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Universal Basic Income: It sounds nice, but…

I go through some of the problems with Universal Basic Income proposals in a piece over at The Spinoff. Here’s a snippet:

In 2010, Treasury worked out what would happen if the government replaced all existing benefits, including NZ Super and Working for Families, with a universal payment of $300 per week for adults plus $86 per child per week. They found that income tax rates would have to rise to over 55% to fund the scheme. And, the proportion of people living on less than 50% of median household disposable income would rise by 5%.

The system would be costly and would leave the worst off worse off. If the worst off are left worse off, political pressure for layering welfare programmes on top of a basic income scheme would not be small. And hiking tax rates from 33% to 55% would be rather damaging. This was not the tax rate that Treasury thought would apply only to rich people – it would apply to everyone.

Milligan’s impossible trinity cannot be avoided.

Proposals like Gareth Morgan’s Big Kahuna scheme try to square the circle by combining relatively low basic benefit levels with a new comprehensive tax on capital. The scheme would tax any owned capital as though it had earned a 6% return, then tax that return at 30%. So your $500,000 house would cost $9,000 per year in capital tax, regardless of your income or ability to pay.

But the scheme suffers from two bigger problems.

First, if a comprehensive capital tax makes sense, then it makes sense regardless of whether there is a UBI. It should be evaluated on its own merits. For a start, assuming that all capital earns a 6% rate of return, and taxing that assumed return, seems more than a little harsh in a world where term deposit rates are closer to 3%.

More importantly, though, while relatively low basic benefits could make the system affordable, they would not be politically stable. There would be pressure to layer a benefits system on top of the UBI, or to increase the UBI. It does not seem plausible that any government would be able to withstand the likely months’ long John Campbell campaign that would, every day, highlight a different family whose benefits were cut under the shift to a UBI. We would quickly have a welfare system layered on top of a UBI, increasing the costs while eroding the UBI’s benefits.

I have a hard time seeing any UBI that is both politically feasible and desirable. Note too some of the recent work by John Gibson casting rather a lot of doubt on whether the schemes would help even if one were feasible and could avoid Milligan’s impossibility. He notes a few problems with the assumptions underlying support for income transfers:

  • Evidence for poverty traps in developing countries, where lack of income means poor nutrition and consequently means inability to work, simply don’t hold: calories are too cheap relative to minimum daily wages in poor countries.
  • Household resource limitations don’t seem to be a causal factor in children’s schooling outcomes.

He then goes through five rather important potential unintended consequences of income transfer schemes, mostly looking at things in developing countries:

  1. Transfers targeted to types of need encourage Tullock-style competing for aid. He notes a programme in Brazil targeting poor families with kids wound up resulting in less weight gain per month for the targeted kids; the families feared that if their kids grew well, the transfers would stop.
  2. If being in formal work means you pay taxes to support protection schemes targeting those outside of formal work, then you get distortions towards informal work;
  3. Transfers to targeted rural households generate localised inflation that hurts non-targeted households;
  4. Programmes can erode existing informal safety nets where people rely on each other and family during tough times. The effect of programmes is then a bit harder to judge where the effective beneficiary is the person who would otherwise be supporting the recipient of aid.
  5. Programmes likely affect household composition, and consequently undermine targeting. He gives the example of the expansion of old age pensions in South Africa: adults with low skills wound up moving in with pensioners.

On the fiscal side, he raises another substantial problem:

Figure 1 makes clear that cash transfers, even in the most efficient situation of a negative income tax, are either insufficient to lift people completely out of poverty, or dull incentives, or need a small group in the population to subsidise the vast majority. In an increasingly globalised world of much greater competition for skilled labourwhether that minority would be willing to fund such transfers will be a question of first-order importance.
It’s this last part that would be particularly worrying in New Zealand under 55% income tax rates.
About Eric Crampton (88 Articles)
I'm Head of Research with the New Zealand Initiative.

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