Universal Basic Income a Discussion Note

Universal Basic Income – a discussion note

A Universal Basic Income (UBI)[1] is an income paid to all people by the state, regardless of circumstances or need. The idea has been discussed intermittently for over two centuries, but has attracted growing interest recently.

For different reasons it appeals to both political left and right, and economists who have supported it includeJ.M.Keynes, J.K. Galbraith, James Tobin, Milton Friedman,Friedrich Hayek and Charles Murray. One reason for growing interest is the decline of traditional working contracts, which blur the boundaries between employment and unemployment, with 2 million people in the UK now on contacts which do not guarantee minimum hours of work, and 5 million working online, paid by the task.

It has the potential to reduce the interference of the State in individuals’ lives. It gives women equal control over their choices, it recognises the role of unpaid work and reduces the stigma of disadvantage. It could be used as a macroeconomic lever (citizens’ quantitative easing). It might also improve productivity by allowing individuals to make better decisions about employment (reducing leverage of poor employers, and the coercion of the State); by encouraging employers to raise skill levels, pay and working conditions to attract workers; and by allowing individuals to take time out for training.

Precedents

Schemes like Basic Income exist or have been trialledin Alaska, Iran, Namibia, India, and Canada. The Alaskan model is the longest established, and has substantial public support, but is difficult to replicate, since it is essentially a redistribution of a tax on the oil industry. Nevertheless, Alaska is the only State in the USA where inequality has reduced during the period since its introduction in 1982. With the exception of Namibia, none of these schemes pay a rate adequate for subsistence. The limited evidence from existing schemes suggests that overall social effects have been positive, the pattern of work incentives is inconclusive, with some evidence of women taking more time out for maternity and caring roles.

Pilot schemes are currently being proposed or implemented in Finland, Netherlands, Ontario and France. In response to a petition, Switzerland held a national referendum on its introduction last year, but rejected it by a large majority (23%/77%).

In the UK the new flat rate state pension and the pre 2013 Child Allowance have features of Universal Basic Income.

Recent proposals

In the UK the idea of a UBI has been developed by the Citizens Income Trust, who have undertaken substantial work and a range of publications. Policy papers have also been published recently by the Royal Society of Arts, Compass, Progress, and the Joseph Rowntree Foundation (references below).

Atkinson has proposed that there are three models of welfare

1. Contribution based social insurance –the model proposed by Beveridge (the National Insurance Fund) but not implemented in practice. Needs a continuing safety net for those without a contribution record
2. Social assistance funded from general taxation – effectively the current UK system (National Insurance is in reality merely an employment tax). Requires a potentially intrusive means testing regime.
3. Basic income – includes everyone, and in its pure form requires no means testing. Paid for from taxation (usually income tax, and involving abolition or reduction of tax allowances)

Our current system is a version of 2. Beveridge conceived of this as a safety net to protect those suffering poverty, which was almost entirely the result of unemployment or childcare costs. It is complex, and involves elaborate/punitive conditionality mechanisms to incentivise work.

Claimed advantages of UBI

The RSA claims its model has the following dvantages:

1. Motivates work – “work would pay better” (since UBI is paid regardless of work status)
2. Reduces fraud – fewer opportunities to cheat
3. Responds to changing work patterns – disrupted career paths, career breaks, retraining
4. Distributes opportunities for creativity more widely
5. Supports caring roles as demand for care rises
6. Removes intrusive and dysfunctional means testing, and reducing interference by the State in individual lives
7. Redistributes from higher earners and childless people to relatively low earners with children (the “JAMs”, or the “left behind”)

