ref.: Rankin, Keith (1997) "A New Fiscal Contract? Constructing a Universal Basic Income and a Social Wage",
Social Policy Journal of New Zealand 9:55-65 (November).


© Social Policy Agency of the Dept. of Social Welfare.

A New Fiscal Contract? Constructing a
Universal Basic Income and a Social Wage.

by Keith Rankin


INTRODUCTION:
   ACKNOWLEDGING CAPITALISM'S PUBLIC DOMAIN

Advanced economic societies are capitalist. They depend on a healthy interaction between the "dual realms" of capitalism (Heilbroner and Milberg 1995, pp.106­108): the private and public domains. Further socio-economic advance depends on the way we account for capitalism's public domain. Martin Weitzman (1996, p.207) notes that "almost every [economist] is aware that the lion's share of economic growth - or perhaps should I say the lion/s source - is accounted for by the 'residual'" which is essentially the public side of the "dichotomy between public and private goods" (Romer 1996, p.203); the determinant of total factor productivity. Paul Romer, a leader in the field of 'new growth theory', links modern economic growth to "non­rival goods" such as ideas and institutions1. New growth theory captures the essence of the public domain concept.

Taxes, which represent public incomes as well as private costs, can be thought of as royalties for the use of the public domain, a shared property right. Public revenue represents an income stream to every member of society. The problem faced b} advanced capitalist societies such as New Zealand is that the lion's share of income does not pass into the public domain, despite the massive contribution of non­rival goods to their national wealth. The public, as the shareholders of the public domain, are, I believe, underrewarded through prevailing fiscal arrangements.

New growth theories - including the social capital theories of, for example, Robert Putnam (1993) and Francis Fukuyama (1995) - emphasise the socio­cultural contribution to economic wellbeing. Neoliberal economics, on the other hand, places overwhelming emphasis on the private sources of growth; on the idea that the state in general and the social welfare system in particular impose 'deadweight costs' on a wealth-creating private sector. Whereas the new theories imply that a greater share of national income should be returned to the owners of the public domain2, neoliberals, taking a diametrically opposite view, see tax cuts as the recipe for future economic growth.

At the heart of the dispute are conflicting concepts of the word 'public'. To neoliberals, 'public' too easily means 'Government' or 'the State'. The government tends to be personalised as a corporate consumer, a kleptocratic 'big brother'. The new theories, however, based on social capital and non­rival goods, reveal a very different view of the public domain as an environment which supports a private sector superstructure. Here, the wealth of a society depends critically on the substance of its public domain foundations. It is that substance that nourishes creativity, honesty, trust and the socialised concept of self-interest upon which democracy and capitalism both depend3.

After ten years of fiscal attrition inspired by a neoliberal view of the public sphere, a crisis is emerging in New Zealand; a crisis of private affluence for many coinciding with public impoverishment for all. Tax cuts have benefited higher income earners, and tax increases have become politically off limits. The expenditure of public revenue has become increasingly miserly. The application of complex cumulative means-testing to income support has been one very visible reflection of the decay of New Zealand's post­war fiscal contract. Inadequate benefits are today delivered with high transaction costs, imposing high effective tax rates (EMTRs)4 on the additional earnings of beneficiaries and on the many working families who require income supplements.

A society - like a family - cannot be rich if its members are poor5. A civilised society - by definition a society with a sophisticated socio­cultural domain - requires an adequate public revenue to maintain and enrich its social capital and infrastructure and to ensure that each member of that society is supported from the wealth that domain enables.

 

BASIC INCOME SYSTEMS

A fiscal regime that provides a social dividend to all adults regardless of their income - whether as a pension, a cash benefit, a tax concession, a tax credit or a combination - is a basic income system. Basic income systems cut across traditional ideological divides (Van Parijs 1992, Clark & Kavanagh 1996), accommodating libertarian6 and socialist views of the state, and all views in between.

The most simple form of basic income system is the "basic income / flat tax" structure outlined by Atkinson (1995)7. The core benefit provided can be called a universal basic income or UBI (Rankin 1991). A UBI can be more, less or equal to an adequate individual benefit (Van Parijs 1992, p.4). A full UBI - set at or above the social minimum level of income - is a benefit that replaces all other forms of income support, whereas a partial UBI is a universal benefit that coexists with other benefits, acting as the foundation for a simplified income support superstructure. A more developed form of the basic income system allocates all public revenue to each member of the society as a social wage, and distributes part of the social wage as a UBI, while retaining the remainder for direct government expenditure and income transfers.

