Analysis of “Guaranteed Income for the 21st Century”
The proposal from the New School and the Economic Security Project would lower poverty and inequality while expanding cliffs.
In May 2021, researchers at the New School’s Institute on Race and Political Economy, with support from the Economic Security Project, released a paper titled, “Guaranteed Income for the 21st Century.” The paper proposed a policy that expands the Earned Income Tax Credit by guaranteeing $12,500 per adult and $4,500 per child, phasing out for income above certain thresholds.
In this report, we depict the impact on a sample household, as well as on US-wide metrics like the budget, poverty, inequality, and cliffs. We also compare some estimates to the New School’s.
Overall, we find that the reform would, in 2023:
- Cost $1.26 trillion
- Benefit three in five Americans
- Cut poverty 94%
- Lower the Gini index of income inequality 19%
- Increase the prevalence and severity of cliffs by 466% and 100%, respectively
This report describes and compares the New School’s proposal and analysis; calculates the impact for a sample household; and goes into these US-wide results in greater depth.
See how Guaranteed Income for the 21st Century would affect your household.
The Guaranteed Income for the 21st Century proposal
Guaranteed Income for the 21st Century, or 21GI as the New School abbreviates it, would abolish the Earned Income Tax Credit and provide $12,500 per adult and $4,500 per child. The proposal then phases out the new benefit linearly with respect to the tax unit’s adjusted gross income, depending on number of adults: It would phase out from $10,000 to $50,000 for single-adult tax units, and from $15,000 to $70,000 for two-adult tax units. The below graphic, from 39:18 of the New School’s video, depicts the reform.
Sample household
Consider a single parent of one child in New York City. As they earn more, the net benefit of the 21GI falls, due to the shape of the EITC (in this case, federal, state, and local EITCs, since NYS and NYC based their EITCs on the federal), and the phase-out of the new payment itself.
This chart shows baseline (gray) and 21GI (blue) net income as the parent earns more. The shaded regions indicate “earnings dead zones”, where the household is worse off for earning due to cliffs. The doubly-shaded regions are earnings dead zones in the baseline and reform, while the more lightly shaded regions are only cliffs in the reform. Because 21GI adds more phase-out (marginal tax rates), it extends existing cliffs, which in this case result from SNAP and reduced price school meals.
We can also visualize these cliff and incentive impacts in marginal tax rates. 21GI would raise marginal tax rates for all low-income households. For this household, it will raise it by up to 95 percentage points, at an earnings level where the new payment is phasing out, and the federal/state/local EITCs would all otherwise have phased in, lowering marginal tax rates.
Similar to the net income chart above, we can see how 21GI affects total marginal tax rates. This household under 21GI would face marginal tax rates above 70% continuously for most of the earnings range from $13,500 to $49,000.
US-wide impacts
Our static microsimulation model, which applies 2023 tax and benefit rules to the 2021 Current Population Survey March Supplement, finds the following results.
Budgetary impact
We project that 21GI would cost $1.26 trillion, including the main benefit and the EITC elimination.
This estimate exceeds the New School’s estimate of $876 billion by 43%. This discrepancy could result from multiple factors, including importantly the source dataset and tax filing unit assumption.
While we apply the benefit and phase-out to tax units in the 2021 Current Population Survey, the New School applied it to households in the 2019 Survey of Consumer Finances. To the extent that SCF households include multiple tax filing units, it would tend to underestimate the cost by phasing out the benefit for a household whose income would include multiple tax units.
As an example, suppose a 22-year-old, who earns $30,000, lives with their parent, who earns $100,000. 21GI would provide the parent nothing and the child $6,250, half the maximum benefit, given their earnings fall halfway within the $10,000–50,000 phase-out range. But the SCF would show the household as a single tax filing unit with $130,000 income, and thus disqualified from any 21GI benefit.
21GI would alter incentives to file separately; however, neither PolicyEngine nor New School model changing filing behavior as a result.
Impact by income decile
The reform would add 11.7% to net incomes overall, and this percentage decreases with income, from 110% at the bottom decile to 0.7% at the top.
Distributional impacts
21GI would benefit 60% of the population, of whom 97% would gain at least 5% of net income. Over 99% of the bottom fifth would gain, as would 23% of those in the top decile (due to households that comprise multiple filing units).
Poverty
Under 21GI, poverty would fall by 94% overall, and by at least 90% for most subgroups. Deep poverty would also fall 99%.
Inequality
21GI would lower income inequality, disproportionately for the broadest measure we report, the Gini index, which would fall 19%.
Cliffs
Currently, PolicyEngine estimates that 0.6% of households face a cliff, by which an additional $2,000 of earnings per adult would make the household financially worse off. We expect that this underestimates the prevalence of cliffs, since we have not yet modeled all tax and benefit programs that would increase marginal tax rates or introduce explicit cliffs.
As a result of 21GI’s additional marginal tax rates, that rate of cliffs would rise 466% to 3.3% (one in 30 households). The total lost income from those facing cliffs would also double from $6 billion to $12 billion.
