Authors: Erik Brynjolfsson,Andrew McAfee
Avoiding the Three Great Evils
Will we need to revisit the idea of a basic income in the decades to come? Maybe, but it’s not our first choice. Voltaire beautifully summarized why not when he made the observation quoted at the start of this chapter: “Work saves a man from three great evils: boredom, vice, and need.”
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A guaranteed universal income takes care of need, but not the other two. And just about all the research and evidence we’ve looked at has convinced us that Voltaire was right. It’s tremendously important for people to work not just because that’s how they get their money, but also because it’s one of the principal ways they get many other important things: self-worth, community, engagement, healthy values, structure, and dignity, to name just a few.
Whether the focus is on the individual or the community, the conclusion is the same: work is beneficial. At the individual level there has been a great deal of research into what makes people feel fulfilled, content, and happy. In his book
Drive
, Daniel Pink summarizes the three key motivations from the research literature: mastery, autonomy, and purpose.
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The last of these was emphasized by an older worker quoted in a February 2013 story about the pros and cons of the warehouse jobs online retail giant Amazon was creating in the UK: “It gives you your pride back. That’s what it gives you. Your pride back.”
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His view is strongly supported by the work of economist Andrew Oswald, who found that joblessness lasting six months or longer harms feelings of well-being and other measures of mental health about as much as the death of a spouse, and that little of this decline is due to the loss of income; instead, it arises from a loss of self-worth.
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A survey of people in many countries conducted by the Gallup polling organization confirmed the fundamental desire for work. As Gallup CEO Jim Clifton puts it in his book
The Coming Jobs War
, “The primary will of the world is no longer about peace or freedom or even democracy; it is not about having a family, and it is neither about God nor about owning a home or land. The will of the world is first and foremost to have a good job. Everything else comes after that.”
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It seems that all around the world, people want to escape the evils of boredom, vice, and need and instead find mastery, autonomy, and purpose by working.
A lack of work harms not just individuals but entire communities. Sociologist William Julius Wilson summarized a long career’s worth of findings in his 1996 book
When Work Disappears
. His conclusions are unequivocal:
The consequences of high neighborhood joblessness are more devastating than those of high neighborhood poverty. A neighborhood in which people are poor but employed is different from a neighborhood in which many people are poor and jobless. Many of today’s problems in the inner-city ghetto neighborhoods—crime, family dissolution, welfare, low levels of social organization, and so on—are fundamentally a consequence of the disappearance of work.
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In his 2012 book
Coming Apart
, social researcher Charles Murray put numbers to the problems Wilson described and also showed that they weren’t confined to inner cities or largely minority neighborhoods. Instead, they were squarely part of mainstream white America. Murray identified two groups. The first comprises Americans with at least a college education and a professional or managerial job; these are dubbed residents of the hypothetical town ‘Belmont,’ named after a prosperous suburb of Boston. The second group consists of those with no more than a high school education and a blue-collar or clerical job; these are residents of ‘Fishtown,’ named after a working-class suburb of Philadelphia. In 2010 approximately 30 percent of the American workforce lived in Belmont, 20 percent in Fishtown.
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Using a variety of data sources, Murray tracked what happened in Belmont and Fishtown from 1960 to 2010. At the start of that time span the two towns were not that far apart in most measures that track the health of a community—marriage, divorce, crime, etc.—and they were also both full of people that worked. In 1960, 90 percent of Belmont households had at least one adult working forty or more hours a week, as did 81 percent of Fishtown households. By 2010 the situation had changed drastically for one of the communities. While 87 percent of Belmont households still had at least one person working that much, only 53 percent of Fishtown households did.
What else changed in Fishtown? Many things, none of them good. Marriages became less happy, and less common. In 1960, only about 5 percent of Fishtowners between the ages of thirty and forty-nine were divorced or separated; by 2010, a third of them were. Over time, many fewer children in Fishtown grew up in two-parent homes; by 2004, the figure had dropped below 30 percent. And incarceration rates skyrocketed; in 1974, 213 out of every 100,000 Fishtowners were in prison. That number grew more than fourfold, to 957, over the next thirty years. Belmont also saw negative changes in some of these areas, but they were tiny in comparison. As late as 2004, for example, fully 90 percent of children in Belmont were still living with both of their biological parents.
The disappearance of work was not the only force driving Belmont and Fishtown apart—Murray himself focuses on other factors
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—but we believe it is a very important one. The evidence suggests that communities in which people are working are much healthier than communities where work is scarce, all other things being equal. So we support policies that encourage work, even as the second machine age progresses.
And we see two pieces of good news here. The first is that economists have developed interventions that encourage and reward work in ways that a basic income guarantee alone does not. The second is that innovators and entrepreneurs have developed technologies not only to substitute for human labor but also to complement it. In other words, digital tools are not just taking work out of the economy; they’re also providing new opportunities for people to contribute work to it. As technology keeps racing ahead the best approach is to combine these two pieces of good news and try to maintain an economy of workers. Doing so will address all three of Voltaire’s evils and give us a much better chance of maintaining not only a bounteous economy, but also a healthy society.
Better Than Basic: The Negative Income Tax
The Nobel Prize–winning conservative economist Milton Friedman did not advocate many government interventions, but he was in favor of what he termed a ‘negative income tax’ to help the poor. As he explained it in a 1968 television appearance:
Under present law we have a positive Income Tax that everybody knows about. . . . [U]nder the Positive Income Tax if you happen to be the head of a family of four, for example, and you have $3,000 of income, you neither pay a tax nor receive any benefit from it. You’re just on the break-even point. Suppose you have an income of $4,000. Then you have $1,000 of positive taxable income, on which at current rates (14%) you pay $140.00 in tax. Suppose today you had an income of $2,000. Well then you’re entitled to deductions and exemptions of $3,000, you have an income of $2,000. You have a negative . . . taxable income of $1,000. But currently under present law you get no benefit of those unused deductions. The idea of a Negative Income Tax is that, when your income is below the break-even point, you would get a fraction of it as a payment “from” the government. You would receive the funds instead of paying them.
