More on saving, investment and income

The following builds on the preceding blog about chapter 6 of Keynes’s General Theory. It seeks to clarify the Keynesian framework for measuring national income and to give further clarity to the meaning of income, saving, and investment. Keynes’s closed-economy analysis, as set out in chapter 6 of his General Theory, will be extended to include the foreign and government sectors. A distinction between the creation of value added and its distribution will also be drawn. This is because commentators, politicians, and lobbyists often (deliberately or otherwise) conflate value creation with value distribution. Incorporating the government and foreign sectors, it will be shown, preserves the equality of saving and investment. Aggregate saving can be determined either from the expenditure approach to national income determination or from the income approach; both approaches yield the same figure for saving and this further confirms the power of Keynes’s framework.

Incorporating the government and foreign sectors

In the following table, the productive sector of an economy has been split into the B2B sector whose businesses buy and sell between themselves, the B2C sector whose businesses sell to households, the B2G sector whose businesses sell goods and services to the government, and to the B2F sector whose businesses sells goods and services to foreigners. Sales and purchases between businesses in the B2B sector have been cancelled against each other so that only transactions between the B2B and the other sectors remain. These remaining transactions cancel on consolidation. The residual purchases figure of 500 that remains after consolidation represents imports since all other purchases, totalling 1,000, were made from the B2B sector. In a closed economy without a government sector, as assumed in chapter 6 of Keynes’s General Theory, consolidated A1 would be zero.

CodeDescription B2B B2C B2G B2F AdjustmentConsolid
ARevenue1,00040,00010,0005,000(1,000)55,000
A1Purchases500500300200(1,000)500
IInventory
adjustment
400(500)(600)400(300)
ICapital
adjustment
4,000(3,000)6,0007,000
U = A1 – IUser cost100(3,000)3,900(6,200)(1,000)(6,200)
Y = A – UValue added90043,0006,10011,20061,200

User Cost

The items in red relate to User Cost, denoted as U, and is obtained from A1 – I. Subtracting user cost (U) from Revenue (A) yields business income (Y) known as Value Added. Value Added is a measure of the additional market value added by the factors of production to purchased materials, goods, and services (denoted by A1). The factors of production, namely land, labour, capital, and government, will subsequently receive a share of the value added as a reward for their respective contributions. This is covered later.

In cases where no capital expenditure has taken place, the user cost will consist of just revenue costs (purchases of materials or finished goods plus an inventory adjustment) and a charge for depreciation. When capital equipment has been purchased, A1 will include the cost of new capital equipment. In these cases, user cost U must be decreased by the cost of the purchased capital equipment so that only revenue expenditure is set against revenue (A). This is achieved via a capital adjustment. Examples of capital adjustments are supplied in the above illustration. If capital expenditure has taken place then the capital adjustment will be positive. If the capital adjustment is negative then this will be because of depreciation of capital equipment. If a positive capital adjustment is higher than A1 then capital equipment is being made “in-house” rather than being purchased in a finsished state from an outside supplier. In the above example, the B2C and B2F sectors are making their own capital equipment.

Factor Costs

In addition to user cost, Keynes also identifies a second set of costs which he calls factor costs. Whereas user costs are concerned with payments to other entrepreneurs, factor costs are those payments a business makes in exchange for services other than those provided by entrepreneurs. These services facilitate, or are necessary for, production and exclude raw materials, finished goods, and capital equipment. The classical factors of production are land, labour, and capital, but in modern advanced societies government should be included. Hence factor costs include wages, rental payments, interest charges, business rates and corporation tax, and dividend payments. Factor costs are a distribution of value added and represent factor income in the hands of the factors of production.

The table shown below lists the aggregate factor costs of an economy. The total is 61,200, which is equal to the aggregate value added calculated above.

Factor costConsolidatedHouseholdsGovernmentRentiers
Wages (W )50,000
Interest (i)1,000
Taxation (T)4,000
Dividends (d)5,000
Profit (Pi)1,200
Value added61,200

In the following table each factor cost in the above list has been assigned to the sector for which the factor cost is income. So wages paid to labour is household income, interest and dividends paid to financiers are rentier incomes, and taxation is income received by government. The aggregate retained profits (Pi) of 1,200 is assigned to the rentier sector since retained profits form part of shareholders’ equity. Rental payments made by businesses would be assigned to rentiers.

