What is the difference between targeting and universalism?
Tax churn. Or so I will suggest.
There are two basic ways to improve the economic position of disadvantaged Americans using the income tax system. The first approach, targeting, uses refundable tax credits to put more money in the hands of lower-income households. Subsidies decrease for households with higher earnings. The second approach is to use a Universal Basic Income, which gives refundable tax credits to everyone, regardless of income.
The idea of a UBI is growing in popularity, but there is a good deal of confusion about the differences between targeted tax credits and a UBI. I think the confusion is at least partly due to the fact that phasing out a tax credit as income rises looks suspiciously like giving a payment to everyone and then funding it through a tax on income.
In this post I will argue that
- Universalism = targeting + tax churn
- Tax churn has political and economic costs
The easiest way to see this is by looking at a very simple example.
Imagine an economy with two types of jobs, low skill jobs paying $10k, and high skill jobs paying $100k. Suppose that half the population is high skill, and half is low skill.
The income tax initially is a flat tax with a marginal tax rate of 20% and a personal exemption of 20k. This means that low skill workers pay no income tax, and high skill workers pay tax of 16k (20% of the 80k they earn in excess of the personal exemption). The government collects 8k in revenue per person (it collects 16k from each high income person, which is 8k per person because half of the population is low income). This money is spent on public goods.
Now assume we want to help low income workers. Let’s compare a targeted approach to a Universal Basic Income.
Let’s start with the targeted approach. Suppose we give each low income person a refundable tax credit of 10k. This tax credit counts as part of their taxable income, so the pre-tax income of low income people is now 20k (10k earned, 10k in a refundable tax credit). None of this is subject to tax, however, because the exemption amount is 20k. (If the tax credit pushed low-income workers over the exemption amount, then they would be subject to income taxation, and they might be discouraged (somewhat) from working, but that is not the issue I want to focus on here.)
The government needs to continue to collect revenue of 8k per person to cover existing spending priorities, and it needs to collect additional revenue to pay for the new targeted tax credit. Clearly, the income tax rate needs to be increased, but how far? Well, the income tax will need to collect 16k from each high income person to cover existing spending plus 10k to cover the cost of the tax credit. (Because there are equal numbers of high and low income people, each high income person needs to cover the cost of one tax credit.) This means the tax rate on income needs to rise to 32.5% (we need to collect 26k from each high income person, on 80k in taxable income: 26/80 = 32.5%).
Now suppose that instead of a tax credit targeted to low income people, we implement a Universal Basic Income. This means that everyone gets 10k, even high income people. To pay for this, the taxes of each high income person need to go up by 10k, to 36k. The tax rate needs to rise to 45% (36/80 = 45%).
The after-tax position of high and low income people are the same under these two tax programs. Low income people have 20k (10k earnings plus 10k tax subsidy), high income people have 74k (100k earnings less 26k in tax payments with targeting, 100k income plus 10k tax subsidy less 36k tax with universalism).
The important lesson here is that extending the targeted tax credit to high income people results in pure tax churn. We give high income people a tax credit and then turn around and increase their income taxes by exactly that amount to keep the government’s budget in balance. In other words, in this simple model, a UBI is equivalent to a tax credit targeted to low income people coupled with pure tax churn for high income earners.
The economic costs of tax churn
Tax churn is harmless (and also pointless) in this model, but in the real world giving people money and then raising their taxes results in efficiency losses. And the efficiency losses from a UBI would be substantial, because the amount of money that would need to be raised to implement a generous UBI (which is needed to ensure a decent standard of living for low income people) would be enormous. For some rough numbers, see Hoynes and Rothstein here.
The political cost of tax churn
Universalism is often thought to have political benefits, and this may well be true if we focus only on the benefit side of the equation. But taking taxes into consideration cuts the other way. In the models I described above, the net redistribution is the same, but the nominal tax rate is much higher under a UBI. To the extent that people suffer from “tax illusion”, or “nominal tax aversion”, this suggests that targeting has a potential political benefit.
There are lots of complications I am glossing over here. Universalism is simpler to administer than targeting and it avoids clawback problems. (However, I suggested that these problems with targeting can largely be avoided through better program design.) Some people really do have special needs, which again argues for some degree of targeting. A patchwork system of targeting can lead to both low participation rates and high marginal tax rates on the disadvantaged who do participate.
I was prompted to write this by a few posts on targeting and universalism that I found confusing: initially this post Scott Alexander, and more recently by Matt Breunig (here, here). Scott Sumner responds to Alexander, and I think he’s making a point similar to mine, but I’m not sure. I wrote down this simple example to clarify my own thinking and figured I would share it.
