In these heady days of progressive proposals for massive increases in the federal budget, such as the Democrats’ recently announced $3.5 trillion human infrastructure package, a timely paper has reopened an old debate with a new proposal for a guaranteed national income, in the form of a negative income tax (NIT). The NIT, first proposed in the 1970s, is one type of income guarantee. It provides a cash benefit to individuals — an income floor — that declines as their income from other sources increases. The authors claim that their plan would completely eliminate poverty in the United States, which would be a very big deal.
The United States currently establishes income floors for various groups of people, especially under Social Security, but the biggest gap has always been those of working age said to be able-bodied who for one reason or another are unable to earn much or any income. An important but limited response to this gap is the new expanded Child Tax Credit (CTC), which began distributing direct cash payments to parents earlier this month.
The paper was authored by a group of economists and researchers, including Naomi Zewde, Kyle Strickland, Kelly Capotosto, Ari Glogower and Darrick Hamilton of the New School’s Institute on Race and Political Economy. Hamilton was an adviser to Bernie Sanders during his 2020 campaign and bids fair to remain a leading economic voice on the Left for a long time to come, so this proposal is as much a news event as a policy paper. On a parallel track in Congress, Rep. Rashida Tlaib (D‑Mich) has proposed an NIT in her “LIFT+ Act,” which would provide a $3,000-per-adult basic income.
How a negative income tax works
The negative income tax has been called an “upside-down” income tax. Eligible individuals receive a fixed cash benefit that is reduced according to income from other sources, also known as “means-testing.” For instance, if the benefit provided is $10,000 with a “phase-out rate” of 50 percent, and a person’s other income is $12,000, the benefit would be reduced by 50 percent of this other income, or $6,000, leaving a net benefit of $4,000. In this example, any income above $20,000 would “zero out” the benefit.
Like the universal basic income (UBI) idea, an NIT benefits those with the lowest incomes, or no income at all.
Means-testing has provoked criticism on the Left, but it is the only way to keep the cost of a cash benefit manageable enough to fit into the federal budget. The UBI is thought to avoid means-testing, but this is incorrect. Insofar as the UBI is taxable and returned to the government in income taxes, for all practical purposes it too is means-tested.
The NIT proposed in the paper, which we’ll call ‘ZSCGH,’ from an acronym of the authors names, is a logical extension of Biden’s CTC in several respects. One is that it’s ambitious in terms of cost — estimated at $876 billion a year — but not wildly out of sync with the scale of current budget thinking. Like the new CTC, it does not require recipients to be employed. The program would also be tax-based, pitched as a reform of the Earned Income Tax Credit (EITC), and administered by the Internal Revenue Service. And finally, it’s targeted and not universal, which is why its cost is plausible.
Problems with UBI
In all these respects, it surmounts the difficulties of popular UBI advocacy, the greatest of which is the unrealistic cost: A UBI that genuinely meets basic needs would be entirely out of bounds of existing or plausible federal budgets.
A UBI provides an unconditional cash grant to everyone. (Exactly who constitutes “everyone” is actually a ticklish issue, but one left for another time.) One UBI proposal for $6,000 a year — well short of “basic” if basic means something a person could live on — is estimated to cost $1.9 trillion annually. (When you hear about budget packages of $4 or $6 trillion, that generally means over a ten-year period. The annual amount would be a tenth of that.) Andrew Yang’s proposal for $12,000 per person would cost $2.8 trillion a year.
Sometimes UBI advocates will defend against sticker shock by cautioning that the bulk of that cost would be reclaimed with higher taxes. The biggest flaw in that argument is political: Imagine Democratic politicians’ reactions to the idea of an annual tax increase of a trillion dollars, per year.
The main economic flaw of this approach is that the so-called “claw-back” — which amounts to a humongous tax increase — contradicts claims that a UBI would have no incentive effects. In other words, a great part of the UBI benefit is reclaimed by the federal government though the individual income tax, and the net taxes (tax increase minus the UBI benefit) of many would rise to finance a UBI. A tax on income is said to discourage work, saving or investment, though such claims are routinely exaggerated by the Right. But the claim that the UBI escapes incentive effects altogether is another myth fostered by its advocates.
Another problem is that the round-trip of that enormous amount of money — from government to person as UBI benefits, back to the government as tax increases — would lose a lot of passengers along the way: Roughly one dollar in six owed in federal taxes is not paid on time, or ever.
A more just safety net
The ZSCGH paper wisely highlights the impact of the NIT in the realm of racial justice. As with other social-democratic proposals, a benefit that reduces class inequality also reduces (but does not eliminate) racial inequality. The authors document the household poverty rate by race as follows: whites, eight percent; Blacks, 18 percent; Latinx, 17 percent. An NIT that eliminates poverty, or that just cuts it in half, benefits larger proportions of Black and Latinx households, simply because their poverty rates are higher to begin with. The paper’s authors also write that their proposal narrows median income gaps by race, since the benefits would extend well above the official poverty line. The reduction in gender inequality, especially for female-headed households, follows for the same reasons.
Eliminating poverty by raising individual incomes with cash benefits is not the limit of progressive objectives. We would not want people to rely on cash to buy health insurance or clean water, for instance. People also need public services and facilities, with social insurance programs alongside a social safety net strengthened by an NIT.
We also want to empower workers to win higher wages from employers. The cushion afforded by a guaranteed income would help workers bargain for better deals, since they become more able to withhold their labor, or to take a spell out of the labor market. But still, you can’t knock cash.
Even with guaranteed public employment (another Darrick Hamilton project), there will always be those unable to work who will need income. An NIT is the right field upon which to fight this battle. The ZSCGH paper and the Tlaib plan provide a running start.
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Max B. Sawicky is a senior research fellow at the Center for Economic and Policy Research. He has worked at the Economic Policy Institute and the Government Accountability Office, and has written for numerous progressive outlets.