New Zealand's present tax­benefit regime, once reformed into a basic income system on a fiscally neutral basis8, given time, productivity growth and policy insights from new growth theory, can develop into a generous basic income system. Juliet Schor's idea (1991, p.2) of a historically rising productivity dividend is suggestive of the means by which a more than adequate UBI might be able to evolve from a very basic UBI.

The introduction of a universal basic income, per se, is not a costly reform. For any tax rate and level of committed public expenditure, a level of basic income can be calculated9. Likewise, for any level of UBI, there is a calculable cost in taxes and/or public expenditure and/or economic activity10. The main barrier to reform is not the cost of reform, but mid­twentieth century ways of thinking about income taxes and benefits as disconnected parts of the fiscal system; ways of thinking that make it hard for us to think of tax concessions as benefit entitlements.

 

TAX CONCESSIONS ARE BENEFITS

The present fiscal regime can be easily reinterpreted as a basic income system by accounting for the existing income tax scale as if it was proportional (ie "flat"). The company tax rate (33% at present) or the upper personal tax rate then becomes the rate of income tax. Relative to the flat tax benchmark, any tax concessions of any kind become benefits and penal taxes become surcharges. From this accounting perspective, cuts to concessionary tax rates - as occurred in July 1996 and as scheduled for 1998 - are a form of benefit increase11. A tax cut and a benefit increase are both ways of putting extra public money into people's pockets. This contrasts with a neoliberal accounting perspective, which sees tax cuts as a means of putting more private money in people's pockets, and sees benefit increases as transferring more private money from one pocket to another.

 

Table 1: the 1997 New Zealand Income Tax Schedule

 

Table 1 shows the structure of the 1997 income tax scale. The 15 percent and 24 percent tax rates can be taken as concessionary rates. Therefore, any resulting tax concession is, for each dollar of earnings subject to concession, the difference between the core tax rate (33%) and the concessionary rate. Once we accept that ordinary tax concessions are a form of benefit, it is a small step to account for the maximum ordinary tax concession (eg $3,933) as a partial UBI.

The next step is to account for the smaller tax concessions payable to persons earning less than $34,200 per annum. We can regard any adults whose total annual benefit entitlements - including tax concessions, student allowances, Family Support tax credits and Accommodation Supplements - come to less than $3,933 as being subject to a clawback or surcharge on their UBI12. And we can regard any adult whose total benefits come to more than $3,933 as being in receipt of a supplementary benefit.

 

A PROPOSAL FOR REFORM

Accounting for the present tax­benefit regime as a basic income system constitutes the first stage of fiscal reform. Removing UBI clawbacks is the second. By thinking of public revenue as a set share of gross domestic product (GDP) - a  social wage fund - and thinking of the individual social wage as an equal division of that fund, a UBI becomes a cash portion of each adult's social wage. Table 2 presents a set of stylised facts relating to a fiscally neutral basic income system for New Zealand13. I have allocated a UBI of $4,000, approximately equal to the present maximum ordinary tax concession of $3,933. For those at present entitled to receive more than $4,000 in tax concessions and cash benefits, their supplementary benefits appear in Table 2 as "other spending".

A child's UBI would be essentially the same as the universal family benefit that existed from 1938 to 1991. It is zero-valued in Table 2, however, reflecting the present reality of a fully means­tested Family Support scheme, and reflecting the view that child poverty in 1997 can be most immediately addressed by paying caregivers a UBI and, where necessary, a supplementary benefit based on family size.

Table 2 represents little more than the accounting stage of reform. The reform involves four key points: (i) conflating company tax and personal tax into a single rate of income tax (in effect, a production tax), (ii) treating tax concessions as benefits, (iii) attributing the entire public revenue (the social wage fund) to its individual owners, and (iv) distributing part of the individual social wage as a UBI. The individual social wage is simply an attribution of public revenue - of the social wage fund of $43.2 billion - to individuals; a division of $43.2 billion among 3.6 million people, which comes to $12,000 per adult and child. Social expenditure is funded from this fund, which represents $12,000 of the total income of each New Zealander each year. Government expenditure is thus 'social wage funded'. By way of contrast, conventional accounting treats these items as 'tax funded' and therefore more heavily funded by high income recipients and not funded at all by beneficiaries, caregivers and children.