A good website for UBI studies:
Anybody ever heard of resetting the power balance between ownership and labor — establishing, say, 50% labor union density overnight — and it wouldn’t cost the Treasury a penny?
Regularly scheduled union cert/recert/decert elections at every non-government workplace would result in a world where just about every legislative issue worked out in the average person’s favor. 50% of private workers want a union — 6.2% (and still going down) have a union. Maybe a lot more would want a union if they ever heard of unions (a hard to find the species in large parts of this country).
Nobody denies that the union certification vote is being routinely and brutally suppressed in the USA — not just shaved but completely lopped off . Only way to deal with that that I have ever seen is SEIU attorney Andrew Strom’s regularly scheduled union elections proposal. When is the world going to pick up on this? ???
PS. This IS on topic for this discussion (and almost every other). It is called cutting the Gordian knot — resetting (all) the power balance(s) in the average person’s favor.
I’m skeptical that labor reform is an effective short term fix for what ails us, and the long term benefits seem pretty far off and uncertain. How long would it take unions to recover in a more favorable legal environment? It could take decades, it might never happen. And anyway, we can’t even get simple reforms passed. That’s why I tend to focus on policies that we can implement now and have some idea of what will happen if we pass them – like a child allowance. At least poor kids will have more to eat and their parents will be less stressed, which seems great to me. Labor law reform is a good idea, and there are some pretty interesting proposals out there, but it’s a tough road and I wouldn’t want to put all my eggs in that basket.
Let’s start by blocking out some kind of proportion of people being stripped because they lack unions. About 40% of American workers earn $15 an hour or less. (You do understand that SEIU’s Andrew Strom’s proposal was mandatory cert/recert/decert elections on a regularly scheduled basis.)
What I estimate the those salaries can be raised — doubled! — by is based strictly on what the consumer is willing to shell out for their labor. Most firms run labor costs of 10-15%. Double labor costs at, say, Walgreen’s or Target’s and prices only go up 12.5%. Let’s presume 12.5% loss of business — labor is way ahead. 40% of labor force are now consumers with twice to spend — lost business comes right back, to some point anyway. Pure free market solution, you notice.
50% of workers say they want unions now — in an economy where unions are all but invisible (6.2% and going down in private economy). As the idea of unions becomes an everyday experience once again, the demand for same will only grow (half the workers I try to talk to about unions have no idea what I’m talking about). Plain and simple: workers should just have right to be organize just because they feel like it, whether it is good for them or not.
50% unionized would make the political system work a lot better for us.
Strom’s proposal would be the hottest pro-Democrat party issue in decades.
If my response is off topic (not), why don’t we have a regular discussion about the possibility of mandatory cert/recert/decert elections at every private workplace? We don’t have to wait for someone else to start it up. If the topic were already out there it would be one of our hottest topics (ditto for the whole country). We don’t have to wait for someone else if the idea shows promise (of being the silver bullet that it is).
I think “Universalism” is generally thought of in an absolute sense (everyone, always, receives 1000$ more) rather than a relative sense (everyone, always, has *access* to this basic income when their own is not enough).
“Relative” universalism is achieved in the sense that nobody has to test for something or got to be “targeted”. The “targeting” is automatically achieved by the income tax system, no bureaucrats needed.
I really think we ought to treat universalism this way because otherwise, many (weak) arguments can be made about its inefficiency. Arguments that seem to vanish as soon as we talk about relative universalism.
The ultimate result is the same for people who need it. And then, this income is gradually withdrawn through the tax system. So there’s way less tax churn as is mentioned in the article. And, all of sudden, the cost optics aren’t so bad anymore…
As reference I suggest these two articles :
https://atlaspragmatica.com/ubi/ (particularly the conclusion for an implementation example)
https://usbig.net/papers/BackOfTheEnvelope–4Posting–2017Jun.pdf (for a rebuttal of the absolute cost kind of thinking)
I’d be delighted to hear (read) from you all on these articles and their propositions.
I took a quick look at the “back of the envelope” paper, and I *think* (because I only scanned) that the paper just looks at net redistribution and ignores the magnitude/cost of tax churn. This is a big problem for a real UBI, which would require much higher gross taxes and/or elimination of existing transfer programs. The Hoynes/Rothstein paper discusses some of these issues.
Thanks for having a look !
If I may : I think the first link  is more representative of the “relative” part I was talking about and has the merit of actually laying down a plan for a gradual introduction of a UBI in England while only marginally altering the actual effective tax rates.
It assumes cuts, yes, to actual “redundant” programs such as employment insurance (if my memory serves me right) but, in a way, why wouldn’t there be cuts? Special needs programs which are not redundant should absolutely stay as these are after all “special”.
