ã 1992 The Other Economy; Economics Nature can Live With; ed. Alan Marston, proceedings of The Other Economic Summit (TOES), Auckland 1992, pp.203-211.

Universal Benefits: Can we afford to not have them?

Keith Rankin, University of Auckland Economics Dept., 2 May 1992

The case for a system of publicly managed income transfers - "benefits" - of some kind is accepted by most citizens in developed economies. What is not yet widely accepted is the "no fault" principle; the principle that only a lack of income and an age criterion should determine eligibility for a benefit. New Zealanders today seem concerned to distinguish between the deserving and the undeserving, despite having pioneered a "no fault" approach to accident compensation 20 years ago.

Key problems with the present welfare system have been exacerbated by a prolonged recession which has brought about both high levels of unemployment and unusually high numbers of people wanting employment. Specific problems include: a poverty trap that makes it very difficult for a person to return to productive employment after being on a means-tested benefit, an unjust income distribution, a lack of individual and local control over the means by which people can experience economic well-being, and a need for very high rates of output growth if full-time employment is to once again become the main means of achieving equitable income distribution.

Means-tested benefits have to be abated gradually or abruptly. Either way, they impose high effective marginal tax rates (the normal tax rate plus the amount of benefit lost for each dollar of additional income) on beneficiaries. The inability of unemployed people to complement their benefits with private income or adult education discourages people from self-help and traps them into reliance on targeted benefits as their only income. In addition, means-testing requires an expensive and intrusive Social Welfare bureaucracy.



I propose a universal benefit system. Anyone who does not have an income at least as high as the legal minimum weekly wage would automatically receive a universal benefit of $6,000 per annum ($115 a week). Anyone receiving such a benefit would pay tax on their casual income at a secondary tax rate of 46%. The universal benefit would replace existing benefits and student grants/loans.

In addition, I propose a supplementary benefit of $4,000 per annum, payable to current recipients of national superannuation, invalids benefits, domestic purposes benefits and family support. The supplementary benefit would be abated at 14 cents per dollar, leaving recipients with an effective marginal tax rate of 60 percent.

All benefits would be paid on an individual basis. However, in the case of a two-parent family, the supplementary benefit would be abated in line with the income of the higher-earning parent.

I also propose that people in regular employment should face a more progressive income tax scale; a scale similar to that of 1986-88, in which the top tax rate was 48%. A very simple and fair scale can be devised by the means of a universal tax rebate of (say $6,000) combined with a single tax rate (say 46%). The minimum regular wage should be set so that a worker on it would pay no income tax ($250 a week; $13,000 per annum).

What are the differences between this system and the present system? Some beneficiaries would have their benefit incomes cut. Regular workers would lose the gains made by the 1988 tax cuts. The remaining activities of the Social Welfare Department would be absorbed into the Revenue and Health Departments. The main gainers would be part-time workers and mothers at home. Benefits to "housewives" would, as at present, continue to be financed by husbands. The transfers would simply become more explicit, and with high-income husbands contributing more than low-income husbands.



If a universal benefit was available, would people resign from their jobs or reduce their hours of work in order to become beneficiaries? Or, would more people want to work more? To an economist, the issue is conceptually simple, but difficult to quantify because of two effects that can work in opposite directions: a price effect, and an income effect. Some people, without changing their present labour force activity, would find that the effective price (ie after-tax wage rate) paid for additional work would rise; others would experience a fall. In addition, all else being equal, most people's net incomes would change.

Previous changes to tax scales suggest that there would be no overall tendency for people presently in work to work less. It is unlikely that there will be a large number of resignations by people wishing to go on the new 55+ benefit, for example. Nor would reducing tax rates for people on low incomes lead to a cut in wages. There was no rise in real wages as low income people faced higher taxes during the 1980s, and developed countries which have low tax rates for low income recipients do not have lower wages than New Zealand. A universal benefit should not act as a wage subsidy to existing employers. It would have the opposite effect of increasing the bargaining power of workers in low-status jobs.



