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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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Where does money come from?

Do Banks Create Money?

The tables shown below illustrate how banks create money. The tables show two hypothetical high street banks and a central bank.  In this scenario, I bank with My Bank and you bank with Your Bank.  The scenario shows what happens when My Bank grants me a loan which I then use to pay you for services rendered.

Row # 1

Both banks start identically with capital of £1,000 which they have deposited at the central bank (Bank of England). The central bank acts as the banker to the high street banks, so the two high street banks effectively each have a current account with the central bank. These current account balances are shown in the Central Bank table.

Row # 2

I apply for and am granted a loan for £100 from My Bank. My bank creates a current account in my name and gives me credit for £100. I am thus authorised to issue a cheque of up to £100 from this account. Note the absence of cash – the money credited to my account is purely electronic. At the same time, My Bank creates a My Loan account which shows I must repay My Bank £100. Money has been created immediately these two entries are posted to My Bank’s books.

Row # 3

I write a cheque in your favour for £100 drawn on My Bank to pay you for services rendered. You deposit this cheque with Your Bank which credits your current account and debits an account called My Bank with £100.  This debit to the My Bank account signifies how much My Bank owes Your Bank.

Row # 4

Your Bank then submits the cheque for clearing. When the cheque is cleared My Bank will reduce my current account by £100 and reduce its Central Bank current account balance by the same amount. At the same time, Your Bank will increase its Central Bank current account by £100 and reduce its My Bank account by the same amount. This is to show that My Bank has settled is debt to Your Bank through the current accounts held at Central Bank. The Central Bank transfers £100 from the My Bank current account to the Your Bank current account to reflect this settlement.

Row # 5

The closing balances show the balances held by the banks once clearing has completed.

Row # 6

This row shows the difference between the closing and opening balances. It shows that I owe My Bank £100 and that My Bank’s current account held at the Central Bank has reduced by £100. My Bank will expect to earn interest on the loan and to restore its current account balance when I repay the loan. You now have a current account at Your Bank with a balance of £100. This is money you can spend – it is yours, This money did not exist until My Bank made the loan to me. It hasn’t come from the current accounts at the Central Bank because the total held at the Central Bank has not changed. So where has the £100 come from? The answer is it has been created out of nothing by My Bank when it approved my loan.Where does money come from