The "Child Investment Fund" presented in Table 2 is an aggregate of children's social wage allocations. Approximately one-quarter of public revenue can be said to belong to New Zealand's children, and can be regarded as an investment fund. Indeed, the school and pre-school components of the education system, the child health system, and the Children's and Young Person's Service (CYPS) could all be thought of as being funded from the child investment fund; ie from the social wage incomes of our children.

 

Table 2: New Zealand 1997: some Stylised Facts.

 

Implicit in the process of achieving reform, however, are changes that go beyond accounting. As well as topping up the ordinary tax concessions of low paid workers to create a partial UBI, the supplementary benefits could be conflated into a single payment, funded as a tax credit. It would be customised according to the profile of the recipient, and subject to a single means­testing regime. I have in mind a kind of points system, not dissimilar to that used by the New Zealand Immigration Service, which would award points towards a supplementary benefit in accordance with family composition, disabilities of family members, and age. Such a points system would be able to facilitate phased retirement by allocating increasing number of points towards a supplementary benefit to persons as they age, from, say, 55 to 65. New Zealand Superannuation, post­reform, could integrate into the supplementary benefit regime, or could become fully universal through a UBI top­up - an age dividend - payable from the retained social wage.

 

GROSS EARNINGS: A CONCEPT PAST ITS USE-BY DATE

One very important implication of a flat rate of income tax is that the whole concept of gross personal earnings can be dispensed with. This concept served as a useful accounting fiction in the twentieth century era, when graduated income tax scales emerged as a politically acceptable means of raising additional public revenue. In the 1990s, however, such personal tax scales simply reinforce the neoliberal view that all income is initially private income. On the other hand, once taxation is seen as a flat­rate royalty paid by producers for public domain resources, then the ensuing revenue is directly accounted for as public funds. With the public revenue being attributed to every individual as social wage income, then taxation would no longer be able to be treated by economists as a drain or a leak from the circular flow of goods, services and money.

 

Table 3: DISBURSEMENT OF FIRM'S 'VALUE-ADDED'

 

Income tax would be remitted directly by firms, without ever being allocated to individual employees. With a flat tax rate of 33 percent, a person's true wage or salary - the reward for their labour - is 67 percent of the gross wage. Employers could simply deduct 33 percent of their gross wage bill, without allocating the income involved to their employees. Then, for employees with a 'primary tax code' the employer would add the UBI amount to the labour wage, and deduct the amount from the total submitted to Inland Revenue. Table 3 shows how a stylised firm would disburse its income, and Table 4 shows how an employee's payslip might appear, following the formal introduction of a basic income system into the nation's fiscal contract. Table 4 depicts the case of an employee who today would be said to be receiving a gross salary of $50,000. The $3,125 paid to the employee each month is essentially the same amount as that salary­earner would receive under present accounting arrangements; it is just the make-up of the pay slip that is different.

There could be three tax codes: primary, secondary and contract. The secondary tax code would be used for a person's second or subsequent job. Persons not wanting to receive their UBI with their wages would opt for a 'contract' code, and could have their UBI payments managed through an interest earning Inland Revenue account that they might be encouraged to access only while between contracts or while waiting for payment.

 

Table 4: MONTHLY PAYSLIP OF EMPLOYEE ON PRIMARY TAX CODE

 

The end of gross personal incomes is an important step in resolving the 'poverty trap' problem of high effective marginal tax rates (EMTRs). Because there would be no longer any personal income tax, each person would have a zero marginal tax rate. EMTRs would only be relevant to persons in receipt of a supplementary benefit, or persons paying a surtax such as a student loan repayment or child support liable parent contribution by formula assessment. Disregarding the latter two cases14, the single abatement rate for the supplementary benefit becomes the EMTR for any beneficiary. Supplementary benefits might abate at say, 40 percent of private earnings. That would mean that an unemployed family granted $200 per week ($10,400 per year) in excess of their UBI entitlement would have their benefit cut to $160 per week if they earned $100 per week. Their supplementary benefit would disappear once earnings reached $500 per week. Generally, each $1,000 of additional annual earnings (ie after-tax earnings exclusive of their UBI) would cause the annual benefit entitlement to be abated by $400.