Coming at the problem from a different angle, we could simply extend National Superannuation to all adults. With the introduction of the new 55+ benefit, we now have a two-tier system of guaranteed retirement income. We could simply pay everyone over 17 (say) the "55+" benefit, and pay national superannuation to everyone designated as a "pensioner". This two-tier system of national superannuation would be called "universal basic income" (UBI). It could become a three-tier system, with people aged, say, 17-24, on a lower benefit.

The "25+" benefit (basic income) could be set at one-fifth of gross national product (GNP) per adult (about $6,000 per annum at present), while the pension would be set at one-third of GNP per adult. Pensioners would pay tax on all of their market income at 60 cents in the dollar, while other adults would pay 46%. The young adult basic income might be set at 75% of the adult rate ($87 a week), with a tax rate of say 38%. The universal basic income is either the universal benefit or the tax rebate described above, and the pension is the universal benefit and the supplementary benefit combined. Thus, the work-incentive effects of a UBI would be no different to those described above.

With a UBI, the public accounts would appear to show a very high degree of public expenditure and taxation, but that would be no more than an accounting process. The most honest accounting approach is, whatever the prevailing welfare system, for all benefit payments and subsidies to be accounted for as negative taxes. Benefits are tax credits. True government expenditure, net of tax credits, is much lower than most advocates of reduced government spending imply.

I have calculated elsewhere (refer below), using the 1991 Budget's estimate of the tax base, that a universal basic income would yield approximately the same budget deficit if the basic tax rate was set at 48%. With a 46% tax rate, the scheme would add a fiscal stimulus of $1 billion.

Reducing the age of full pension entitlement from age 60 to age 40 would only add another $400-500 million to the deficit. This option seems highly desirable, as it encourages wage and salary positions to be vacated in favour the young, which is what employers want, and it facilitates the transition of older people into self-employed or employer status. In addition, unemployed people over 40 often have higher commitments, reflecting their higher average incomes when in employment.



Depressed local communities can also offer universal credits, as a complement to a national system, or alongside the present benefit system. So also could other extended communities such as Iwi. Basically, the idea is to expand existing "green dollar" or barter systems into community credit systems. The main problem with existing barter systems is that many unemployed people have few skills and little self-confidence, and are unable to easily acquire the credits they require to participate.

The solution is to issue community credits (CCs) to all participating adults within a community. (All ratepayers would automatically become participants. Some rich people may apply to not participate, while resident non-ratepayers would become participants simply by application.) Such credits would have dollar values and would be used to purchase goods and services from registered businesses in the community displaying a CC emblem. (Each participating business would carry a percentage on its emblem, indicating the maximum proportion of payment that would be accepted in community credits. Prices could not be raised for customers using CCs, just as they cannot be raised today for customers using bankcards.)

Sufficient credits could be issued each fortnight (eg $400,000 equally divided between 10,000 participants, to be issued on weeks in which benefits are not paid) to ensure that unemployed labour is utilised. Firms receiving CCs would be able to pay their employees a proportion of their wages in CCs (each firm would decide that proportion, but would have to apply the same proportion to all employees). Companies and individuals would pay taxes on their CC incomes, but in community credits. Thus, in order to utilise such revenue, the national government would have to purchase goods or services from local communities.

The "CC dividend" ($20 per week in the above example) would be raised as local unemployment increased, and reduced when signs of CC inflation occur.

In the case of Maori communities, especially after Iwi gain increasing rental income following Waitangi Tribunal settlements, benefits could be distributed within each Iwi. The aim would be, by providing an alternative income source, to encourage Maori to participate in activities other than low-paid full-time jobs; activities such as education/training and community entrepreneurship. If young Maori were to be provided with supplementary benefits, then low-status unpleasant jobs would have to be increasingly filled by non-Maori or changed into high-status jobs.



A universal basic income makes it easier for economic growth to take new forms more appropriate to an age of high productivity in which technology decreases the amount of labour and materials required to make things, and in which the planet's natural capital has been depleted by pollution and through the use of non-renewable resources.

