““PROFESSOR’S TEASER Here is an interesting teaser from Harvard economics professor Greg Mankiw, in a blog post entitled ‘A quick note on a universal basic income’.25 Consider an economy in which average income is $50,000 but with much income inequality. To provide a social safety net, two possible policies are proposed. Which would you prefer? — A universal transfer of $10,000 to every person, financed by a 20-percent flat tax on income. — A means-tested transfer of $10,000. The full amount goes to someone without any income. The transfer is then phased out: You lose 20 cents of it for every dollar of income you earn. These transfers are financed by a tax of 20 percent on income above $50,000. I have seen smart people argue as follows: Policy A is crazy. Why should Bill Gates get a government transfer? He doesn’t need it, and we would need to raise more taxes to pay for it. Policy B is more progressive. It targets the transfer to those who really need it, and the transfer is financed by a smaller tax increase levied only on those with above-average incomes. But here is the rub. The two policies are equivalent. If you look at the net payment (taxes less transfers), everyone is exactly the same under the two plans. The difference is only a matter of framing. The professor’s argument is logically sound, although in practice the two policies are not equivalent. Means testing necessarily involves administrative costs for the state, and personal costs for the claimants, that reduce the value of any payment below its nominal value. Means-tested benefits are also uncertain and unstable, because the earned income on which they are based is uncertain and unstable. So, while the exchequer cost of the two policies may be equivalent, the value to recipients is not. All the more reason to go for the non-means-tested universal payment and claw it back from higher earners through the tax system.””