The abatement rate for supplementary benefits becomes the third key parameter defining the proposed basic income system. In the case of a full UBI, there are no supplementary benefits so its value is zero. But otherwise, a change in the abatement rate could be an alternative or a complement to a rise in the tax rate as a means to raising the UBI amount. Progressively raising both the abatement rate and the UBI would be one route to eventually phasing out supplementary benefits.

The introduction of a universal basic income, the removal of the concept of gross income, and the introduction of a single benefit abatement regime, constitute a solution to the problem of the poverty trap. With a UBI, nobody stands to lose their entire benefit on account of an increase in family earnings, because the UBI itself constitutes a basic minimum benefit. There would always be an incentive for a person or family to seek to raise their private incomes, because there would only be one penalty, the loss of a part of one's supplementary benefit. Welfare fraud would be less of a problem than at present, because the basic income would be a legal entitlement for all, because end of year tax reconciliations would ensure that underpayments and overpayments of supplementary benefit were resolved, and because a single government department - a "one stop shop" - would manage the collection and disbursement of public revenue.

 

POLITICAL CONTESTABILITY

The economic contribution of the public domain to GDP can only be valued indirectly through the kind of political auction that we call 'elections'. A basic income system is particularly well adapted to the MMP environment, in which parties have to brand themselves, and in which coalition governments are accountable for the way they blend their policy manifestos. This branding and blending is the essence of an efficient political auction. The public domain cannot be valued by economists, in part because many of its attributes are not subject to the laws of scarcity. Weitzman (1996, p.211) says "if the essence of the creative act consists of cleverly combining useful existing ideas, then there is truly a rigorous sense in which human ingenuity has the potential to overcome diminishing returns." Creativity is a public domain resource that has a falling marginal cost as its quantity supplied increases.

A rise in the tax rate following the election of a centre­left government would normally mean a fall in labour wages, to be offset by a rise in the social wage, including a rise in the UBI. Under a basic income fiscal contract, the trade-offs between high and low taxes, and between wage income and social wage income, become readily apparent. Rather than having a contract in the form of a Fiscal Responsibility Act that asserts that debt repayment and low taxes are "sound" and that implies public domain resources have little economic value, it would be possible to move to a value­neutral regime of politically accountable fiscal trade­offs.

The key parameters which would determine a political party's fiscal profile are: the basic tax rate15, the UBI amount16, the benefit abatement rate, and new expenditure initiatives. At a slightly higher level of complexity would be proposals to change the points allocations for benefits and proposals to introduce new taxes (eg carbon taxes; capital gains taxes; financial transaction taxes) as alternatives to higher income taxes. These fiscal trade-offs cannot easily be evaluated by the public today, because accounting for taxes and benefits has become too complex (St. John 1996) for the public to see how the different parts relate to each other, and because the contemporary language of public policy has its own neoliberal bias.

 

CONCLUSION

A basic income system can lead to the resolution of the underlying fiscal paradox facing modern developed economies such as New Zealand's; the problem of increasingly constrained public revenues inhibiting the growth of the socially owned "non­rival" resources that have been historically responsible for economic growth. The assertion that capitalist systems do involve a synergy between the private and public domains is uncontroversial; even neoliberals accept that some productive forces dwell within the public domain17. The controversy lies in the relative importance attributed to each domain. By separating the accounting from the politics, the ideological conflict that has inevitably accompanied the neoliberal reform process can be defused. Ideology can be placed where it belongs, in the political arena.

Valuing the relative contributions of the two interdependent domains cannot be undertaken by technocrat economists, or by business or trade union lobbyists. To achieve the best possible political valuation of the economic contribution of the public domain, the central parameters of the fiscal contract between firms and households must be easily understood by electors. A single rate of income tax, a universal basic income, an end to confusion between gross and net incomes, a single benefit abatement rate, and an official poverty line (social minimum) can all be incorporated into a new fiscal contract.

