During his presidential campaign, tech entrepreneur Andrew Yang has brought an old/new idea to the foreground of public policy: basic income. Yang’s “Freedom Dividend” is the most high-profile basic income proposal since Richard Nixon’s Family Assistance Plan.
But giving everyone in America $1,000 dollars a month isn’t the only way to fight poverty. As a matter of fact, it’s not the only way to give people cash.
The most common way we give working people cash in the United States is through the Earned Income Tax Credit. The Earned Income Tax Credit is a tax credit given to working people under a certain income threshold. The credit is limited to working people by increasing in generosity at the lower end of the income distribution, leveling off, then decreasing as people make more income. Below, you can see what an Earned Income Tax Credit could look like maxing out at $1,000 a month.
Figure 1: Earned Income Tax Credit Model
Currently, the federal government, 29 states, DC, Guam, and Puerto Rico all have versions of the Earned Income Tax Credit. Scioto Analysis conducted a cost-benefit analysis last summer on Ohio’s Earned Income Tax Credit and has analyzed recent Earned Income Tax Credit changes in the state of Ohio. As an antipoverty tax break that encourages work originally passed by a Democratic Congress and signed by a Republican President, the Earned Income Tax Credit has traditionally enjoyed bipartisan support.
Older than the Earned Income Tax Credit is guaranteed income, also known as a “negative income tax.” Famously trumpeted by Milton Friedman as a solution for administrative waste in the social welfare system in the United States, guaranteed income provides an “income floor” for low-income people then draws down as people make more money.
Figure 2: Guaranteed Income Model
Guaranteed income provides more support for people at the bottom of the income distribution than the earned income tax credit and does not pull people into the workforce the same way that the earned income tax credit does. A guaranteed income was proposed by Richard Nixon in the early 70s and even passed the House of Representatives but stalled in the Senate and never became law.
A newer proposal that turns the guaranteed income concept on its head is the “Universal Earned Income Tax Credit” proposed by Syracuse University Economist Leonard Burman. Rather than starting with a grant and then taking it away as income goes up, the Universal Earned Income Tax Credit gives cash as income goes up and never takes it away as incomes increase.
Figure 3: Universal Earned Income Tax Credit Model
The universal earned income tax credit would encourage low income people to work while supplementing their incomes and would not be very targeted, going to a lot of high-income people as well as low-income people. Nothing like the universal earned income tax credit has been implemented before.
Lastly, universal basic income. Universal basic income is a no-strings-attached, no phase-in, no phase-out cash transfer to all people. Universal basic income has picked up in the public policy conversation over the past few years fueled by both poverty advocates and Silicon Valley futurists worried about the future of work.
Figure 4: Universal Basic Income Model
Universal basic income has had pilots since the 1960s and is currently being tested in Finland and California. The most famous basic income in the world is probably the Alaska Permanent Fund, a fund financed by Alaskan oil revenues that makes direct payments to all Alaskans in the state, regardless of income.
Graphic from Business Standard
Another variation worth noting is a conditional cash transfer. Conditional cash transfers are usually targeted to geographic areas of need and are awarded on condition of completing socially beneficial activities such as school attendance, primary care screenings, and vaccinations. Since they usually do not interact with other income, they work much like a universal basic income in theory with an added incentive to carry out the conditions of the benefit. Conditional cash transfers are much more common in middle- and low-income countries and the Global South.
Giving $1,000 a year to every person is one way to do cash transfers, but it is hardly the only way. The earned income tax credit, guaranteed income, universal earned income tax credit, universal basic income, and conditional cash transfer approaches all have benefits and drawbacks. They all share one big benefit, though: providing families who need them cash to deal with the contingencies of life.