What Is Universal Basic Income (UBI), and How Does It Work?

Universal Basic Income (UBI)

Investopedia / Sydney Saporito

What Is Universal Basic Income (UBI)?

Universal basic income (UBI) is a government program in which every adult citizen receives a set amount of money regularly. The goals of a basic income system are to alleviate poverty and replace other need-based social programs that potentially require greater bureaucratic involvement. The idea of universal basic income has gained momentum in the U.S. as automation increasingly replaces workers in manufacturing and other sectors of the economy.

Key Takeaways

  • The idea of providing a regular, guaranteed payment to citizens, regardless of need, has been around for centuries.
  • Democratic presidential candidate Andrew Yang made universal basic income a key pillar of his 2020 campaign, which helped shine a national spotlight on the issue.
  • UBI proposals vary in size, although Yang’s plan would give every American adult $1,000 per month from the federal government.
  • One of the core criticisms of basic income is the cost, with some plans representing more than half of the entire federal budget. 

Understanding Universal Basic Income (UBI)

The idea of providing a basic income to all members of society goes back centuries. The 16th century English philosopher and statesman Thomas More mentions the idea in his best-known work, Utopia.

Thomas Paine, a pamphleteer whose ideas helped spur the American Revolution, proposed a tax plan in which revenues would provide a stream of government income “to every person, rich or poor.”

And Martin Luther King, Jr., proposed “guaranteed income” in his book Where Do We Go from Here: Chaos or Community? published in 1967.

While the federal government provides financial support for low-income Americans through the earned income tax credit (EIC), Temporary Assistance for Needy Families (TANF), and other programs, a system of universal income has never taken hold in the United States.

However, the concept has risen to the national consciousness in recent years. Much of this renewed interest has to do with fundamental changes to the economy—namely, the growth of automation—that threatens to leave many Americans without jobs that pay a subsistence wage.

The American Rescue Plan, signed by President Biden on March 11, 2021, includes generous tax breaks to low- and moderate-income people. For 2021 only, the size of the earned-income tax credit will increase for childless households. The maximum credit amount for childless people increases to $1,502, from $543. The age range has also been expanded. People without children will be able to claim the credit beginning at age 19, instead of 25, except certain full-time students (students between 19 and 24 with at least half a full-time course load are ineligible). The upper age limit, 65, will be eliminated. For single filers, the phaseout percentage (for the credit) is increased to 15.3% and phaseout amounts are increased to $11,610 (the maximum earned income).

A 2019 report by the Brookings Institution, for example, found that one-quarter of all U.S. jobs are susceptible to automation. The researchers argue that roles involving more routine tasks, such as those in manufacturing, transportation, office administration, and food preparation, are most vulnerable.

Supporters of universal basic income believe a guaranteed payment from the government can help ensure that those who are left behind by this economic transformation avoid poverty. Even if government-sourced income isn’t enough to live on, it could theoretically supplement the income from the lower-wage or part-time jobs they are still able to obtain.

Proponents also believe that a universal payment system would make it easier for people to receive assistance who are in need but have trouble qualifying for other government programs. Some Americans seeking disability insurance payments, for example, may lack access to the healthcare system, thereby hindering their ability to verify their impediment.

Political Support for UBI

Many of UBI’s supporters come from the more liberal end of the political spectrum, including former Labor Secretary Robert Reich and past head of the influential Service Employees International Union, Andy Stern.

However, support for a government-supplied income stream has been endorsed by several prominent figures on the right as well.

Among them is the late conservative economist Milton Friedman, who suggested that private charitable contributions aren’t enough to alleviate the financial strain many Americans endure.

In 1962’s Capitalism and Freedom, he argued that a “negative income tax”—essentially a UBI—would help overcome a mindset where citizens aren’t inclined to make sacrifices if they don’t believe others will follow suit. “We might all of us be willing to contribute to the relief of poverty, provided everyone else did,” he wrote.

Libertarian philosopher Charles Murray believes that guaranteed income would also cut government bureaucracy. He has proposed a $10,000-per-year UBI, as well as basic health insurance, which he says would allow the government to cut Social Security and other redistribution programs.

Momentum for UBI

Universal basic income received considerable attention during the first stage of the 2020 presidential campaign after entrepreneur and former Democratic candidate Andrew Yang made the idea a cornerstone of his campaign. Yang’s “Freedom Dividend,” as he called it, would give every American over the age of 18 a $1,000 check every month. Those enrolled in federal assistance programs could continue to receive those payments or opt for the Freedom Dividend instead.

Yang contended that the labor force participation rate—that is, the percentage of Americans who were working or looking for work—was at its lowest in decades. “The Freedom Dividend would provide money to cover the basics for Americans while enabling us to look for a better job, start our own business, go back to school, take care of our loved ones or work towards our next opportunity,” his campaign website noted.

Former presidential candidate Andrew Yang’s $1,000-a-month "Freedom Dividend" would cost roughly 50% of the federal government’s projected budget for 2021.

President Biden's American Rescue Plan, signed on March 11, 2021, was a $1.9 trillion pandemic relief package. Its benefits included another round of stimulus payments for every qualified adult in the U.S. This time, the stimulus payments will be in the amount of $1,400 for most recipients. Eligible taxpayers will also receive an identical payment for each of their children. To be eligible, a single taxpayer must have an adjusted gross income of $75,000 or below. For married couples filing jointly, that number has to be $150,000 or below, and for heads of household, adjusted gross income must be $112,500 or below.

Pope Francis, a staunch advocate of the disenfranchised, has framed the issue in moral terms. In an Easter 2020 letter, the pontiff wrote the following of a universal basic wage: “It would ensure and concretely achieve the ideal, at once so human and so Christian, of no worker without rights.”

Criticism of UBI

Despite its promise to curtail poverty and cut red tape, universal basic income still faces an uphill battle. Perhaps the most glaring downside is cost. According to the nonprofit Tax Foundation, Andrew Yang’s $1,000-a-month Freedom Dividend for every adult would cost $2.8 trillion each year (minus any offsets from the consolidation of other programs).

Yang proposed covering that substantial expense, in part, by shrinking the size of other social programs and imposing a 10% value-added tax (VAT) on businesses. He also proposes ending the cap on Social Security payroll taxes and putting in place a tax on carbon emissions that would contribute to his guaranteed income plan.

Whether that set of proposals is enough to fully offset the cost of the Freedom Dividend remains a contentious issue, however. An analysis by the Tax Foundation concluded that Yang’s revenue-generating ideas would only cover about half its total impact on the Treasury.

Among the other criticisms of UBI is the argument that an income stream that’s not reliant on employment would create a disincentive to work. That, too, has been a subject of debate. Yang has suggested that his plan to provide $12,000 a year wouldn’t be enough to live on. Therefore, the vast majority of adults would need to supplement the payment with other income.

The Bottom Line

Recent studies suggest only a weak link between UBI and joblessness. A 2016 analysis by researchers from MIT and Harvard, for example, found that “cash transfer” programs in the developing world had little recognizable impact on employment behavior.

However, there’s little evidence to suggest that replacing traditional welfare payments with a universal basic income would actually increase employment, as some of its proponents suggest. A recent two-year experiment in Finland where universal basic income effectively replaced unemployment benefits concluded that UBI recipients were no more likely to find new employment than the control group.

Article Sources
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  2. Martin Luther King, Jr. "Where Do We Go from Here: Chaos or Community?" Beacon Press, 1967.

  3. U.S. Congress. "H.R. 1319, Pages 141-148."

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