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Basic Income and Welfare

Background

A recent Guardian piece by Declan Gaffney asserts that a Universal Basic Income could not replace the UK’s social security (or welfare) system. The piece can be read here:

http://www.theguardian.com/commentisfree/2015/dec/10/finland-universal-basic-income-ubi-social-security

A basic income that replaced the UK’s social security system would need to be so generous that it would disincentivise the jobless from looking for work. Hence a punitive social security system that relies on sanctions is necessary because otherwise the jobless will not look for work. In short, such a Basic Income would make life too comfortable for the lazy and workshy.

Well perhaps this is true. given Declan’s assumption of a universal and unconditional basic income intended to replace the social security system. Such a basic income would need to be very generous and might well have the effect that Declan fears. A valid  inference of Declan’s fine piece is that Basic Income is a nice idea but infeasible; so let’s keep means tested and contingent benefits. and rely on Universal Credit to provide the right balance between carrot and stick.

Should the idea of Basic Income be abandoned?

Given Declan’s point, that UBI could not, or should not, replace the social security system, is Basic Income simply a nice but impracticable idea?

I agree that it would be too expensive for basic income to replace all social security, at least in the UK’s circumstances. UK housing costs, for example, are far too high and would need to fall massively before a Basic Income could be anywhere near sufficient to cover housing costs. Until such time as the high cost of housing in the UK  is addressed, a system of means tested benefits for housing costs will be needed.

Similarly, the social security system also provides contingent benefits, that is benefits which compensate for disability, unemployment, old age, and child rearing. It would not make sense for a uniform basic income to be set at a level  which covers contingent costs  of minorities – it would be far too expensive. In any case, the National Insurance Fund insures against some of these contingencies via contributions.

So Declan says (and others say) that the current social security system accommodates the variegated needs of the population and that a basic income is unnecessary and inadequate. However, I do not believe Declan’s argument is dispositive.  A modest basic income scheme, that is, one which does not seek to replace all social security benefits, is a practical  and worthwhile option.

Proposal for a modest basic income

A hat tip to Mike Gist (@mgist) who suggested that I calculate the net tax liability at different income levels before and after introduction of a basic income. I have done this analysis for the tax year 2015/2016, assuming an annual personal allowance of £10,600, which, to help fund the scheme, would be scrapped. So post tax income after implementation of basic income and after scrappage of the personal allowance is being compared with post tax income before scrappage of personal allowance. Tax credits have been excluded from the analysis.

The analysis shows that no one, whatever their income level would be left worse off if annual basic income were to be set at £4,240. Below is a graph of the results.

  1. The graph shows that for market incomes of below £45k (approx) tax payers would be better off post tax after abolition of annual personal allowance under basic income of £4,240 p.a.
  2. For incomes between £45k approx and £100k, there is no gain or loss. For incomes over £100k there is a gain which stabilises at £4,240 when income reaches £120k approx.
  3. The gain for incomes over £100k arises because personal allowances are currently restricted or non-existent at this level. Scrapping the annual personal allowance as per the scheme thus causes all income levels to be treated equally with respect to personal allowances.

Basic income simulation

Other points

  1. The analysis shows that the cost of even this modest scheme will exceed the current (pre-scheme) income tax take. To establish the cost of the scheme it is necessary to know how many people will gain how much for all income groups.
  2. A basic income set at £4,240 is sufficient to replace Job Seekers’ Allowance for the unemployed, and Working Tax Credits for those in work. Hence the aggregate spend on JSA and WTC can be deducted from the additional cost calculated in point 1.
  3. The basic income would replace working tax credits without the cliff edges and complexity that the existing system contains.
  4. The graph’s U shape is caused by the kinks in the current income tax schedule, and not by the properties of the basic income scheme itself. The withdrawal rate is a constant 20%. There is thus a strong incentive for workers at lower pay rates to increase their market earnings.
  5. The scheme has been formulated with the same parameters as are used in the existing income tax regime. That is the bands and rates (20%, 40%, and 45%) on which income tax is charged are identical as those which are in current use.
  6. Some of the annual gains of £4,240 accruing to 45% tax payers (those earning more than £150k p.a.), could, if a government had a mind to, be taxed away by raising the rate to 50%.
  7. The scheme should be acceptable to the electorate since there are no losers.

Summary and conclusions

An ambitious basic income scheme, that is, one that seeks to replace all social security benefits, is probably incontrovertibly infeasible.

However, because an ambitious scheme may be infeasible this is not necessarily a good ground for rejecting the concept of Basic Income completely. A modest scheme may be both feasible and worthwhile.