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To finish his example, if the negative income tax rate were 50 percent, the person making $2,000 would get $500 back from the government, which is $1,000 (the negative taxable income) times .50 (the 50-percent negative income tax rate), and would thus have total income for that year of $2,500. A person with zero income would get $1,500 from the government, since they had $3,000 of negative taxable income.
The negative income tax combines a guaranteed minimum income with an incentive to work. Below the cutoff point in the example (which was $3,000 in 1968 but would be about $20,000 in 2013 dollars), every dollar earned still increases total income by $1.50. This encourages people to start working and keep finding more work to do, even if the wages they receive for this work are low. It also encourages them to file tax returns and so become part of the visible mainstream workforce. In addition, it is relatively straightforward to administer, making use of the existing infrastructure for filing taxes and distributing refunds.
For all these reasons, we like the idea of a negative income tax. At present, the American federal tax system includes a related idea called the Earned Income Tax Credit, or EITC. Compared to Freidman’s forty-year-old proposal, however, the EITC is small; in 2012 it maxed out at less than $6,000 for families with three or more qualifying children and less than $500 for families with no children. In addition, it cannot be used by people who have no income. Even though it’s small, though, the EITC is still powerful: research by economists Raj Chetty and Nathaniel Hendren at Harvard, along with Patrick Kline and Emmanuel Saez at Berkeley, suggests that states with more generous EITC policies also have significantly greater intergenerational mobility.
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We support turning the EITC into a full-fledged negative income tax by making it larger and making it universal. We also think claiming the EITC should be made easier and more obvious. Approximately 20 percent of eligible taxpayers don’t take advantage of it, probably because they aren’t aware of its existence or are put off by its complexity.
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The EITC is really a subsidy on labor, paying a bonus dollar of labor income. It puts into practice some of the oldest economic advice of all: tax things you want to see less of, and subsidize things you want to see more of. We tax cigarettes and gas-guzzling cars, for example, and subsidize solar panel installations.
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The idea, of course, is that the tax will decrease the incidence of the undesirable activity (smoking cigarettes, driving a gas-guzzler) by making it more expensive, while the subsidy will have exactly the opposite effect. We agree with our MIT colleague Tom Kochan, who thinks of unemployment as a kind of “market failure,” or externality. That means that the benefits of increasing employment—reduced crime, greater investment, and stronger communities—extend to people throughout society, not just the employer or employee who are party to the employment contract. If unemployment creates negative externalities, then we should reward employment instead of taxing it.
It’s not always possible to follow this advice. The U.S. government taxes labor not because it wants people to be idle but because it needs to raise money somehow, and income and labor taxes have historically been the preferred method. The income tax first appeared during the Civil War and was made permanent in 1913 by the Sixteenth Amendment to the Constitution.
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By 2010, over 80 percent of all revenue collected by the federal government came from individual income taxes and payroll taxes. In turn, payroll taxes fall into two categories. The first are payroll taxes withheld by employers from their employees’ wages; the second are per-employee taxes charged to the employers themselves. Payroll taxes, which fund programs like Medicare, Social Security, and unemployment insurance, accounted for only about 10 percent of federal tax revenue early in the 1950s but now make up about 40 percent, an amount roughly equal to that raised by the individual income tax.
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While income taxes are not meant to discourage work and employment, they can still have this effect. Payroll taxes can lead to similar shifts, and by design mainly affect people with low and middle incomes.
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They can cause organizations to move away from hiring additional domestic employees, and instead outsource work or make use of part-time contractors. As digital technologies keep acquiring new skills and capabilities, these same organizations will increasingly have another option: they’ll be able to make use of digital laborers rather than humans. The more expensive human labor is, the more readily employers will switch over to machines. And since payroll taxes make human labor more expensive, they’ll very likely have the effect of hastening this switch. Mandates like employer-provided health care coverage have the same effect; they too appear as a tax on human labor and so discourages it, all other things being equal.
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We bring up these points not because we dislike Social Security or health care coverage. We like both of them a great deal and want them to continue. We simply point out that these and other popular programs are financed, in whole or in part, by taxes on labor. This might have been an appropriate idea when there were no viable alternatives to humans for most jobs, but that is no longer the case. The better machines become at substituting for human labor, the bigger negative effect any tax or mandate will have on human employment.
So in addition to subsidizing work via a negative income tax, we also support not taxing work as much in the first place and reducing burdens and mandates on employers. Like so much else at the intersection of economics and policy, this is easy to say and extremely hard to enact. How else, if not by taxes on labor, are expensive, popular, and important programs like Social Security and Medicare to be funded? How is health care coverage to be provided if not by employers?
We don’t claim to have all the answers to these critical questions, but we do know that the economist’s toolkit contains other kinds of taxes besides those on labor. As discussed in the last chapter, these include Pigovian taxes on pollution and other negative externalities, consumption taxes, and the value-added tax (VAT), which companies pay based on the difference between their costs (labor, raw materials, and so on) and the prices they charge customers. A VAT has several attractive properties—it’s relatively straightforward to collect, adjustable, and lucrative—but is not currently used in the United States. In fact, America is the only one of the thirty-four nations in the OECD without one. Economist Bruce Bartlett, legal scholar Michael Graetz, and others have put together alternatives to the current American tax system that rely heavily on a VAT.
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We think these are valuable contributions to the discussion about how to best pay for government services in the second machine age, and deserve serious consideration.