Universal Basic Income Explained

Budget planning concept,Accountant is calculating company's annual tax.
Pra-chid / Getty Images/iStockphoto

Universal basic income had a moment in 2019 and 2020, after Andrew Yang made it a centerpiece of his 2020 presidential election campaign, calling his version the “Freedom Dividend.” Today, with Americans — bolstered by stimulus checks and expanded tax credits — working to get their lives back on track as the U.S. emerges from a historic pandemic, the topic has become only more compelling — and to some, more controversial.

What Is Universal Basic Income?

Just as Social Security guarantees a fixed income to senior citizens and retirees, a UBI would guarantee a livable wage to every adult age 18 and up. Termed “Social Security for all” by some, Americans would receive direct monthly payments regardless of financial need.

The core idea — direct cash payments with no strings attached — has many variations. A UBI is, well, universal. But some argue for a more limited approach that only offers payments to those people who really need them.

Why Is UBI So Important Now?

People have been proposing some version of a UBI for hundreds of years. Thomas Paine was an advocate, and the idea was even popular among Republicans as recently as the early 1970s. Richard Nixon promoted a form of guaranteed income and won support from Donald Rumsfield and Dick Cheney in the process.

Make Your Money Work for You

Part of the driving force behind renewed interest in UBI stems from the current economy. Globalization has pushed manufacturing jobs overseas, and automation is continually replacing human workers. Driverless automobiles, for example, are likely to save tens of thousands of lives a year, but they’re also going to put some truck drivers out of work, Tesla founder Elon Musk told CNBC.

And it’s not just limited to blue-collar workers. Advances in artificial intelligence and machine learning mean that some white-collar professionals, like accountants and financial advisors, do work that could be replaced by a computer program.

As more and more reliable jobs paying decent salaries are replaced by low-wage, low-skill service work that rarely supplies a living wage, it’s clear that many Americans are being left behind by the current economy. That is no more apparent than in the pandemic’s effect on lower-income Americans, who were hardest hit by job loss and will be slowest to recover — if they ever do. UBI would be a way to counter the failure of the economy to provide for the working class in the way it used to.

Make Your Money Work for You

How Is UBI Distributed?

One of the most controversial aspects of the universal basic income is that people might get money for nothing.

The universal nature of a UBI means a lot of people who would get checks shouldn’t get them — multimillionaires or those able but unwilling to work, for example. However, the program would be easier and cheaper to implement absent an eligiblity-based application process, perhaps saving enough money on administration costs to more than make up for payments to people who otherwise might be excluded.

what is considered middle class

How Much Would Be Given?

Proposed payment amounts differ by plan but generally range from about $5,000 to $15,000 a year. The intent is to avoid discouraging people from working yet pay enough to cover their basic necessities.

What Would Be the Cost of UBI?

Simply put — a lot. Even UBI’s biggest proponents admit this would be enormously expensive. Yang’s plan, for instance, would have cost about $3 trillion a year — putting it about on par with projections for Medicare for All plans and increasing federal spending by about 73%.

Make Your Money Work for You

Who Would Pay for the UBI?

The American people, ultimately. Although the total price tag would be high any way you slice it, proponents suggest options for paying for the program that could reduce the tax burden on the average American.

Options for Reducing Tax Burden

  • Higher Taxes: A UBI would mean more taxes, but the monthly stipend would reduce the impact.
  • Less Spending: Although the sticker price of a UBI is very high, many advocates see it as a way of consolidating or eliminating Social Security, Medicare and government programs that support low-income Americans.
  • Economic Expansion: Republicans have argued for decades that tax cuts pay for themselves by stimulating the economy. The same principle would apply here, on a much larger scale.
  • Value-Added Tax: A value-added tax, which is is levied on an item at each part of the supply chain rather than on the end product alone, could raise a lot of revenue, especially if implemented at the same time consumers are receiving UBI payments.
  • Carbon Tax: A tax on carbon emissions would hit polluters the hardest while combating global warming and raising revenue to help fund a UBI.
  • Sovereign Wealth Funds: A sovereign wealth fund is a large, one-time, upfront investment in an endowment that would fund regular costs by way of its investment returns, thereby reducing the tax burden on future generations.
  • Closing Tax Loopholes: Ending any number of tax breaks, including the earned-income tax credit and mortgage interest deduction, might help fund the UBI — and in the process, produce a lot of additional revenue and simplify the tax code without changing broader tax rates.