The right to enjoy one's social inheritance is no less sacrosanct than the rights of private inheritance. The introduction of a universal basic income is a way of recognising the public property rights of a resident population. It is a logical outcome of any social accounting system predicated on the natural synergy between the private and public spheres of activity. It is a means of acknowledging the public contribution to economic development, while recycling public income back into the private domain for private expenditure. A universal basic income is an effective means to the creation of a self­reliant economy which can be set to any level of fiscal constraint. As a part of a social wage, it complements other forms of public expenditure. And, by acting as a safety net but not as a poverty trap, a universal basic income can be used by a rich society to ensure that it is not populated by poor people.

 


NOTES

  1. While Romer emphasises ideas and knowledge, leading public choice theorist James Buchanan attributes an overwhelming importance to the "legal­government framework" (Van Parijs 1992, p.15) as a source of economic wealth.[return]
  2. Income tax can be seen as a "just tax", in that it "takes from persons what they have no just right to possess" (Steiner 1992, p.81) and allocates to the owners of the public domain, who do have a just right to possess. [return]
  3. The idea of socialised self-interest arises directly from the writings of Adam Smith, in particular his Theory of Moral Sentiments (1757) which can rightfully be claimed as the foundation of social capital theory. [return]
  4. Effective marginal tax rates. [return]
  5. We expect dependents within a rich family to not be poor; indeed we have Child Support laws to enforce this principle. Likewise no member of a rich society should ever be involuntarily poor. We should also note that one measure of the wealth of a family is the number of dependents it can support. Likewise, a rich society can afford to have a lower labour force participation rate than can a poor society, and, as Weitzman suggests, a rich society can expect to grow faster as a result of its greater ability to generate and process ideas. [return]
  6. By 'libertarian' I have in mind the belief that you should be able to spend your own income rather than having the government spend it on your behalf. This view can accommodate high or low amounts of public revenue, so long as that revenue is recycled, and contrasts with the 'neoliberal' view that public revenue beyond a bare minimum is tantamount to theft. Steiner (1992) is an example of a libertarian supporter of basic income. [return]
  7. Atkinson (1995, pp.2,4) suggests that a basic income system for Great Britain based on a flat rate of income tax of 40 percent, the current upper tax rate, and a "refundable tax credit" which converts tax allowances into a universal benefit. Nobel Laureate James Meade favoured a "Social Dividend" (1993, p.146) or "Citizens Income" (1995, p.55) to supplement the low wages that would be required to sustain full employment, to be funded in part by classing "personal tax allowances or reliefs" and "other social welfare benefits" (Meade 1995, p.55) as a part of this new benefit. The British and European Debates can be accessed through the Basic Income European Network (BIEN) on the Internet at "http://www.econ.ucl.ac.be/ETES/BIEN/bien.html". [return]
  8. Here "fiscally neutral" means without raising the 33% tax rate, and without lowering the fiscal surplus. [return]
  9. Saunders (1988), p.26: "As they are normally proposed, GMI [guaranteed minimum income] schemes are self­financing". Note that, while Saunders is referring to a basic income system, the GMI terminology should perhaps be avoided in the New Zealand welfare debate, because of its associations with the existing Guaranteed Minimum Family Income, which is a highly targeted benefit for low income wage-earning families. [return]
  10. A given level of UBI can be calculated, given any particular budget constraint. A rise in the UBI can be funded either from higher taxes, from a reduction of other public expenditure, or through an increase in GDP and employment. [return]
  11. A "social dividend of sorts" (Berryman 1995); "the long awaited social dividend" (Clifton 1995), "true dividends of growth" (Brash 1996, p.16). [return]
  12. The number of New Zealanders subject to very high clawbacks is small, because Income Support, Inland Revenue and the Ministry of Education, taken together, already target just about every low income person for some sort of assistance. It should also be noted that part-time employees do receive ordinary tax concessions as well as these other benefits. [return]
  13. The numbers presented in Table 2 are approximately correct for New Zealand in 1997. They are presented as stylised facts in order to make the arithmetic as easy to follow as possible. More details of 1997 costings are available in the Appendix Table to Rankin (1996). [return]
  14. I would favour abolishing student loans and writing off student loan repayments, once a UBI came to act as a universal student allowance. Further student assistance could be provided through supplementary benefit points. Non­vocational education is a key feature of the public domain. The Child Support Scheme would come to be means­tested on true earnings rather than on fictitious gross earnings. For the longer term, the social wage approach focuses on the need for universal public investment in children, and sees additional liable parent contributions as a matter for private mediation, resolvable on a case by case basis, and as legally binding as any tax payment. [return]
  15. Also the GST rate would remain a part of the debate. Consumption taxes can be regarded as payments made by consumers for their use of the public domain. [return]
  16. Formally, the UBI should be specified as a percentage of GDP, so that it maintains a constant share of national income, unless explicitly changed. [return]
  17. For example, Gerald Scully, in a report commissioned by the New Zealand Inland Revenue Department, suggests that a tax rate of 20% would optimally account for the public contribution to national income (Easton 1997, p.57). [return]

