USBIGDiscussionPaperNo.21,February2002.doc

USBIG Discussion Paper No. 21, February 2002 Work in progress, do not cite or quote without author’s permission INCOME GUARANTEES AND THE EQUITY-EFFICIENCY TRADEOFF Steven Pressman Department of Economics and Finance Monmouth University West Long Branch, NJ 07764 (732) 571-3658 pressman@ I. INTRODUCTION Guaranteed income plans and negative income tax first began to attract attention in the US during the 1960s. Robert Theobald (1963, 1966) pushed for guaranteed incomes arguing that automation would make it impossible to create enough jobs with decent incomes for the large majority of the labor force. As technology made workers redundant, unemployment would rise. Even those able to keep their jobs would receive lower wages. For this reason, Theobald concluded, the government would have to make some basic income floor a right for all citizens. It could do this in a number of different ways; but the main options were government transfer payments or tax rebates (leading to negative taxes owed) to low-income households. Conservative economist Milton Friedman (1966: 177-95) gave a big boost to the negative income tax when he came out in favor of it. Friedman saw this policy as a way to end the stigma of welfare, mitigate the disincentives associated with the US welfare system, and reduce the confusing panopoly of welfare programs. The main objection to the negative income tax for Friedman was political rather than economic-- people were unlikely to vote for a redistributive scheme whose main beneficiaries would be a small minority of citizens. Not surprisingly, many liberal economists added their support. Keynesian James Tobin (1966), normally an adversary of Friedman, supported a guaranteed income for essentially the same reasons as Friedman. He even began to address some of the practical issues for designing such a plan (Tobin, Pechman Mieszkowski 1967). Other economists supported the plan for pragmatic and humanitarian reasons-- because it put income quick