Monday, 13 January 2014

Guaranteed Minimum Income

TANSTAAFL applies, as always.

Matt Zwolinski makes the libertarian case for a guaranteed annual income over at the BHL blog. It's not a bad case. Here's Matt:
The first of these posts elaborated on the (quasi-Nozickian) argument that a BIG could serve as a kind of rough-and-ready compensation for past injustice. David Friedman and David Henderson both took issue with this argument as I articulated it in my original essay. But I’m not convinced. The federal government was directly responsible and/or culpably complicit in the commission of a long series of gross injustices, and many currently existing Americans continue to suffer the effects of those injustices. The government owes those who were harmed by its wrongdoing some form of redress, and I think there are plausible grounds for using a BIG to make that redress. I haven’t seen any published responses to this essay yet, but I’d be interested in talking more about the issues of historical redress, collective responsibility, and second-best theory that it raises.
My second post tried to explain why Friedrich Hayek supported a basic income. Or, perhaps more accurately, it tried to develop an argument based on Hayekian considerations. It’s not an argument that Hayek actually made. But it’s an argument that’s rooted in the quasi-republican account of freedom and coercion that he developed in The Constitution of Libertyand I think it’s an argument he probably would have endorsed. Essentially, the argument is that a basic income is necessary to keep people out of the kind of poverty that could render them vulnerable to coercion by employers and others with economic power. I’m sure a lot of libertarians will bristle at the notions of “coercion” and “freedom” employed in the argument, but I think that there’s a lot to be said on their behalf, and that they’re worth taking seriously.
He also has a great links roundup of others' commentary; David Friedman's critique is particularly good.

The basic problem with guaranteed income schemes is that they cannot really replace the welfare state. It would be great if they could, because we could then do away with a whole pile of messiness around really high effective marginal tax rates when abatement starts kicking in on a bunch of means-tested policies, and a whole pile of transactions costs around assessing eligibility for different benefits.

Think of it this way. Imagine the level of support currently granted to somebody who's really badly off: a bunch of disability-related benefits, income support, child-related support, housing support and the like. The total value of that bundle is going to be large. If you set up a GAI to make sure this person is no worse off, the average and marginal tax rates needed to support paying everybody that amount would be crippling. If you instead set up a GAI to pay everybody a basic income and have other support schemes on top of that for those with particular needs, you keep much of the current welfare apparatus but add in the substantial hit to marginal tax rates of giving everybody the GAI payment.

I don't think the basic math's changed much since I wrote about it in 2011; Treasury had then reckoned we'd need a flat personal tax rate of between 50% and 56% to make it work. Again, we're faced with Milligan's Impossibility: In any GAI, you can only pick two of the following three:

  1. low tax rate
  2. high benefit
  3. balanced budget

The University of Manitoba's Evelyn Forget has done some nice work on a guaranteed minimum income scheme trialed in Dauphin a few decades ago. Straight cash transfers to people in Dauphin from people mostly outside of Dauphin did a lot of good for a lot of people in Dauphin. I wonder what it would have looked like if Dauphin's higher income earners and businesses had to cover the programme's costs.


  1. I'm not sure that the guaranteed income needs to be set at the level of the biggest benefit package currently granted in order to ensure that the recipient is no worse off. A guaranteed income would presumably reduce the supply of labour, increasing its price, so that the previous recipient of a benefit larger than the new guaranteed income would have more and higher-paying job opportunities. I suppose the price of goods and services might consequently rise, offsetting the gains from higher wages, but this rise should be limited by the possibility of importing foreign goods whose prices haven't changed.

    Of course, this reduction in labour supply might be bad for the chances of funding the guaranteed income via income taxes, but funding it via the rents derived from the unimproved value of land might be more feasible.

  2. If shifting to Georgist land taxation makes sense, doesn't it make sense independently of whether there's a guaranteed basic income? Arguments on that usually set out the efficiency case for land taxes over income taxes, predicated on an offsetting drop in the inefficient tax. Maybe if you flipped entirely to land tax plus a progressive consumption tax you could eek out a few efficiencies relative to the NZ status quo, but I'd be pretty surprised if it were sufficient to cover a GAI without pretty substantial hikes in overall taxes. And while the Georgist land taxes are more efficient than income taxes, it's the average total tax burden that's going to affect a pretty important extensive margin here: whether migrants want to move to NZ and whether locals decide to emigrate. So a move to a Georgist system combined with a GAI that substantially increases the net total tax burden on folks towards the upper end could wind up being a bit nasty.