ref.: Rankin, Keith (1998) "Rejoinder to David Preston", Social Policy Journal of New Zealand 10:36-38 (June).
© 1998 Social Policy Agency of the Dept. of Social Welfare.
Rejoinder to David Preston
I would like to thank David Preston for commenting on the papers (November 1997; issue 9) by myself and Michael Goldsmith on the topic of "universal basic income".
My article "A New Fiscal Contract? Constructing a Universal Basic Income and a Social Wage" set out to establish a fiscal contract between the producers who use "public domain" resources for private gain and the people who own those resources, through the means of a universal basic income (UBI): a flat rate of income tax combined with a universal benefit. My article suggests that such a contract can be established at minimal disturbance to present fiscal arrangements, because its most radical elements are accounting changes rather than policy changes. Whatever the tax rate, a universal income can be created.
A UBI is simply a cash "dividend" from each person's social wage, where the social wage represents each citizen's allocation of public revenue.
Preston says "Rankin fails to make any convincing linkage between a universal basic income and the formation of social capital". The main thrust of my article was that a universal basic income constitutes a return on social capital (broadly defined), and not that a universal basic income causes an increase in the accumulation of social capital. New Growth Theory, which I cite, suggests that in economically developed societies, social capital - especially in the form of new ideas - will accumulate of its own accord. My advocacy of a social wage as an explicit return on social capital is unlikely to undermine the formation of social capital, however. Indeed there are reasons to believe that the inclusion of a UBI as a part of each person's income portfolio would enhance rather than diminish the level of creativity and other socially beneficial voluntary activity. People are probably more willing to contribute to the public domain if they can see that they are drawing an income from it.
Preston switches from the broad concept of social capital that I use - the public domain - and switches to the narrow usage when he says "Parents who raise children to be responsible and competent add to social capital. People who indulge themselves in idleness and drug addiction, or neglect or abuse their children subtract from social capital." I do not deny that people who feel they have no stake in society act as a drag on our collective well-being. A universal basic income is intended to ensure that everybody, as citizens, have a stake in society, and therefore have incentives to not pursue anti-social lifestyles. Fulltime idleness is not a natural human trait. Most people with substantial private capital income do not "indulge themselves in idleness".
Preston says "Unfortunately [Rankin] does not explain how [a UBI of $4,000 per annum can be funded] without raising other taxes to compensate for the net cost of the shift". In fact my Table 2 does show how. The key point, however, is that almost every adult New Zealander already receives benefits (including tax concessions) close to or above $4,000 per annum, especially if we consider student loan living allowances as benefits. The people who would gain additional benefit incomes are low-paid (especially part-time) workers, non-employed partners of employed people, and people who have not applied for accommodation supplements that they are presently entitled to. We lack the comprehensive micro-data required to accurately estimate the extent to which individuals fall short. Nevertheless, given the macro-data as per Table 2, my best guess is that the cost of topping up every adult to a minimum annual benefit of $4,000 is the same as the cost of the 1998 "tax cuts".
It is important to understand that the universal basic income which I advocate is fully tax-funded across the economic cycle; it is not Social Credit, which Preston alludes to. Thus, for any level of basic income, there is a tax rate (or a portfolio of direct and indirect taxes) that will fund it. An adult UBI high enough to entirely replace the unemployment benefit would require a flat rate of income tax of at least 42 percent, assuming no change to other taxes. In 1996 I did a comprehensive set of costings, which used a tax rate of 43 percent to yield a UBI of $7,000 per annum plus supplementary benefits, or $9,000 per annum with no supplements. As Preston implies, the two-tier option ($7,000 plus transfers) is more equitable than the latter. Hence my personal preference for a form of UBI that does not replace all other benefits, but that nevertheless pays a universal income high enough to decimate the present income support bureaucracy.
I took my analysis of the reconstituted income tax system to a further level by suggesting that a flat rate of income tax really amounts to a production tax. Thus, if we shift to the "basic income / flat tax" (Atkinson 1995) approach that my paper advocates, we can go further and simply regard all income tax as a direct rather than an indirect charge on businesses. That actually reduces businesses' compliance costs. Production tax would simply be a set percentage of a firm's "value-added". Once we take this step, then all wages and salaries would always be quoted net of tax. Thus there would be no marginal tax rate because there would be no personal income tax. While this is mainly an accounting change, it is a change that goes a long way to defusing the present "disincentive" problem of high effective marginal taxes discouraging low-income workforce participants from raising their incomes.
The incentive issue raised by Preston is quite complex, and is linked to much more than effective marginal tax rates. For example, income effects, arising from average rather than marginal tax rates, provide incentives for high income earners to work more when tax rates increase. More importantly, a UBI provides incentives for overworked parents to participate less in paid work, just as it provides incentives for beneficiary families to participate more.
Preston concludes by saying "Rankin fails to disprove the contention that Universal Basic Income systems are likely to lead to higher average tax rates". This comment completely misses the point. My contention is that a UBI in New Zealand will require an average income tax rate of at least 33 percent. Clearly a universal income in excess of $4,000 per annum will require a higher tax rate. Taxes, like wages, represent an income to households as well as a cost to producers. Higher taxes do not represent a loss of income to society as a whole.
Preston criticises me most of all for failing "to demonstrate any clear linkage between a UBI type system and the formation of social capital". As stated above, I never attempted to establish such a linkage. While such a linkage probably does exist, it is important to note that a UBI is far from being a utopian solution to all our economic ills. As I have framed the concept, a universal basic income is mainly a basis for public accounting reform; for a fiscal contract between sovereign households and producing firms. Such a contract between capitalism's public and private domains can efficiently integrate our tax and benefit systems. And, as Michael Goldsmith notes, it enables the tax-benefit system to define citizenship in an inclusive socially-integrative way.
Atkinson, A.B. [Tony] (1995),Public Economics in Action: the Basic Income/Flat Tax Proposal, Oxford: Clarendon Press.
Goldsmith, Michael (1997), "Universal Basic Income and the Concept of Citizenship", Social Policy Journal of New Zealand 9:45-54.
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. This paper is on the Internet at "keithrankin.co.nz/krnkndisc_pap.html". The missing Appendix Table is at "keithrankin.co.nz/krnknapp_tabl.xls".
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.
© 1998 Keith Rankin
Rankin File | Universal Basic Income