Factor costConsolidatedHouseholdsGovernmentRentiers
Wages (W )50,00050,000
Interest (i)1,0001,000
Taxation (T)4,0004,000
Dividends (d)5,0005,000
Profit (Pi)1,2001,200
Value added61,20050,0004,0007,200

Saving

Saving is given by aggregate A1 minus aggregate U. Referring to the value added statement above we get 500 – (- 6,200) = 6,700 which, reassuringly, is equal to business investment shown in the same statement.

The saving figure of 6,700 is further confimed by aggregating the saving of each sector, assuming that the expenditure by the government and by foreigners is consumption expenditure. The following table sets this out:

Saving by sectorHouseholdsGovernmentForeignersRentiersTotal
Income (W ) 50,000(T) 4,000(M) 5007,20061,700
Expenditure(C) 40,000 (G) 10,000(X) 5,00055,000
Saving (S)10,000(6,000)(4,500)7,2006,700

The government deficit of 6,000 falls short of total saving of 6,700, and falls short of household saving of 10,000, and of private sector saving of 17,200. This seems to refute the claim made by the MMT school that government deficits are necessary, otherwise the private sector can not save.

Consumption expenditure versus revenue expenditure

A source of confusion sometimes arises between these two terms. Consumption expenditure is spending by households on goods and services provided by business. Whether a householder perceives the items purchased as capital or revenue in nature is irrelevant – sales by firms to households are consumption expenditure. From a business point of view, items sold to households are stock-in-trade, which are revenue in nature. Capital expenditure is undertaken by businesses, not by households.

Summary and conclusions

Keynes’s framework set out in chapter 6 of his General Theory defines income, saving, and investment in a closed economy without a government sector. An attempt has been made here to extend his methodology and ideas, using his notation, to an open economy with a government sector.

Keynes’s concept of business income is value added. This has enabled his ideas to be illustrated by a value added statement.

It is business that creates value added. Other sectors of the economy, although they may facilitate the creation of value added, and/or be necessary for creation of value added, do not create value added. Instead, they absorb it. These value absorbing sectors correspond to the factors of production, namely land, labour, capital, and government.

For the purpose of national income accounting, household purchases of goods and services from firms are consumption expenditure, whether or not householders perceive the purchases as capital expenditure or as revenue expenditure. For national income accounting purposes, the distinction between capital and revenue expenditure is relevant only to the spending activities of firms.

MMT’s claim that government deficits are necessary for private saving to take place is not plausible (leaving aside the desirability of saving).

Understanding Keynes on Income, Saving, and Investment.

Keynes covers these topics in chapter 6 of his General Theory. The chapter is very wordy and contains few examples – Keynes was not a good communicator of his ideas. This piece seeks to present his key ideas from chapter 6 in a more user friendly way so as to make them more accessible to a wider audience. A brief case study will be used.

Keynes’s model excludes the foreign sector and thus assumes UK firms operate within a closed economy. Apart from the business and possibly the household sector, Keynes’s model makes no explicit reference to other sectors of the UK economy, eg the government or financial sector.

However, Keynes is correct to make this apparent omission because the trading section of a firm’s traditional income statement is alone relevant to the determination of how much wealth has been created in a period. The remaining sections of a traditional income statement report the revenues associated with the other sectors of the economy, and merely show how the created wealth has been distributed among the factors of production. Keynes calls these remaining costs “factor costs”. These factor costs, eg wages, rent, taxes, interest, and dividends can be associated with suitably chosen sectors, eg households, government, financiers, and/or rentiers. Keynes concentrates on wealth creation, not on how the wealth is distributed between the other sectors. For this reason, this exposition starts with a traditional, widely used and understood trading account before developing it into a value added statement.

Consider the following consolidated trading accounts of the B2B and B2C sectors of the domestic economy. The trading accounts are prepared in traditional format which any accountant would instantly recognise.

