UBI or NIT

1.Introduction

2.NIT

3.Incentive mechanism of NIT

4.How much help is good help? 

5.Benefits of UBI & NIT

1.Introduction

The idea of Universal Basic Income (UBI) has gained currency in recent years. Three decades have passed since the end of the Communist social experiment, which spectacularly failed, and the leftists lost their ground. Nonetheless, after two decades of neoliberal dominance, the Great Recession, a widening wealth gap and the populist epidemic have contracted a number of Western liberal democracies. UBI, thus, seems to offer those on the political Left an alternative model to Marxism and Communism. The basic tenet of UBI is to provide all citizens with a basic income, just enough for them not to fall into destitution, thereby removing a plethora of inefficiencies stemming from extreme poverty, such as wasted human capital, incarceration, and healthcare expenditure, while also eliminating bureaucratic excesses. 

2.NIT

In the meantime, the idea of Negative Income Tax (NIT) was famously proposed by the free-market advocate Milton Friedman decades ago in his publication “Capitalism and Freedom” (1962), which, in its essence, is similar to UBI, but differs slightly in some details. 

For instance, the most common concern amongst UBI critics is that since UBI provides people with a certain amount of money equally with no questions asked, people may lose incentives to seek employment, making them indolent. NIT solves precisely the problem by incentivising people to work, while removing extreme poverty and bureaucratic inefficiencies. The major difference in the similarity between UBI and NIT is precisely the presence of the incentive mechanism.

3.Incentive mechanism of NIT

NIT offers a welfare system, in which those who earn below a certain amount receive a supplementary payment from the government instead of paying taxes. In effect, NIT guarantees minimum income without entirely removing the incentive for the poor to actively take up jobs. 

In an NIT system, those who earn a certain level would owe no taxes to the government, while those earning more than the income threshold pay a portion of their income above the level as their income tax. Meanwhile, those that earn below the level would receive a payment relative to a proportion of their shortfall. In other words, the supplementary payment from the government in this case equal to the amount of their income shortfall below the threshold. 

Milton Friedman, for instance, proposed the threshold to be $3,000 a month for a family of four with the subsidy rate of 50%. On this basis, if a family earns no income at all, there is still $1500 a month guaranteed. If a family earns $2000, the unused allowance is $1000, of which 50% will be subsidised, therefore $500 will be granted to the family as a supplement (Fig.1).

Fig.1: Friedman’s example: the $3,000 threshold with the 50% subsidy rate

Moreover, on this basis, it is much better to work harder and make more than not. Thus, people are incentivised (Fig.2). 

Fig.2: Incentive mechanism

4.How much help is good help? 

For Friedman, if the subsidy rate were higher than 50%, the incentive to seek employment would likely diminish. In the system with the 50% subsidy, it is always preferable to earn more, which contrasts the central tenet of UBI. To illustrate this, as shown below, if the government subsidy is raised to 80%, up to the threshold, people are less incentivised to earn more. 

Fig.3: the $2,000 earnings with the 80% subsidy rate

Fig.4: the $1,000 earnings with the 80% subsidy rate

Even if a household has only a half of another household’s income, thanks to the 80% government subsidy, the difference in their final incomes is so marginal as 7%, as shown above. It means that people are less incentivised to work and earn more. Efforts are less rewarded with too much help. 

If we accept a premise that society is made up of individuals with different values and temperaments, young and old, men and women, and industrious and lazy, then, if efforts are rewarded too much without redistributing the fruit to the poor at all, a wealth gap widens, and often, social unrest ensues. 

5.Benefits of UBI & NIT

In theory, by implementing an NIT, or UBI for the matter, social welfare and government assistance programs, such as minimum wage, food stamps, housing vouchers, disability benefits, unemployment benefits and so on, can be eliminated, effectively reducing the administrative and bureaucratic expenses incurring the government. 

Both UBI and NIT programmes would also eliminate so-called a welfare trap, which often deters the poor from seeking higher wages and more challenging work. For instance, a minimum wage worker earns a tiny more than a welfare threshold by putting an extra effort or taking up night shifts and thereby ends up losing some welfare benefits. As a consequence, his or her net income falls by a fraction. It is utterly discouraging, as it makes one think, “it is better off just collecting welfare benefits.”  

In the US, for example, the IRS would administer NIT centrally, which consequently remove an array of welfare benefits and various bureaucratic organisations. The money saved from the removal of those organisations can now be put to more productive use, such as fixing the wear and tear of the public infrastructure, as roads and bridges are falling apart in the country.  

Also, whilst UBI and NIT appear to be some socialist programs, they preserve critical aspects of capitalism, namely entrepreneurship and creative destruction that Communism lacked, all the while incorporating socialist elements to save the poor. They provide those who wish to become entrepreneurs and thereby drive job creation with a safety net. With it, they would be more encouraged to venture out, as the risk of failure is mitigated. Even if one fails, there will be something to fall back on. It allows people to fail and become a little bit more courageous and adventurous than being fearful and too security-conscious. 

In the light of the accelerating propagation of automation, AI, Big Data and autonomous vehicles that underpins the meteoric rise of tech firms, disappearing manufacturing jobs, worsening income inequality and the failing welfare state, UBI and NIT may be the most consensual bi-partisan economic policies in the coming years.   

6.Bibliographies

Friedman, Milton. 1962. Capitalism and Freedom. University of Chicago Press. 

Linke, Rebecca. (2018). Negative income tax, explained. MIT Slone School Management. Retrieved from: https://mitsloan.mit.edu/ideas-made-to-matter/negative-income-tax-explained

Bregman, Rutger. (2016). Utopia for Realists. Bloomsbury Publishing. 

Yang, Andrew. (2019). War on Normal People: The Truth About America’s Disappearing Jobs and Why Universal Basic Income Is Our Future. Hachette Books.  

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