Productivity growth should benefit everyone. This can happen through people getting higher incomes or working fewer hours or enjoying work more. We need a system of income distribution that makes it easier for people to trade-off income-earning activities for non-market (eg leisure) pursuits, depending on their individual preferences or circumstances.

Why doesn't it happen today? We see an expansion of part-time work, but wage-rates are falling sharply relative to GNP, and households are supplying many more hours of labour time than they did in the 1950s, 1960s and 1970s. Increased leisure is being imposed on those who least want it; unemployed and discouraged workers.

A UBI will make it possible for people who value leisure highly to work less, and for people such as most of today's unemployed, who value income, to work more. The reallocation of leisure to the people who most want it is a form of economic growth, as are other forms of voluntary exchange. During periods of economic recession, people tend to value income over leisure, so conventional growth is likely to occur once the barriers preventing the unemployed from working are removed. The growth of part-time employment during a recession simply reflects a lack of employment opportunities, not a public preference for leisure.

When economic expansion replaces recession, people increasingly value leisure over income. In the 1960s, 40 hours labour was enough to support a family in reasonable comfort, unlike the 1920s. Institutions favouring fulltime employment were not a problem so long as only one adult per household worked. Today, 25 hours labour per household in an average week should be sufficient for us to experience higher living standards than we did 30 years ago. That means people need to be able to easily move out of fulltime employment at times of economic growth. An immediately available alternative source of income makes this possible. When people begin to choose their own mix of leisure and income, then economic growth will take the forms that people prefer. Poor people would still want to become rich, but most people would also be attempting to minimise the unpleasant aspects of work.



A universal benefit is not a hand-out to the lazy from the hard-working. It is socially generated income that is initially accounted for as someone's private income; a return from the nation's capital stock: land, climate, buildings, technology, institutions, communications networks, shared knowledge. It is a recognition that economic growth is a product of both public cooperation and individual competition.

By placing nearly 50% of income into a public pool for distribution in the form of public goods and universal benefits, we acknowledge that perhaps half of our national income derives from publicly shared resources, our mutual heritage, and teamwork. By sharing that 46% evenly among us, we follow the principle of communism - that income should be divided according to basic needs. But by the private retention of the remainder of our income, we ensure that efficient market mechanisms are maintained, and that the capitalist principle of reward according to contribution is followed.

A purely capitalist society has a UBI set at 0% of GNP, while a pure communist society has an income tax rate of 100%.

As labour-saving technology improves, income is increasingly derived from ownership (stewardship?) rather than employment. The proportionate size of the public income pool would need to grow as labour becomes redundant. Market communism would gradually replace private capitalism. Taking the argument to its logical conclusion, in a fully automated society in which all employment is performed by computers controlled by a few private individuals, then the tax rate would need to be over 90% as most people would have become dependent on income from the public pool. (The owners of the computers would still have significantly higher disposable incomes than everyone else, despite such high taxes.) Continued economic health would depend on the ability of the general public to retain its spending capacity at a maximum ecologically sound level.

To facilitate a long-run process in which productivity growth outstrips production growth, the percentages of GNP paid as a universal basic income should be set in the country's annual budget, and not embedded into constitutional law. A society with labour shortages (such as a country at war) would probably want to cut its basic income entitlement as a percentage of GNP, whereas a country with increasing structural unemployment would recognise that this condition is a natural feature of the growth process, and be able to act quickly to raise the universal income entitlement of its citizens.

For those readers who wish to read more about these ideas, which are certainly not unique to myself, I recommend the seminal articles by Robert Van der Veen and Philippe van Parijs in the journal Theory and Society 15 (1986): "A Capitalist Road to Communism" and "Universal Grants versus Socialism". And for those who want to evaluate my proposals in more detail, my October 1991 paper "The Universal Welfare State, Incorporating Proposals for a Universal Basic Income" (Economics Department Policy Discussion Paper #12) is available from the Auckland University Economics Department Secretary. My Discussion Paper uses a tax rate of 48%, but suggests that a rate of 46% might be more appropriate if the system is to be used as part of an overall strategy to stimulate the depressed domestic economy.

Rankin File | UBI