Trading Accounts (£k)Consolidated
B2B
Consolidated
B2C
Revenue+1,000+2,000
Opening
inventories
200400
Purchases 01,000
Closing inventories+100+200
Cost of goods sold– 1001,200
Gross profit + 900+ 800

The purchases figures in trading accounts consist entirely of revenue expenditure, eg raw materials, goods for resale, etc. The purchases figure for the consolidated B2B sector is zero because the aggregate purchases of B2B firms will cancel against B2B sales revenue on consolidation. In other words, B2B firms will be selling and buying from each other and, in aggregate, the sector’s purchases and sales will cancel out to zero (unless they import). For this reason, only sales made to B2C firms will be recorded in the B2B sector’s consolidated account. This is why the sales revenue of the consolidated B2B sector is identical to the purchases of the B2C sector. These like items will cancel when the B2B sector is consolidated with the B2C sector. The following table shows the consolidation of the two sectors and the cancellation of the like items:

Trading Accounts (£k)Consolidated
B2B
Consolidated
B2C
AdjustmentB2B consolidated
with B2C
Revenue+ 1,000+ 2,000 – 1,000+ 2,000
Opening
Inventories
200400– 600
Purchases 01,000+ 1,000 0
Closing inventories+ 100+ 200+ 300
Cost of goods sold1001,200+ 1,000– 300
Gross profit + 900+ 800+ 1,700

The above trading accounts can be rearranged so that value added is yielded by the bottom line in place of gross profit. Value Added is what Keynes deemed, in the context of national income accounting, to be income (Y). He rejects using the bottom line (the net profit or net income) of traditional income statements as a relevant measure of income in the context of national income accounting. This is because net profit is calculated after deducting factor costs from gross profit. The factor costs are the revenue of the other sectors of the economy and so will cancel out on consolidation.

The value added statements of the two business sectors are shown below.

Code DescriptionConsolidated
B2B (£k)
Consolidated
B2C (£k)
ARevenue+ 1,000+ 2,000
A1Purchases 0– 1,000
IInventory adjustment100 200
Y Value Added+ 900+ 800

The letters appearing under the code heading are those used by Keynes in his General Theory to denote either a) the category into which an item falls or b) as a specific identifier. For example, closing and opening inventories both fall into the “Investment” category and hence have an I against them. A and A1 are specific identifiers and denote Revenue and Purchases respectively. The inventory adjustment ensures that it is materials used, or goods sold, that is set against revenue, not the purchases figure. So for the B2C sector, raw materials used, or goods sold, £1,200k has been set against revenue.

Value Added Statements can be consolidated using the same rules as with the trading account, i.e., cancel linked items and then aggregate the remaining items, as shown below.

Code DescriptionConsolidated
B2B (£k)
Consolidated
B2C (£k)
Adjustment (£k)Consolidated Value
Added Statement (£k)
ARevenue+ 1,000+ 2,000– 1,000+ 2,000
A1Purchases 0– 1,000+ 1,0000
IInventory adjustment100 200 300
YValue Added+ 900+ 800+ 1,700

Purchases (A1)

In a traditional trading account, the purchases figure (A1) will consist entirely of revenue items. An inventory adjustment is usually required to ensure that unused materials, or unsold goods, from the previous period are set against the current period’s revenue. The inventory adjustment also ensures that unused materials or unsold goods in the current period are carried over to the immediately following period.

Keynes, however, in his General Theory, includes both capital and revenue items within A1. So for Keynes, if a firm makes a one-off purchase of capital equipment from another firm then Keynes would designate the transaction as (A) by the seller and as (A1) by the purchaser. When capital items are included in A1, the purchasing firm’s value added will be understated because A1 will be overstated. An adjustment is necessary to correct for this and this is done via a capital adjustment which will show the part of A1 which is capital expenditure as investment (I).

Capital Adjustments

In his General Theory, Keynes brings up the need to recognise the deterioration of the entrepreneur’s capital equipment in the calculation of value added. He proposes what, in practice, might be an over elaborate calculation for capital consumption. However, his formula is elegant because it also yields how much capital formation has taken place. This calculation is hopefully explained correctly below.

Keynes’s calculation seeks to compare the theoretical value of capital equipment which has been hypothetically mothballed, to the actual value of the same equipment after it has been used in production. His premise is that capital equipment used in production loses value due to use and should have a lower value than identical, well maintained capital equipment that has hypothetically lain idle in the period. His method for determining the capital adjustment, using his notation, is to apply the following formula:

(G – B) – G

where G represents the theoretical end value of capital equipment that has been idle for the period after B has been spent improving it or keeping it in good working condition, and

where G is the actual end value of capital equipment after it has been used in production in the period.

G – B enables the opening valuation of the capital equipment to be determined.

Three possible cases may arise and Keynes’s formula is used below to illustrate.

