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September 18, 2013

Our universal benefits: The impulse to McGovern

1972 presidential candidate had ill-fated plan

The impulse to redistribute income did not begin with the Obama administration. In the 1970s, when income was seemingly more equally distributed, progressives called for increased government income redistribution.

There are two ways for government to redistribute income from the rich to the poor. The first is through universal benefit programs. The second is through means-tested benefit programs, which will be addressed in future columns along with why government should be doing any of this at all.A universal benefit gives everybody a government benefit. Since all enjoy the goody, getting rid of it is politically problematic. That is why presidents Franklin D. Roosevelt and Lyndon Johnson made sure that all old folks got Social Security and Medicare benefits — they knew it would make the programs popular and untouchable.To pick another example, many developing countries subsidize bread-making to make it available to all at below-market prices. As the poor spend a large part of their income on bread, there is likely some redistribution to the poor even though millionaires get cheap bread too.The problem with these universal transfers is they are costly. A recent Wall Street Journal article on fuel subsidies in developing countries noted they cost up to 10 percent of national Gross Domestic Product (GDP).Someone has to pay for the subsidy for bread or fuel or whatever. In the final analysis, it is ordinary citizens who bear the taxes to pay for the subsidies. On average, the taxes required to support the subsidies exceed the benefit of the subsidies. In sum, a universal benefit is a rather odd and costly way of helping the poor.One of the more famous and ill-fated universal benefit programs was a plan by the 1972 Democratic presidential candidate, George McGovern, to give every man, woman and child in the United States $1,000. At the time, it was considered hare-brained and McGovern lost in a landslide.There is one good aspect of a universal benefit that the McGovern’s scheme illustrates well: The poor don’t lose the benefit if they earn more income. This is redeeming because it imposes no direct penalty to work effort. Translated into 2013 dollars, the $1,000 per person universal grant is around $5,600.Under the plan, a family of four would receive a guaranteed income of about $22,400. Any additional income earned in the household does nothing to reduce the government grant amount in any way. All four-person households get $22,400 as base income — and they don’t lose a penny of it if they earn millions of dollars.But like the fuel subsidies, such a program is incredibly costly. A back-of-the-envelope calculation shows that the U.S. Treasury would pay out around $1.8 trillion if the proposal were in place in 2014. That is over 10 percent of projected 2014 GDP, 60 percent of all projected federal revenues for 2014 and 128 percent of projected federal personal income tax revenue for 2014. To finance a $5,600 universal per-person guaranteed minimum income would require doubling everybody’s federal income tax rates. This would introduce major disincentives to work.Of course, part of this McGovern-like income scheme could be financed by reductions in other government programs designed to help the poor. I suspect the shrinkage of these other programs would be much less than necessary to avoid large tax increases. I bet there would be a hew and cry to hire an army of social workers to help the poor manage their newly found minimum income.But again, the gut reaction to a universal guaranteed minimum income is that it makes no sense. Why tax Mr. Average Joe citizen just to give him his money back? If public policy is supposed to help the poor, why issue annual checks to millionaires? Why not tailor the benefit to the poor?So the good point about universal transfers is they can be designed to generate minimal disincentive effects — you don’t lose them when you earn. The bad point is that their expense is ghastly — requiring tax rates that would inevitable only crush incentives to produce.Cecil Bohanon, Ph.D., an adjunct scholar with the Indiana Policy Review Foundation, is a professor of economics at Ball State University.

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