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September 19, 2013

BOHANON: The impulse to distribute wealth

(Continued)

There is one good aspect of a universal benefits that the McGovern’s scheme illustrates well: The poor don’t lose the benefit if they earn more income. This is redeeming because it imposes no direct penalty to work effort. Translated into 2013 dollars the $1,000 per person universal grant is around $5,600.

Under the plan, a family of four would receive a guaranteed income of about $22,400. Any additional income earned in the household does nothing to reduce the government grant amount in any way. All four-person households get $22,400 as base income — and they don’t lose a penny of it if they earn millions of dollars.

But like the fuel subsidies, such a program is incredibly costly. A back-of the envelope calculation shows that the U.S. Treasury would pay out around $1.8 trillion if the proposal were in place in 2014. That is over 10 percent of projected 2014 GDP, 60 percent of all projected federal revenues for 2014 and 128 percent of projected federal personal income tax revenue for 2014. To finance a $5,600 universal per-person guaranteed minimum income would require a doubling of everybody’s federal income tax rates. This would introduce major disincentives to work.

Of course, part of this McGovern-like income scheme could be financed by reductions in other government programs designed to help the poor. I suspect the shrinkage these other programs would be much less than necessary to avoid large tax increases. I bet there would be a hew and cry to hire an army of social workers to help the poor manage their newly found minimum income.

But again, the gut reaction to a universal guaranteed minimum income is that it makes no sense. Why tax Mr. Average Joe citizen just to give him his money back? If public policy is supposed to help the poor, why issue annual checks to millionaires? Why not tailor the benefit to the poor?

So the good point about universal transfers is they can be designed to generate minimal disincentive effects — you don’t lose them when you earn. The bad point is that their expense is ghastly — requiring tax rates that would inevitably crush incentives to produce.

Cecil Bohanon, Ph.D., an adjunct scholar with the Indiana Policy Review Foundation, is a professor of economics at Ball State University.

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