Budgeting for utopia Premium – Money Perception

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© Dreamstime Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) 5 Save MAY 26, 2017 by: Martin Sandbu Universal basic income is receiving ever wider attention. The OECD has now weighed in with a simple but extremely useful analysis of the feasibility of UBI in its member countries. The titular question of its policy brief is well posed: “Basic income as a policy option: can it add up?” Well, can it? Free Lunch readers know of this column’s interest in UBI; we have previously illustrated how in the case of the UK, a decent basic income is affordable if combined with a sweeping rationalising tax reform and substantially steeper marginal tax rates on higher earners. (Though these rates, in the high 50 per cent range, would be dramatically lower than effective marginal tax rates on lower-middle incomes in the means-tested benefit systems that are ubiquitous today.) What the OECD study contributes is a comparative study of several countries, based on a straightforward set of assumptions. In fact two sets of assumptions, as the researchers consider two alternative reforms. First, creating a basic income simply by taking a country’s current benefit spending and distributing to everyone on an equal per capita basis. This is by definition budget-neutral for the government. Second, setting a basic income for non-pensioners equal to the current minimum social assistance level — what we can say a society has decided nobody should ever be left without — and asking how the budget balance would be affected. The OECD assumes such a scheme would be financed by shifting income tax bands down so that all income is subject to taxation, making the basic income itself taxable, and eliminating all other cash benefits except those aimed at alleviating specific hardship (most importantly disability and housing benefits). The researchers then ask how much more funding the government budget needs to find. What do we learn? First, that in some countries, even in the meagre first model, you can improve the lot of the worst-off simply by spreading the current benefits more evenly. That is because (as the chart below shows) existing cash benefit systems are not always progressive; they sometimes give more to those on high incomes than those on low incomes. That is true, notably, in Italy, Greece, Spain, Austria and Poland, all of which give bigger government transfers to the richest 20 per cent than to the poorest 20 per cent. Second, in part because of this, some countries could universalise the minimum social assistance they currently guarantee (the second OECD thought experiment) at little cost to the government. Leonid Bershidsky’s comment on the OECD paper highlights the case of Italy, whose benefits system is so poorly designed (and so ungenerous to the poor) that you could implement a basic income at the minimum social assistance level and have money left over. That, in turn, could be used to cut taxes or to increase the basic income level. In Finland and France, the budget effect would be about zero; in the UK, such a basic income would blow a £44bn hole in the government budget (about 2.5 per cent of GDP). Third, these schemes would not do much to eradicate poverty, because the benchmark of minimum guaranteed social assistance is usually very low. In Italy, a revenue-neutral basic income reform could achieve a UBI of only €158 for each adult and child a month (though for a family of four this does amount to a not insignificant €7,600 a year). France, however, could afford three times this, and Finland even more. The UK could finance a UBI of £230/month per adult and £189/month per child (some £10,000 a year for a family of four). All of these are well below national poverty lines. Fourth, all of this is without raising tax rates. That does not mean the models do not raise tax — removing tax-free earnings allowances does that — but we should note two points. One is that the difference between a paid benefit and a tax exemption is somewhat philosophical: if the basic income is paid out as a deduction from taxes (a negative income tax), it would formally reduce the tax nearly as much as the removal of tax-free amounts increases it. The other is that the change would be incontrovertibly progressive. Fifth, however, this does not mean that all the poor are made better off. As the research’s technical supplement shows in detail, the complexity of existing cash benefit systems means that a UBI reform could make a minority of the poorest worse off (and benefit some already well off). As a result it could bring some people currently just above the poverty threshold down below it, and even increase the overall poverty rate. (That would not be the case in the UK where poverty would be significantly alleviated by a basic income at the level of the current social minimum.)