Case 1: Capital consumption occurs

This occurs when (G – B) > G.

Put simply, this means the closing valuation of the capital equipment is less then the opening valuation. This indicates depreciation through use has occurred.

Example

The theoretical end value (G) of idle equipment was £300,000 after spending £100,000 on idle equipment maintenance (B) during the period. The actual value (G) at the period end was £175,000.

The first step is to insert the relevant figures on the left hand section of the table. The theoretical opening balance can thereby be obtained and transferred to the right side section. The actual closing valuation (given) is then inserted. The capital adjustment (shown in red) is the difference between the actual closing valuation and the theoretical opening valuation.

Equipment idle£kEquipment used£k
Opening valuation (G – B)200Opening valuation200
Maintenance expenditure (B)100Capital consumption(25)
Theoretical
closing valuation (G)
300Actual
closing valuation (G)
175

So in case 1 capital consumption is £25,000 and this amount should be charged to the entrepreneur’s value added statement. It represents disinvestment and should be coded with an I. The accountant’s production unit basis for depreciation may suffice as a reasonable proxy measure consistent with Keynes’s conception of capital consumption.

Case 2: No capital consumption or formation occurs

This occurs when (G – B) = G

The theoretical end value (G) of idle equipment was £300,000 after spending £100,000 on idle equipment maintenance (B) during the period. The actual value at the period end was £200,000.

Equipment idle£kEquipment used£k
Opening valuation (G – B)200Opening valuation200
Maintenance expenditure (B)100Capital consumption0
Theoretical
closing valuation (G)
300Actual
closing valuation (G)
200

In this case, no capital consumption occurred so no charge to the value added statement is required in respect of capital consumption.

Case 3: Capital formation occurs.

This occurs when (G’ – B) < G.

Put simply, this means the closing valuation is higher than the opening valuation. This indicates that capital equipment has been acquired during the period

Example

The theoretical end value (G) of idle equipment was £300,000 after spending £100,000 on idle equipment maintenance (B) during the period. The actual value at the period end was £450,000.

Equipment idle£kEquipment used£k
Opening valuation (G – B)200Opening valuation200
Maintenance expenditure (B)100Capital formation250
Theoretical
closing valuation (G)
300Actual
closing valuation (G)
450

In this case, the firm may have been increasing its capital equipment by its own labour or by purchasing it from another firm. When capital equipment is produced in-house, the wages and salaries of that part of the labour force assigned to the production of the capital equipment will have been capitalised (i.e., included in the actual valuation). Capital equipment produced by an individual firm for its own use should be recognised in the individual’s firm’s value added statement as investment expenditure and should be coded as I.

In the value added statements that follow the capital adjustment from case 1 above has been incorporated into B2B’s results. The capital adjustment from case 3 has been incorporated in B2C’s results.

CodeDescriptionB2BB2CAdjustmentConsolidated
ARevenue1,0002,000(1,000)2,000
A1Purchases0(1,000)1,0000
IInventory adjustment(100)(200)(300)
ICapital adjustment(25)250225
Y
Value Added8751,0501,925

Apart from items on the edges, eg Suplementary Costs, income determination under Keynes’s scheme is concluded.

Consumption Expenditure (C)

The revenue figure of £2,000 in the consolidated column represents the total sales made by B2C firms to consumers. This is because all B2B sales figures have been eliminated by the consolidation process. The revenue figure in the consolidated value added statement thus represents consumption expenditure (C). Using Keynes’s notation consumption expenditure can be otained from the total of A minus the total of A1. The consolidated revenue, as shown above, is the result of the sum of A minus the sum of A1 .

Saving (S)

Saving is by (strict) definiton equal to income minus consumption. The consolidated value added figure of £1,925 represents aggregate income. Subtracting the aggregate consumption expenditure figure of £2,000, a negative figure for aggregate saving (S) of – £75 is obtained. It is no accident that the aggregate saving figure is equal to the aggregate investment figure shown in the consolidated value added statement.

User cost (U)

Keynes appears to set much store by this figure. The user cost repesents the costs that have been consumed (as distinct from being incurred). It is the sum of materials used/goods sold (A1 – inventory adjustments) and capital adjustments (capital consumption – capital formation). The user cost (U) can (theoretically) be negative in which case it is added to revenue. The user cost (U) can be calculated from A1 – I. It is most meaningful at individual firm level since A1 becomes zero on consolidation. The user cost for the B2C sector can be seen to be equal to £950 (£1,000 + £200 – £250). Value Added, which is now the accepted definition of income for national income determination, can be obtained from subtracting an individual firm’s user cost from the firm’s revenue (A) (eg, £2,000 – £950 = £1,050).