A modest scheme, as outlined above, could replace Job Seekers’ Allowance and Working Tax Credits. Withdrawal rates would be at the basic rate of income tax of 20%.

A need for other social security benefits would continue. Incentives to work could be improved by addressing housing costs which are currently so high that without Housing Benefit support it does not pay people to work.

Replacing Job Seekers’ Allowance and Working Tax Credits with an unconditional basic income removes the threat of starvation (which JSA sanctions represent) as an instrument of government policy.  Starving people is wrong and most people would agree that starvation should not be used by governments as a weapon against civilian populations.

Acknowledgements

@mgist for his suggestion that inspired the analysis

@cjfdillow for his comprehensive descriptions of how basic income works.

All errors are mine.

Appendix:

Calculation of post-tax income 

Appendix Basic Income calculations.png

 

 

 

 

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4 comments

  1. Hi. I’m quite mystified by your withdrawal rate of 20%. Surely this will vary greatly. Assuming HB, CTR and tax credits work as now, we would have eg:

    – 32%(tax + national insurance) – for people who have neither housing costs nor council tax
    – about 90% for people on BI, housing benefit and council tax reduction, but without tax credits
    – generally > 90% for people on child tax credit BI, HB and CTR

    90% because
    For each extra pound I earn I:
    – lose 32p in tax and national insurance
    – housing benefit is reduced by 65% of excess income after tax and NI are deducted
    – council tax reductions are at least 20% of excess income (varies in England for working age)
    So I lose a further 85% of 68p = 57.8p
    Total deduction is 89.8p

    A typical child tax credit case:

    I earn £1
    I lose 32p in tax and NI. I lose 41p in Tax Credits (41% taper based on gross income)
    I have 27p left
    I lose 85% of this in reduced HB and CTR
    I am about 4p better off.

    Fundamentally this is little different in outcomes to the existing benefits system (except, of course, for the critical issue of conditionality).

    • Hi Tim,

      I have only just picked up your comment. Sorry about the delay.

      I believe you are missing the point. The scheme starts from a blank piece of paper where all existing benefits have been scrapped.

      Every citizen would receive a basic income of £4,250 p.a. but would have no personal allowance (the scheme is part funded by scrapping the personal allowance).

      Because someone entering work would keep their basic income and pay tax at 20% on their market income the withdrawal rate would be 20% if existing tax rates were retained.

      The point of my blog was to say that basic income can not dispense with welfare – a welfare system would still be needed. But not JSA or Working Tax Credits. The basic income scheme could replace these two items.

      My proposal is that it feasible to rebuild a welfare system around this particular basic income system.

      There would still be a need for disbility benefits. If these were made contingent, not means tested, then such benefits would be paid to disabled people whether or not they were in work. Hence the withdrawal rate remains at 20% under the scheme.

      Similarly, the govt could re-introduce non-means tested child benefit. This would be paid irrespective of a recipient’s income.

      The big sticking point is Housing costs. The blog suggested that the government should intervene directly in the housing “market” so as to bring housing costs down to affordable levels.

      As for National Insurance, I agree the blod did not cover this. Even so, if the National Insurance thresholds are left as they are (approx £6,000 p.a.), the withrawal rate on the first £6,000 of annual market income would be 20% under my proposal. Only after market annual income exceeded £6,000 would the marginal rate of “tax” (the withdrawal rate) rise to 32%. There are several ways this high marginal rate could be addressed (for example, raising the NI threshold and introducing a flat rate on the excess to help fund the higher threshold).

  2. Apologies – where I said “Assuming HB, CTR and tax credits work as now” I should have said “Assuming HB, CTR and child tax credit work as now”.

    If there are not to be huge cash losers *and* you want to keep your very low taper rate, it will be very expensive indeed – you would need to pay everybody’s council tax, bump up child support (and child care support) to child tax credit rates (but without a means test) *and* reshape the housing system, either by paying everybody’s rent or by directly housing people.

    If you do this, then given that you are going to have to massively increase taxes to pay for it, you would probably want to ask yourself if you are sure that is the best use for the additional revenue.

  3. if you look at the graph and the numbers provided in the appendix, which compares income tax liabilities in the current year to the income tax liabilities arising under my basic income scheme, you can see that the govt’s income tax take is approximately the same under both scenarios. Indeed, that was the main point of my blog post which you seem to have missed.

    So you are incorrect to say that income tax would have to “massively increase”. Comparing like for like shows this not to be true.

    I


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