What Are the Potential Advantages of a UBI?

Advocates of the UBI are quick to detail the various ways a universal basic income could address some of society’s most pressing issues. Although the program wouldn’t be a cure-all, it could have a variety of positive effects.

  • Ending Poverty: Just under one in ten Americans lived under the poverty level as of 2019, according to Census data. Considering that the current poverty rate is $12,880 for an individual, a $12,000-per-annum UBI would effectively end poverty as defined by the federal government.
  • Improving Wages: Guaranteeing that even the unemployed can meet their basic needs would empower working-class Americans to just say no to substandard wages. As a result, wages could climb — as they have in the current post-pandemic labor shortgage, as corporations make work more attractive to job seekers.
  • Breaking the Cycle of Poverty: Providing every adult with enough income to cover needs would incentivize grocery stores to set up shop in long-neglected neighborhoods. The same would likely be true for banks and other businesses crucial to building communities, helping neighborhoods with a high concentration of poverty begin to build basic economic opportunities and break the cycles that reinforce poverty generation after generation.
  • Creating a New Generation of Investors: Poverty makes investing — even in the form of a simple savings account — unavailable to a large section of the country. A UBI would not only make everyone a better consumer, but it would also make them better investors — helping grow the economy on both the supply side and the demand side simultaneously.

What Are Potential Disadvantages of a UBI?

Of course, with a program of this size — and one as radical in nature –, there are plenty of potential downsides that need to be carefully addressed before implementing a UBI.

  • Declining Labor Force Participation: Few fears loom as large as that of an unruly mass of people refusing to work because they’re getting something for nothing. It’s impossible to say just how different our economy and culture might be after a shift like this.
  • Runaway Inflation: In the event that everyone has more money to spend and starts spending it, businesses could respond by raising prices, resulting in widespread price increases and ultimately reducing the value of the UBI payment to the point that it no longer meets basic needs.
  • Excessive Cost: Budget hawks worry that debt resulting from too much government spending would crowd private investment out of the bond markets and weaken the economy in the process.
  • The Law of Unintended Consequences: It’s difficult to forecast what the biggest problems with a UBI would even be. A program that would so fundamentally change the economy and people’s relationship with the government likely would have consequences that can’t fully be anticipated.

Is a UBI Already in Effect?

The potential benefits and downsides aren’t completely hypothetical. When Nixon flirted with the idea in the 1970s, he launched a pilot program in a few American cities to see what would happen. In each case, the massive decline in labor force some hypothesized didn’t materialize. There was a small decline in labor force participation, but it was driven by teenagers from low-income households who could now focus on their education or future career instead of low-wage work to help mom and dad cover the rent.

Good To Know

Several states, including New York, California, and Virginia have pilot UBI programs in limited location. New York’s privately funded program is sending $500 per month, every month for a year, to Ulster County residents earning less than $46,900 per year, according to NBC4.com.

Some are calling the pandemic-relief stimulus payments and expanded child tax credit experiments in UBI. Americans have received $3,200 in stimulus checks so far. The expanded child tax credit is worth $3,000 to $3,600 per child, half of which is being paid out in six monthly installments.

There’s no question that these benefits have kept millions of Americans out of poverty for the time being. Whether they’ve also provided a disincentive to work remains to be seen.

Interesting To Note

Finland and Canada both have experimented with universal basic income. Canada’s “Mincome” experiment from the 1970s seemed to indicate that concerns about large sections of the population falling into sloth and idleness are mostly unfounded. Finland’s 2017 experiment found no difference in the number of days worked, New Scientist reported.

If a UBI Happens, Will It Work?

Unfortunately, there’s no good answer. As with many big policy ideas, the universal basic income currently exists entirely in the hypothetical because there’s no instance where UBI has been formally implemented on a mass scale. But the basic ideas at its core seem to have excited many people interested in building a fairer society, so you’re likely to be hearing more about the plan — whether or not it ever comes to fruition.

Daria Uhlig contributed to the reporting for this article.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Joel Anderson is a business and finance writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and focuses on helping make complex financial concepts digestible for the retail investor.

Best Bank Accounts of May 2022

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Loading...
Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.