 

REFERENCES

Atkinson, A.B. [Tony] (1995) Public Economics in Action: the Basic Income/Flat Tax Proposal, Oxford: Clarendon Press.

Berryman, Warren (1995) editorial The Independent 22 September.

Brash, Donald (1996) New Zealand's Remarkable Reforms; 1996 Hayek Lecture, IEA Occasional Paper 100, London.

Clark, Charles M.A. and Catherine Kavanagh (1996) "Basic Income, Inequality, and Unemployment: Rethinking the Linkage between Work and Welfare", Journal of Economic Issues 30(2):399-406.

Clifton, Jane (1995) "Talk too Taxing for Government" NZ Sunday Star­Times, 24 September, p.C2.

Easton, Brian (1997) "Baths, Hogwash and Taxes", NZ Listener, 12 July.

Fukuyama, Francis (1995) Trust: Social virtues and the Creation of Prosperity, London: H. Hamilton

Heilbroner, Robert & William Milberg (1995) The Crisis of Vision in Modern Economic Thought, New York: Cambridge University Press.

Meade, James E. (1993) Liberty, Equality and Efficiency, Basingstoke, Macmillan.

Meade, James E. (1995) Full Employment Regained? an Agathotopian Dream, New York: Cambridge University Press.

Putnam, Robert D. (1993) Making Democracy Work: Civic Traditions in Modern Italy, Princeton N.J.: Princeton University Press.

Romer, Paul M. (1996) "Why, Indeed, in America? Theory, History, and the Origins of Modern Economic Growth", American Economic Review 86(2):202­206.

Rankin, Keith (1991) The Universal Welfare State; incorporating proposals for a Universal Basic Income; Policy Discussion Paper No.12, Department of Economics, University of Auckland.

Rankin, Keith (1996) The Standard Tax Credit and the Social Wage: Existing Means to a Universal Basic Income, Policy Discussion Paper No.20, Department of Economics, University of Auckland.

Saunders, Peter (1988) "Guaranteed Minimum Income Revisited: Paradise Lost or Guiding Light?", Economic Papers [Australia] 5(Sept.):25­32.

Schor, Juliet (1993) The Overworked American: the Unexpected Decline of Leisure, paperback edn.; New York: Basic Books.

Smith, Adam (1976 [1759]) The Theory of Moral Sentiments, Oxford: Clarendon Press.

St. John, Susan (1996) The Welfare Mess Revisited, Department of Economics Policy Discussion Paper, The University of Auckland, December 1996.

Steiner, Hillel (1992) "Three Just Taxes", in Arguing for Basic Income, Ethical Foundations for a Radical Reform, ed. Philippe van Parijs; London: Verso.

Van Parijs, Philippe (1992) "Competing Justifications of Basic Income", in Arguing for Basic Income, Ethical Foundations for a Radical Reform, ed. Philippe van Parijs; London: Verso.

Weitzman, Martin L. (1996) "Hybridizing Growth Theory", American Economic Review 86(2):207­212.

 


conjoint article by Mike Goldsmith

reply to Mike Goldsmith and Keith Rankin by David Preston

response to David Preston by Mike Goldsmith

rejoinder by Keith Rankin

 

© 1997 Keith Rankin


Rankin File || articles on Universal Basic Income