As much focus as there is on the why of a basic income model such as Universal Basic Income (UBI) (examples here, and further reading here), advocacy efforts also need to address the how of implementing the program. Four critical ‘how’ questions are:
- How much does it cost?
- How are we going to pay for it?
- How do we institute a no harm UBI so that beneficiaries currently relying on social safety net programs are not net worse off?
- How do we structure a UBI program where we meet everyone’s basic needs, but it still pays to work?
This post is mainly going to address the accounting methodology of question 1 and will lean heavily on the US context for its examples – but the cost estimation methodology will apply in most country contexts.
Some of the defining critiques of the UBI model involve its cost, with figures quoted at US$3 trillion per year, and at a cost of 20-35% of GDP. However, these critiques use a faulty cost calculation whereby the cost is the UBI amount given to each individual multiplied by the size of the population. In the $3 trillion/year example, this would equate to a $10,000 UBI multiplied by the US population (300 million).
However, UBI as a redistributive program is quite unique to other entitlement programs in that some recipients of UBI are simultaneously contributors to the UBI funding pool via their taxes. In order to meaningfully arrive at a cost estimate for UBI, the methodology must consider the positive tax contributions of those recipients in order to arrive at the net cost.
“Here’s a simple example: imagine a room with 15 people who want to set up a UBI for the room of $2 per person. The upfront cost of the policy would be $30. The ten richest people in the room are asked to contribute $3 each towards funding it. After they each put in $3, raising the total $30 needed, every person in the room gets their $2 universal basic income. But because the ten richest people in the room contributed $3, and then got $2 back as the UBI, their real, net contribution is in fact $1 each. So the real cost of the UBI is $10.”
The upfront or gross cost in Fouksman’s example is reduced by a third.
Widerquist models a ‘back-of-the-envelope’ estimate of a UBI program set at the official US poverty line of $12,000 per adult and $6,000 per child with a 50% marginal tax rate (page 6). His estimate, after netting out the contributions of richer UBI recipients, lands at $539 billion per year, which is about 1/6th of the gross cost of $3T, and constitutes about 2.95% of GDP.
Methodology discussion – the salient points
The key to gaining true insight into the cost of UBI is to distinguish between gross upfront cost and the real net cost. Again, Fouksman outlines it best. This net-cost concept is fundamentally important to understand, because most other transfer payments are designed to flow to those who do not contribute into it. Fouksman highlights a fundamental blind spot with most gross UBI calculations – those who pay for UBI through their taxes, will also receive a UBI – negating some of the cost of contributing to UBI in the first place.
Another angle with which to examine the true cost of UBI: although a UBI will be paid out to all members in society – because the rich have already paid for their share of UBI via their taxes, their payouts need not be included in the UBI cost estimate.
Widerquist presents yet another way to understand the accounting: “UBI involves a very large amount of taking money from and giving back to the same people at the same time in the same form. If you don’t account for all this taking-and-giving-back, you can’t get a realistic assessment of how much UBI costs or of the distributive benefits and burdens it involves.”
From this we can begin to understand when one is a net beneficiary, when one is a net contributor, and the rate at which people gradually switch over from beneficiary status to contributor status as their incomes improve.
Outcomes of understanding the UBI net-cost estimation methodology
Current UBI cost estimations are grossly overstated and misleading, and do not contribute meaningfully to the debate on why and how UBI could be implemented. In Widerquist’s poverty-level UBI example, such a program in the US would cost $539 billion per year, which is just 25% of current US entitlement spending and approximately of 2.95% of GDP.
Understanding the net cost of a UBI is very significant in advancing the policy discussion around whether or not basic income schemes should be universal.
Under a UBI scheme, every member of society should expect a regular income, irrespective of their existing wealth or work status. This would mean billionaires such as Jeff Bezos and Bill Gates would receive a basic income – a concept that at first glance seems obscene.
Since learning more about this topic four years ago, I knew that I broadly supported a UBI due to its inclusiveness, and the reduction in stigma of receiving government support (due to the universal nature of the payment). What I didn’t know was how I felt about the wealthy also receiving the guaranteed income. What I personally hadn’t considered was the differentiation between a net beneficiary of UBI and a net contributor. I hope that knowledge of the net cost of UBI better circulates in public debate, as well as the knowledge that we can afford it, should we choose to.