Some objections

1. Political/social acceptability – increased taxes, removing conditionality, greater “rough justice”
2. Cost – there is significant disagreement about the costs of a basic income scheme
3. Uncertainty of behaviour change – it might reduce willingness to work, thus reducing GDP (and the income to pay for the scheme)
4. Substantial rise in tax levels (estimates vary substantially)
5. Transition problems – difficult to implement rapidly, but partial/transitional systems lose the benefits (like simplicity, removal of means testing, or reductions in income) and thus reduce acceptability
6. Variable costs outside UBI – there are at least three areas where costs vary so widely that most proposals involve retaining some form of separate welfare benefit to meet:
7. Housing costs – because of wide regional variation housing costs are difficult to incorporate.
8. Disability costs – since people with disability necessarily incur additional costs, it would be necessary to retain some form of disability benefit
9. Poor evidence - existing schemes are poor models because they operate in very specific circumstances and pay at levels well below subsistence

The Citizens Income Trust Model

The current CIT proposal is designed to be revenue neutral. To achieve this, it retains (at least in a transitional period) most existing means tested benefits[2], but take up of these would be reduced. It is funded mainly by a 3% increase in current income tax bands, and the introduction of a flat rate 12% National Insurance charge. Its effects are illustrated in the two tables below.

An evaluation of a Citizen’s Income scheme with the working age adult Citizen’s Basic Income set at £60 per week.

Citizen’s Income Trust 2017

Changes in inequality and poverty indicators

The current taxand benefitsscheme in2015/16illustrativeCBI scheme

This scheme wouldredistribute fromrich to poor, with the‘squeezed middle’seeing the largestaverage increase in disposable income (5-8% increase for the bottom half of the income distribution.

The RSA Proposal

Three principles

The RSA model is a modified form of the proposals of the Citizens Income Trust. The RSA proposes than any scheme must satisfy three tests:

1. Moral – does it conform to generally accepted moral principles
2. Fiscal neutrality – does it cost no more than the current system
3. Distributionally acceptable – does it secure a politically acceptable distribution of resource

They claim that their proposal meets these, but several people have challenged this.

The RSA model

1. Paid to all citizens[5]
2. Replaces current tax allowances
3. Redistributes from high earners to families with children
4. Payment is at a “basic” level – creating an incentive to work
5. All recipients must be on the electoral register
6. Possible special contractual contribution requirement for recipients aged 18-25
7. Possible to combine basic income with socially useful employment at below minimum wage levels in work which would not otherwise be paid for.
8. Separate arrangements for housing costs and disability

Costing

The RSA claims that this model isrevenue neutral, with some redistribution from higher earners to families with children, to ensure that they do not suffer financially by comparison with the present system.

The net cost of the change would be £6-10b, of which they propose to raise up to £3b from an additional 50% tax rate on incomes over £150,000. This additional sum (around 1% of GDP) is substantially less than the £20b tax cuts made by the Government in 2015-16.

The RSA model excludes Housing and Council Tax Benefit which are very important for the poorest deciles. They propose a Basic Rental Income, to be funded through a Land Value Tax. It also assumes a continuing disability benefit.

Feasibility

Malcolm Torry has considered the feasibility of UBI implementation.

“.. it might be difficult for a government to legislate for a Citizen’s Income in the face of some entrenched prejudices against universal benefits: ‘the rich don’t need them’, ‘people wouldn’t work’, and ‘if resources are limited then we should give more to the poor’). But these objections to universal benefits are all answerable: 3 - the rich pay more in Income Tax than they would receive by way of universal benefits; people are more likely to work if marginal deduction rates decline; and targeting means means testing, with all of the problems that that involves - and recent increasing press interest in a Citizen’s Income suggests that understanding of the reasons for increasing the coverage of universal benefits is in fact increasing. “

Torry claims that a model proposed by the Citizen’s Income Trust to a Parliamentary Enquiry in 2007 was revenue neutral, but would involve unacceptable losses to people currently receiving Working Tax Credits[8]. He discusses a modified version, which would abolish the current Personal Allowance, but pay much lower rates than the RSA model and retain a number of elements of the current system (notably the current State Pension and Working Tax Credits, and NI at a flat rate of 12%). He claims that this model could be implemented very simply, because the only administrative changes would be adjustments to tax codes, payment of UBI, and simplification of means testing.

Critiques

Donald Hirsch reviewed UBI for the Joseph Rowntree Trust.

He noted that the idea is appealing, good for human dignity and frees people from state interference, and he welcomed the simplicity of the idea.

