As Finland’s experiment with a universal basic income comes to an end, it’s worth pondering why the idea captivates so many on both Right and Left. It’s difficult for me to speak for those groups, I fear they think it has something to do with sticking it to The Man. I can only tell you why the idea appeals to hard-core classical liberals (similar to libertarians) like myself.
It’s the Laffer Curve.
Yes, I know, it’s a much-derided idea. If you tax the rich too much, they’ll all go fishing instead of conquering the universe – what a silly thought, eh? Yet objective observation of the world tells us it’s true: If you tax people enough, they really will stop working.
There are two parts to this, the income and substitution effects. If taxes change, some will work harder. They’ve got an idea of the net income they need or want and they’ll work until they get it and only then quit working. Take some of that money off them with taxes, and they’ll work more hours to hit their target. Detailed studies of taxi drivers have shown that many do think this way – they’ll work until they’ve made their daily nut, then off home they go.
The substitution effect works the other way. Say that fishing is worth $10 an hour to me, and I enjoy it that much. If I’m paid $15 an hour, then I’ll work. If I’m paid $15 an hour with a 40 percent tax rate, then I’ll go fishing because that’s worth more to me.
Reality is that we all work to both effects at some time or another, one will predominate at one time or another. Almost no one works entirely to only one effect.
The Laffer Curve is just the interplay of the two. When will enough people go fishing in the face of a tax rise so that revenue falls? The best observations we’ve got say when taxes are in the 50-60 percent level, some people stop working. One famed paper claims the right number is 54 percent for taxes upon incomes, including employer-paid taxes on labor like Medicaid/care supplements and so on. That’s a touch higher than the federal tax system today, a touch lower than that added to certain state taxation systems.
Note what we’ve not said here, that this only applies to rich people. In fact, it applies to all of us. Sure, poorer people are more likely to be influenced by the income effect, but that’s a tendency, nothing like a certainty. As is noted over in The Hill:
Detailed numbers for the U.S. aren’t really available, but they are for the U.K. When we combine taxes and benefits withdrawal, some 3 million (out of 30 million workers) face tax rates of more than 60 percent, hundreds of thousands above 80 percent and some tens of thousands above 100 percent.
And that’s the argument for a universal basic income: The Laffer Curve. The UBI is universal, everyone gets it, it isn’t withdrawn as incomes rise, therefore marginal tax rates are lower. Fewer people bunk off to go fishing, because the Laffer Curve is also universal, not just for rich people.
Sadly, as Finland has just shown, the people who do the paying, us as taxpayers, tend not to like unconditional benefits. It just smacks too, too, much of something for nothing going to ingrates. Thus, not for the first and not the last time, good economics (making us all richer with lower marginal tax rates) falls given the realities of democratic politics.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
