(Bloomberg) – If something sounds too good to be true, it probably is.
That adage comes to mind when discussing universal basic income—that is, cutting a check of the same amount to all citizens, regardless of earned income—the kind of initiative that Switzerland will be voting on in two weeks.
That’s right: Every adult Swiss citizen, even the multimillionaires who sport Breguet watches, could potentially receive an equal monthly payment from the government.
Proponents of universal basic income argue that giving citizens money directly is an effective poverty-relief measure, can improve incentives to work, and offers a way to streamline a plethora of government-administered, income-support programs, all while removing the stigma associated with receiving them. Theoretically, such a plan could get support from a broad array of politicians, regardless of political affiliation.
Such reasoning, however, can run into serious economic and popular political headwinds, as illustrated by a poll last month suggesting Swiss voters will soundly reject the measure.
In a presentation to the Canadian Association for Business Economics, University of British Columbia Professor Kevin Milligan explained why it’s unlikely that any basic income initiative will receive that level of support or accomplish all of its professed goals. Any such plan will involve trade-offs that should prove distasteful to either the left or the right, if not both.
Milligan noted that in these discussions, it’s important to distinguish between universal basic income and minimum income guarantees.
Under the latter system, there would be a phase-out threshold whereby those who earned in excess of a certain amount wouldn’t receive any income supplement. For instance, under a 100 percent phase-out rate set at $25,000 a year, an unemployed individual would receive $25,000, a person earning $15,000 would get $10,000, and anyone making $25,000 or more wouldn’t get a penny. Canada’s province of Ontario, for instance, plans to pursue a minimum income guarantee pilot program in a select community.
No basic income initiative needs to be that black and white, however; such a system could be designed so that the size of the cash payment decreases gradually as earned income exceeds select thresholds, in the same fashion as marginal rates increase under a progressive tax system. For example, an individual making nothing might receive $25,000, someone earning $25,000 a year might receive an additional $15,000 as an income supplement, and a person who makes in excess of $50,000 might receive $5,000.
The three critical features to take into account when designing a basic income initiative are this phase-out rate, the size of the payout, and the cost of income assistance programs. Therein lies the “impossible trinity” of basic income, as outlined by Milligan: