage subsidies received by multiple earners and child allowances — would also be reduced at a consolidated rate of 25 percent.

Health care would be separated from the cash assistance program through universal coverage in some form such as universal catastrophic coverage, Medicare for All, or a subsidized public option added to the existing Affordable Care Act.

Affordability

A full discussion of the affordability of integrated cash assistance is beyond the scope of this commentary, but here are some very rough numbers:

As of 2018, the federal government spent $164 billion on child nutrition, Head Start, WIC, and child-related tax credits. There were about 73 million children under 18. That would allow a universal child grant of about $4,500, assuming a phase-out that focused benefits on the poorest half of those children.

In the same year, the federal government spent some $192 billion on conventional in-kind and cash welfare (housing, SNAP, TANF, etc.). In addition, “middle-class welfare” in the form of tax deductions for home mortgages, charitable contributions, and retirement savings came to another $375 billion, for a total of $579 billion. That would be enough to provide a universal basic grant of about $2,150 to each of 264 million resident adult U.S. citizens. Giving Social Security recipients the choice of getting their current benefits, or the new basic grant, but not both, would increase the basic grant to about $2,800 per adult, assuming that 90 percent of retirees chose to stay with Social Security. With a phase-out that focused benefits on the poorest half of adults, the benefit for those with the lowest incomes would be something in the neighborhood of $5,000.

The basic grant and child allowance specified above would be enough in themselves to provide benefits as great as or greater than those of the present EITC (maximum of $3,500 for one parent with one child or $5,800 for a couple with two children.) Part of the funds now spent on the EITC could be used to expand wage subsidies to childless low-income workers, now largely excluded from the EITC. The rest could be used to provide a wage-subsidy that would add to the basic grant and child allowance for low-wage households.

Taking all of these components together, an ICA could provide benefits of something like $19,000 per year to a family of four with two children in which neither adult had any earned income. If one of the parents worked full-time at the federal wage of $7.25 per hour and the other worked half-time at the minimum wage, earned come would total $21,750. Adding $5,000 in wage subsidies would bring total family income to $45,750, or nearly double the federal poverty level for a family of four.

The bottom line

Replacing the present welfare system with a system of Integrated Cash Assistance could substantially reduce poverty while also enhancing work incentives for low-income families. Even if the ICA were financed entirely by diverting funds now spent on conventional welfare and “middle class welfare,” with no new funds committed, it would raise the incomes of non-working families close to the poverty line, while raising the incomes of households whose heads worked at minimum-wage jobs to a level well above the poverty level. These figures are based entirely on “static” calculations. That is, they do not take into account the possibility that wages subsidies and reduced benefit reduction rates could substantially increase labor force participation and therefore increase revenue flowing into income and payroll taxes.

The ICA parameters used in our example are purely illustrative. Within a given budget for the ICA, the program could be tilted more toward the basic adult grant, more toward children, or more toward wage subsidies, according to policymakers’ perceptions of needs. Although the illustrations assume that no additional funding is available, that could be changed if policy makers wanted to impose additional taxes.

UBI advocates make a valid point when they emphasize the administrative simplicity and inherent fairness of unconditional grants paid to everyone. I remain convinced that a simple UBI would outperform our current dysfunctional welfare system. However, viewed pragmatically, a program of Integrated Cash Assistance could do an even better job than a simple UBI both in relieving poverty and encouraging labor force participation.

For more on the way UBI and work incentives can work together, see “Putting Everyone to Work: UBI, Wage Subsidies, or Both?” (Medium) and “Can We Put Everyone to Work?” (Slideshow). Photo courtesy of Pixabay.com.