His concerns were:

1. UBI requires consent to tax increases, and taxation at lower income levels – probably politically unacceptable
2. Willingness to abandon conditionality – again politically difficult
3. UBI would have unpredictable behavioural impact – might reduce work, although UBI improves incentives to work a little rather than not at all
4. Acceptability of substantial transfers from richer to poorer – again politically problematic
5. Need to address public discourse associating low income with “welfare dependency”
6. Political concerns about levels of support for children

He notes that Universal Credit is potentially an interim step towards UBI, especially if modified to reduce tapering.

David Piachaud is one of the most recent commentators on UBI. He argues that partial or transitional UBI schemes would lose most of the claimed benefits of UBI, and therefore one must examine a “full UBI” model. Even if transitional schemes are necessary, they are only justified if the end is desirable. He proposes four tests of a full UBI:

1. The justice of unconditionality – he dismisses on the grounds that citizenship implies mutual contribution. A person who chooses to make no contribution of any kind (the “Malibu Surfer”) should not be entitled to benefit from the effort of others.
2. Individualised simplicity - he dismisses because of the varying costs of disability, housing, and the economies of shared living in households.
3. Economic efficiency –UBI is inefficient because it requires a high degree of churn of money, collected from most and then distributed to many people who do not need it. He also argues that proponents of UBI underestimate likely behavioural change.
4. Political feasibility–unconditional benefits are not perceived to be fair, and this is unlikely to change

He argues that UBI fails all four tests, and is therefore a distraction from policies to address the underlying social and economic issues. Direct targeting of welfare is more efficient: conditionality is not in itself wrong: what is wrong is often the way it is implemented. The money and effort which could be devoted to designing and implementing a UBI scheme could be better used to address these issues directly.

The issues which should be addressed, he argues are:

• Housing
• Unemployment and underemployment
• Investment in human capital
• Care work – including the burden faced by unpaid carers

Discussion questions

1. Is this the best way of addressing the most important policy issues?
2. Is it financially feasible?
3. Could it be politically acceptable?
4. What behavioural changes might we expect?
5. How could the transition to UBI be managed?

References

Citizen’s Income Trust (2016) Citizen’s Basic Income: a brief introduction, Citizen’s Income Trust.

Hirsch, Donald (2015) Could a Citizens Income Work? Joseph Rowntree Foundation

Landman, Howard & Lansley, Stewart (2016) Universal Basic Income: an idea whose time has come? Compass

Painter, A. (2015) Creative Citizen: Creative State, RSA

Piachaud, David (2016) Citizen’s Income: rights and wrongs, LSE

Torry, M. (2014) Research Note: A Feasible Way to implement a citizen’s income, Euromod Working Paper

Torry, M. (2016), The Feasibility of a Citizen’s Income. Palgrave Macmillan

Prepared for a meeting of the Norfolk and Suffolk Fabian Society

By Stephen McNair

January 2017

[1] Also known as Citizen’s Income, Basic Income Guarantee and other terms. It is similar to, but not the same as, a Negative Income Tax model.

[2] This is necessary because modelling indicates that a full replacement of existing benefits by UBI would either involve very substantial extra costs, or serious losses to people in the lowest earnings quintile.

[3]Poverty is defined as household incomes below60% of median household income

[4]The original ISER working paper on which thisbooklet’s figures are based abolished all Income TaxPersonal Allowances. Because for elderly peoplethe small Citizen’s Pension did not compensatefor the loss of their Personal Allowance for thosein employment, an increase in pensioner povertyoccurred. The amended version implements anIncome Tax Personal Allowance of £5,000 pa for everyone over the age of 65. This ensures no increase in pensionser poverty, and improves other indicators.

[5] Except prisoners, and payable to citizens of other EU countries only after a minimum number of years contribution.

[6] Varies according to assumptions about child numbers per household.

[7] The new State Pension and Child Benefit (pre 2013) both operate on the principle of the basic income.

[8]20% of people in the lowest quintile of after tax income would lose more than 10% of current income