Eliminating Poverty in America Could be a Lot Easier than You Think
Being rich can’t buy happiness. But being poor sure can buy misery. This is true because the connection between wealth and well-being is curvilinear. A person making $2,000 per month is usually much happier than a person making $1,000 per month. But a person making $12,000 per month is not usually much happier than a person making $11,000 per month. To a very poor person, a $1000 monthly raise is life-altering. To an upper-middle class person, the same boost in income is a remodeled kitchen.
This means that, to increase national happiness, we should greatly increase the income of the very poor. A guaranteed minimum U.S. income — not unlike the universal basic income you may have heard about from Andrew Yang — would do exactly this.
Both economists and politicians have argued that simply giving money to very poor people might reduce the usual incentive to work. A recent study in Finland attempted to test this idea by giving about $640 per month (for two years) to Finns who’d long been unemployed. The hope was that this would increase employment. This did not happen, and the study has been widely panned as a failure. But this modest increase in income seems to have done two important things. It increased both the happiness and the physical health of the Finns who received it. And although it did not increase employment, it also did not decrease it.
Further, there is a major problem with the Finnish income study. To receive this monthly stipend, many recipients had to give back other benefits that were part of the Finnish social safety net. In fact, some recipients lost net income. Others realized only tiny gains. Only a minority of those studied saw a meaningful increase in net income. That’s too bad because, if this study had been done properly, it might have told a very different story.
Consider a natural experiment with Native American Indian families conducted by Duke University’s E. Jane Costello and her colleagues. This team found that a modest $4,000 annual increase in family income reduced the number of Indian middle schoolers who got into trouble in school. It also reduced rates of clinical depression and anxiety. More than a decade later, more of the children whose families had received this money had graduated high school, fewer had become teenage parents, and fewer had become addicted to alcohol or drugs.
Unlike the Finnish study, each Indian family in the Duke study experienced modest but real increases in family income. It is worth adding that this income supplement yielded clear benefits only when it lifted families above the poverty line. Some kids were so poor that they remained poor — even after the benefit. These kids experienced little benefit from the extra money. The U.S. poverty line is not arbitrary.
Notice that this study suggests that people who currently have different incomes need different income supplements. My analyses of poverty suggest that, in most parts of the United States, it would take an annual tax-free income of about $30,000 to be free from poverty. So, whereas a family with no income would receive a full $30,000 annual supplement, a family earning $12,000 per year would receive an $18,000 supplement. But I’d like to see this go a little further — so that American families earning below the median U.S. income would stop paying personal income tax. This may sound like an unnecessary complication. But research shows that people who almost qualify for a benefit but would not receive it often oppose the benefit! For example, people already making about $15 an hour are often opposed to raising the minimum wage to $15 per hour— because it would reduce their relative after-tax advantage over those earning $12 an hour. Further, putting more money in the pockets of Americans with modest means should also stimulate the economy.
This proposal has many virtues, from ending poverty and growing the economy to improving America’s poorest schools. In addition, Martin Daly’s research strongly suggests that it would also reduce U.S. murder rates. Yes,” you may be thinking, “and it would bankrupt the government.” But it wouldn’t. The bottom 50% of American wage earners—those who’d benefit under this plan— pay only 3% of the total annual income tax paid to the IRS. So, this plan would not be America’s fiscal undoing. My calculations suggest that the cost of this proposal would be about $350 billion dollars per year, which is 10% of the total of $3.5 trillion in taxes the IRS says it collected in 2019.
To get that extra 10% in tax revenue, we’d need to do two things. First, we’d have to increase specialty taxes, such as business and estate taxes, by 10%. Businesses that now pay 21% in taxes after the massive 2017 tax cuts would begin to pay 23.1% instead. The top 1% of individual U.S. earners would pick up the rest. This is possible because the richest 1% of Americans are incredibly rich. They already pay 37% of all U.S. income taxes. A 30% increase in this 37% gets us to an overall increase of more than 10% This would mean a 35% top income tax rate rather than the current 27% rate. That’s a substantial tax increase on the very rich. But the poorest of the top 1% of U.S. earners earn more than $700,000 per year. This is how easy it would be — in principle — to end U.S. poverty. I should clarify that this proposal is not a replacement for any other piece of the fragile U.S. social safety net. Giving with one hand and taking with another won’t eliminate poverty.
Of course, this proposal might be very hard to enact. A bill supporting a guaranteed minimum income might require a change in the percentage of U.S. Senators who are open to data-based solutions to social problems. Further, many economists would urge us to begin with careful experiments on a guaranteed minimum income — scaling things up to the U.S. population only if studies yielded the expected promises.
If the 99% of Americans who are not ultra-rich wish to end poverty, we will have to experiment with novel ideas. One such idea, the guaranteed minimum income, seems to have tremendous promise. The question may be whether we can overcome barriers such as voter cynicism and gerrymandering to embark on such a radical national experiment.
For Further Reading
Costello, E. J., Egger, H. L., & Angold, A. (2004). Developmental Epidemiology of Anxiety Disorders. In T. H. Ollendick & J. S. March (Eds.), Phobic and anxiety disorders in children and adolescents: A clinician’s guide to effective psychosocial and pharmacological interventions (p. 61–91). Oxford University Press. https://doi.org/10.1093/med:psych/9780195135947.003.0003
Brett Pelham is a social psychologist who studies identity, gender, health, and social inequality. He is also an associate editor at Character and Context.