A Basic Income for All

Keith Rankin, 2 April 1998.


I would like to congratulate Simon Collins for his Herald piece on a universal basic income (1 April, 1998).

The idea of integrating the income tax and benefit systems has been frequently raised throughout this century. Variations of the idea have been mooted by thinkers on both the political left and right, including a number of Nobel Prize winning economists such as the US liberal James Tobin and the US conservative Milton Friedman. In Europe, the Basic Income Network is supported by social scientists of varying disciplines and political orientation.

A basic income approach to tax-benefit reform has the potential to stem the tide of growing inequality that now characterises all "first world" nations.

The simple formula at the core of the basic income idea has been called "basic income / flat tax" by one prominent British economist (A.B. Atkinson). As an alternative to the 1998 tax cuts, it would have been possible to pay an adult basic income of $90 per week funded by a flat rate of income tax of 33 percent.

By Atkinson's definition, higher earning New Zealanders already receive a basic income. From July, every New Zealander grossing over $38,000 per annum ($730 per week) will, in effect, be paying 33 percent tax on all of their income while receiving a "refundable tax credit" of $100 per week. The $100 tax credit is just the tax concession on the first $730, expressed as a dollar amount rather than as a percentage. The 1998 tax cuts represent an increase in the refundable tax credit of up to $22 per week.

Basic income proponents argue that all tax residents - not just high earners - should receive a standard tax credit, which might be called a "citizens income" or "social dividend".

Paying a tax credit of $100 to all New Zealand adults would require an income tax rate of about 35 percent. To pay $150, enough to replace unemployment/sickness benefits and student allowances, would require an income tax rate of 42 percent. Alternatively, a GST rate of 15 percent with an income tax and corporate tax of 39 percent would fund a $150 tax credit. Indeed, 39 percent is the present corporate tax rate in Australia.

A basic income of $150 per week would replace all benefits except NZ Superannuation, Invalids Benefit, DPB and Family Support. These remaining benefits would be considerably simplified, because, once the first $150 was assured, only payments above $150 per week would be regarded as benefits.

One of the most recent organisations to suggest a "universal citizens income" as a practical alternative to the welfare messes of modern developed economies is the Paris-based OECD (Organisation for Economic Cooperation and Development), in their 1997 publication "Societal Cohesion and the Globalising Economy".

Social scientists are coming to understand that, in economically developed societies, all socially necessary work can be done by a fraction of the available workforce. And they are coming to appreciate that discretionary spending is more subject than ever to the fickle winds of fashion, and of globalisation. Most paid work is now insecure and unable to assure workers that they can meet long term commitments such as mortgages. The world of work in the 21st century will be increasingly "casual", with short and medium term contracts the norm.

A basic income system provides the glue that makes it possible for people to survive between jobs. It also represents a means by which overworked parents can reduce their time away from home. And it represents a means of encouraging the unemployed to accept substantial part-time jobs.

To create an inclusive society, we have to find a fair, efficient and non-intrusive way of distributing the proceeds of past and future economic growth. In accepting reduced real wages and working conditions, the paid workforce has made sacrifices to enhance New Zealand's economic competitiveness. It is appropriate that low income workers - employees and self-employed - should each receive a social dividend as recognition of their efforts.

Unpaid caregivers and voluntary sector workers also make huge contributions to our economic wellbeing, while receiving no concessions at all from the tax system apart from targeted family support credits. A citizens income recognises their efforts without imposing stigmatising penalties on parents who are less than perfect. The universalist philosophy is that parents will be most responsible if their society trusts them to be responsible and enables them to live with dignity.

The present process of using tax cuts as a way of distributing the proceeds of economic growth is highly inequitable, in that it gives substantial "growth dividends" (as Don Brash called them in his 1996 Hayek Memorial Lecture) only to the more highly paid people in the workforce. It is a process of social division, not integration.

A universal basic income ensures that income derived from shared effort - including the shared efforts of past generations - is distributed equitably. At the same time, it ensures that income derived from individual effort continues to be distributed by market means. It is a market solution to the welfare mess.


Rankin File