Investment Expenditure (I)

This is equal to the inventory adjustment plus the capital adjustment. If the closing inventories are higher than the opening inventories then investment will have occured. If the closing inventories are lower then disinvestment will have occurred.

Capital consumption decreases the period’s investment. Capital formation will increase investment.

Positive investment increases value added.

Summary

The above exposition is a condensed summary of chapter 6 of Keynes’s General Theory. The exposition is intended to make accessible the important material in that difficult-to-read chapter to a wider, less specialised readership, eg accountancy and business studies students. The more marginal topics in that chapter have not been given much weight in this exposition.

Chapter 6 shows that income for national income accounting is most closely aligned to the gross profit figure which is found in traditional commercial income statements. Gross profit figures are augmented with capital adjustments to arrive at value added. Keynes’s proposed formula for capital adjustments has been unpacked so as to make it more understandable. The resulting income is known as value added.

Keynes’s analysis has its focus on the creation of wealth. The distribution of wealth to the other sectors of the economy does not figure in his analysis. However, the government does prepare analyses to show “who got what” via the income approach to GDP determination.

Keynes shows how investment is equal to saving by adhering strictly to the defintion of saving as being equal to Income minus Consumption. In the consolidated value added statement value added (income) has been determined as £1,925k and consumption expenditure as £2,000k. Hence saving is – £75k.

Keynes’s analysis assumes a closed economy. The introduction of a foreign sector would appear to render some of his analysis inadequate.

Transmitting economic ideas

The table below demonstrates how a nation’s GDP is determined. The table contains specimen transactions. Not all of a nation’s transactions relevant to GDP determination are included, just a sample. The table reveals the logic behind GDP determination and the role of the actors. It’s worth noting immediately that the government is a producer of goods and services and that government produced goods and services are included in GDP at cost. Household income is derived from wages and self-employment. Rentier income is derived solely from ownership of financial capital or property; rentiers do not produce anything.

The advantages of setting out GDP determination in tabular format are several.

Firstly , for those wishing to learn the basics it demonstrates the logic underpinning GDP determination. Included in this group could be first year undergraduates in economics, accountancy, business studies, and cognate subjects. As a former teacher myself, demonstration is vastly superior to presenting equations or relying on words to convey knowledge. In my experience, students will thank you for providing demonstrations to accompany words and to explain equations.

Secondly, it provides a format whereby students’ understanding can be tested. It should be fairly straigtforward to provide pre-printed tables with appropriately headed columns for students to use to enter a list of transactions under examination conditions.

Thirdly, the quantum of saving for each of the actors drops out of a completed table as shown in the savings table below. It demonstrates how Keynes’s “saving equals investment” postulate is arrived at. The saving figures also permit an introduction to sectoral balance analyses, as well as capital flows in a balance of payments context.

Fourthly, from the same table, the three approaches to GDP determination can be obtained. This is shown below.

Finally, the approach is not limited to demonstrating national income determination. It can be applied to other topics in economics, eg the banking system. Try it!

Fallacies of Modern Monetary Theory (MMT)

Fallacies of Modern Monetary Theory (MMT)

Taxation does not fund government spending

It does! Governments can fund public spending in just three ways: 

  1. Through taxation;
  2. By borrowing from the private sector;
  3. By borrowing from its banker (the central bank).

The last option on this list is forbidden in most advanced economies. This leaves taxation and borrowing from the private sector as the only available funding sources.

Money is a liability of the government

No it’s not! Customer deposits held by retail banks are liabilities of those retail banks. These customer deposits are not liabilities of the government or of the central bank. As an aside, money deposited with these banks is an asset to the depositor (customer).

Government spending precedes taxation

This could be true if money was created and injected into the economy by the government. But this condition does not hold. Most money in circulation is created and injected into the economy by private banks. 

Taxation alone determines a currency’s value

It is true that governments require taxes to be paid in the national currency and this creates demand for the currency. However, a nation’s international trading performance and capital flows also affect demand for a nation’s currency and its value. So tax is not the sole determinant. 

Conclusion

The “magic money tree” does not exist!

Image

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