Ultimately, it seems to me that leaving the fulfillment of our most basic needs to the (labor) market makes for an economic life rife with distortions, exploitation, silent coercion and great disparities. As such, UBI or not, it again seems to me that we, as productively advanced as we are now, should begin to think about a way of assuring that none of us shall be indigent or stigmatized for not being of a good enough exchange value on the labor markets.
I’ll have a look at the cited paper. Thank you for the pointer !
 : https://atlaspragmatica.com/ubi/#conclusion
Interesting site, Peoples Policy Project. Read the article. Have to read it again. Maybe it is a given? The number chosen is representative of the actual needs of a child. I am never to sure of these numbers and I always look for a basis for them.
Off Topic example. First, I cost model parts in manufacturing looking at Labor, Materials, and Overhead costs, Profit, etc. The idea is what is the basis for the price demanded by the seller. The basis can vary by location. The thought behind this is to know what a good price is and also to establish what is valuable to me. Maybe I give a little on price to have them hold finished goods or raw material or set an amount of capacity for me.
I guess what I would wonder about Child Credits or Direct Monthly Subsidies is the cost to exist. Another wayward point. Do we really know what healthcare costs? It is eating up 18% of the economy right now. Not long ago, the drug Rituxan experienced a price increase of 18% because they found a new use for an older drug. The ICER which evaluates pricing, rejected the pricing increase because the information provided by the manufacturer (Biogen) did not support such an increase. The 18-25% increase was too high.
Does either of these two points relate to whether people of a certain income bracket directly apply to subsidizing their income. No, however, I like to have a basis in which to determine what is needed as it blows away the Manchin argument of the poor riding around in their automobile cashing checks while he floats on some boat on a lake in West Virginia.
In the end, it more than likely costs us more not to provide a subsidy for children as the alternatives are healthcare costs, less educated population in a rapidly changing world, a place in prison at ~$40,000 per year.
“Fifty percent of those sentenced to prison are sentenced five to 15 years. Low-income and minority populations, make up roughly three-fifths and two-thirds of the prison population. The root causes of mass incarceration are poverty and over-criminalization.” As the linked article implies poverty “may” lead to substance abuse. Drug offenders are one of the leading reasons of incarcerations as well as homelessness, child support, paying fines, over charging, etc.
I would love to have a conversation with Manchin. I did catch Stabenow at a Garden Party in Michigan and asked about student loans while some younger people clapped. I caught Durbin at Showdown in Chicago afterwards and after his speech to participants protesting the ABA.
All of this implies a basis for doing something to stymie the greater and resulting costs of poverty. About 2040-something white America will begin its descend into being a minority. It is best to do something now to improve our relationship with the rest of the nation.
We do need to understand why, beyond the superficial price of a subsidy.
I don’t have any special insight into Manchin’s thinking, but my guess would be that he is worried that giving money to people who don’t work will reduce labor supply. This is a standard argument for work requirements (except for the retired and disabled). I explicitly ignore this question to focus on the tax churn point. The question of what to do for working age people who could work but do not is really a hard question. Even committed social democrats like Lane Kenworthy acknowledge this. Of course, Kenworth thinks we should do more than we are currently doing. I agree, but we need to figure out how to bring along people like Manchin. His view isn’t fringe. And total cost (interpreted as gross taxes) matters to people like Manchin, and targeting lowers gross taxes. I think Breunig is smart and quite interesting. I’ve cited his work before and I agree with a lot of what he says, but have doubts about his views on targeting. It seems to me that he is ignoring financing costs, but it’s possible I don’t understand his position.
I do not recall addressing people getting a job. I did address the costs associated with just existing. That subsidy allows single parents and parents to afford daycare, healthcare, etc. As far as Kenworthy and Manchin, they can afford such opinions because they are affluent. Old study, “50 percent of the more affluent people polled believed that the poor were not doing enough to help themselves.” Well good for them. Are the workhouses still in existance?
Aren’t “we” addressing low-income people? People who are working and do not make enough to afford buying healthcare insurance, typically go to ERs, and do not have primary care doctors? In the neighborhoods they live, there are more fast food places than there are Krogers, Meijers, Frys, Safeways, etc. Kenworthy, Manchin, and “Come On Man, get a job Biden,” etc. are higher in the income range and can afford to have an opinion about what other people should be doing.
I did address the costs of not addressing the issues. My experience with prisons and the make up of people there far exceeds anyone on this site. The same holds true for the court systems.
How can one address what is needed if they do not understand the costs?
I just notice that the tax rate on high income people would have to be 40% if the UBI is included in taxable income, not 45%. (36k raised in revenue, 90k in taxable income; 36/90 = 40%.) Nothing else changes.