ref.: Preston, David (1998) "Universal Basic Income - a Cure or a Worse Disease?",
Social Policy Journal of New Zealand 10:28-32 (June).


© 1998 Social Policy Agency of the Dept. of Social Welfare

 

UNIVERSAL BASIC INCOME - A CURE OR A WORSE DISEASE?

David A Preston

 

When Social and Economic changes become stressful people look around for solutions. Often the solutions proposed consist of reviving ideas from earlier times, with the suggestion that they will fit the new problems. Part of the purpose of intellectual debate is to examine such proposals to see whether they are realistic, or if they may bring more new problems than they solve.

One of these revived suggestions is the idea of Universal Basic Income proposed by Michael Goldsmith and Keith Rankin in issue 9 of the Social Policy Journal. In the opinion of this reviewer both articles suffer from a failure to demonstrate that their proposed Universal Basic Income remedies are in fact a cost effective cure for the problems they wish to solve. These are the abolition of poverty and the distribution of a share of national prosperity to all citizens. In the case of Rankin this is also allied with the desire to find a solution which does not weaken incentives to work, but does contribute to the build of social capital.

Universal Basic Income in a variety of forms is not a new concept. It has emerged from widely different parts of the intellectual and political spectrum. In the late nineteenth century Edward Bellamy proposed a variant of the universal basic income as a kind of soft socialism. By the thirties of the 20th century Major Douglas was proposing a national dividend as a solution to inadequate purchasing power. In the 1970s Milton Friedman championed a Negative Income Tax as an alternative to Social Welfare. Over the course of a century the concept had moved from the left to the right of the intellectual spectrum. However, North American trials failed to validate the efficacy of the Friedman proposals. In the interval since then most economists on the market orientated end of the spectrum have distanced themselves from the idea of unconditional income transfers from the state to people potentially capable of being self supporting.

Two decades on and the concept has surfaced again, though I will leave it to Goldsmith and Rankin to define the perspective from which they write.

 

The Goldsmith approach

In his article Universal Basic Income and the Concept of Citizenship (Social Policy Journal issue 9. Page 45) Michael Goldsmith extols "the poetic, almost mantra like, credo of the London-based Citizens Income Study Centre" which amounts to "a small but guaranteed income" for every citizen. He appears to reject the view he attributes to Beveridge and Marshall that income provision should be linked to a requirement to work or contribute on the part of those with the ability to do so. Indeed, he reinforces the concept of unconditional transfers with the quote from Van Parijs 'large numbers of people have no intention or possibility of working in the existing paid labour force because they have more important things to do, like caring for dependents, doing "voluntary" work, or surfing.'

A strong case can be made for recognising the interests of the state and community in adequate care for dependents. No such case exists for subsidising private surfing. The failure to draw any distinction between activities taxpayers can be asked to support because of wider social benefits and those where there is no social return is a fundamental weakness in the Universal Basic Income (UBI) approach. Indeed, if the state had some surplus funds it was itching to dispose of there are a long list of causes and purposes which would have a stronger claim than paying universal incomes out to people who don't actually need the money.

The poetic rhapsody over "small but guaranteed" incomes for all also fails to address issues of cost and need. If the UBI payments are to be universal, to replace social welfare benefits, and also to be high enough to support people at an adequate standard of living, then they will require a major increase in taxes. In the New Zealand case for example a payment to people of all ages would involve adding 2,850,000 additional beneficiaries to the 850,000 beneficiaries and superannuitants currently supported by the taxpayer. If average UBI payments were set at levels similar to the average of current benefits and NZ Superannuation payments then this would require average tax rates to rise by about 35 per cent of GDP, or over 40 per cent of personal earned incomes. This increase in average and marginal tax rates would have a major disincentive effect on the great bulk of earners because they would retain far less of any additional dollar they earned.. Only one relatively small group would have their incentives increases. These are beneficiaries in part time employment who are currently on the highest rates of benefit abatement. There are much cheaper ways of addressing the incentives problem of this particular group.

Alternatively, if the UBI payment were to be small enough to be financed by something like the existing tax take then average benefits for those in need would have to be cut to one quarter of their current level.

The first option would be fiscally unsustainable in a world of mobile businesses and skilled workers with emigration opportunities. The second option would mean mass starvation of the poor in conjunction with mass payments to others in no need of assistance. A compromise level would achieve the effect of increasing poverty and reducing incentives to earn all in one package. This is a "cure" which seems worse than the disease.

Goldsmith opens up a potentially interesting question when he discusses who should be entitled to citizenship linked transfers from the state in an increasingly mobile world. Even apart from the UBI proposal, all states have some rules about who may be entitled to free or subsidised services such as health or education. However, the suggested linkage to notional obligation to pay taxes involves a circularity in terms of non earners. Unless it were linked to some other more restricted concept of residence or citizenship rights there would be nothing to stop 5 billion people around the world offering to be classified as New Zealand taxpayers in order to qualify for Goldsmith's UBI payments.

In summary the Goldsmith approach is an attempt to explore a philosophic concept of citizenship-linked economic rights rather than a practical analysis of what UBI might actually mean in economic and social terms.

 

The Rankin proposals

Keith Rankin makes an attempt to put some economic flesh of the bare bones of the UBI proposals in his article "A New Fiscal Contract? Constructing a Universal Basic Income and a Social Wage" (Social Policy Journal issue9, page 55).

Rankin makes a promising start on developing an alternative perspective by approaching the issue from the stance of New Growth theories. These stress the important role of social capital and infrastructure in underpinning economic growth and the efficiency of private economic enterprise. Unfortunately, this promising start is not followed through. Rankin fails to make any convincing linkage between a Universal Basic Income and the formation of social capital. This is not surprising since what people do with their time and the lifestyle they adopt is crucial to the concept of social capital. Parents who raise children to be responsible and competent people add to social capital. People who indulge themselves in idleness and drug addiction, or neglect or abuse their children subtract from social capital. The social capital argument leads more clearly to the concept of conditionality in benefit payments than it does to a Universal Basic Income.

Rankin's second line of approach is to explore the idea of an initial and partial UBI system based on flat 33 per cent tax on all income. This amounts to raising all income tax rates to the existing maximum level, with the concessions built into existing tax rates below this level recast as UBI payments. In the Rankin presentation all people get back the equivalent of the tax rate concessions on an income of $34,200 p.a, rounded to a figure of $4,000 in a UBI payment.

Unfortunately he does not explain how this can be done without raising other taxes to compensate for the net cost of the shift which is generated by paying larger tax rebates to people currently paying less than $4,000 in income tax.. As he does not propose any increase in top income tax rates, I have supposed that the revenue shortfall is met by an increase in GST or other expenditure taxes. Once this is done a less happy picture emerges. The change involves cutting the real incomes of most earners in order to give a benefit to others, mainly non earners or people with part time employment. The equity effects of this and the disincentive effects on low paid full time earners are not adequately explored. For example a woman in full time paid employment on an average wage would seem to lose net income, while the socialite wife of a rich lawyer would get extra spending money with no questions asked.

Rankin also suggests (p 62) that with a an eventual full UBI there would be no supplementary benefits. How such a system could cope with the wide real variations in individual circumstances and costs amongst low income people is also not made clear.

Rankin proposes a new method of distributing UBI via firms to their employees. Why this would be more efficient than a centralised payment agency is not clear.

Rankin argues on pages 60 to 61 that the system he proposes amounts to a zero marginal tax rate for individuals because wages would be defined in net terms. How this can be so when the employer is deducting 33 cents in the dollar tax is not clear. It assumes that employees regard only their net wage as an income. It this is true then existing PAYE rates at amounts of up to 33 per cent have no disincentive effect, and Rankin is trying to solve a non existent incentive problem for workers. However, if employees take account of the tax deductions, then there is a disincentive effect under either tax model, with the effect being proportionally larger for lower paid workers under his proposals. This is because lower paid workers now face a marginal deduction rate of 33 per cent rather than the current rates of 15 and 24 per cent.. His argument also ignores the impact on the self employed, where the employer and the employee are the same person.

The proposed solution for low income earners disadvantaged by the changes during the transition consists of supplementary benefits abating at 40 per cent. Rankin does not appear to have considered the extra fiscal costs this approach would mean, nor factored it into his analysis of incentives. Further, a 40 per cent abatement rate means that benefits continue to be paid until net earned income is two and a half times the size of the largest supplementary payment, and even this requires the abatement to begin at the first dollar of earned income, which of course re-instates the disincentive which is supposed to have been abolished.

In summary, there appear to be major gaps in the Rankin analysis of distributional and incentive effects. Overall, Rankin fails to disprove the contention that Universal Basic Income systems are likely to lead to higher average tax rates, an overall reduction in incentives, poorly targeted expenditures, and a potential for a worsening of the relative position of low income full time workers. He also fails to demonstrate any clear linkage between a UBI type system and the formation of social capital.