Basic Income – An Idea Worth Exploring

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Basic Income is being discussed more and more.  It will be discussed at this weekend’s Basic Income Ireland seminar.  Basic Income is a weekly payment from the state to every resident without any means test or work requirement – a payment sufficient to afford a decent living standard.  It would work like this:  I receive a weekly payment from the state of approximately €200 per week (if that’s considered to afford me a decent living standard) whether I work or not.  Any income I earn above that is taxed.  If I choose not to work I still receive the €200 weekly payment.   In essence, BI breaks the link between work and income.

There have been considerable criticisms.

First, it has been dismissed on grounds of cost.  It certainly would be expensive, requiring very high tax rates on income from work.  Tax rates of 40 to 50 percent on all income have been proposed to pay for the programme.  And given the need to fund public services, additional social protection payments and investment it is hard to see how this could be introduced in the short-term.

Second is the impact on the labour market and work behaviour.  In short, if you give everyone an adequate income would they choose not to work?  This could create labour shortages in key sectors which would hamper growth and undermine the ability to fund BI.

Third is the inflationary impact.  Boosting incomes could put pressure on prices and drive up imports which in turn would require increasing the BI as it struggled to maintain value.  This could result in an inflationary spiral (of course, we could do with a little spiral to get us out of this deflation).

These are valid criticisms and cannot be easily dismissed.  One of the problems is that there is no full-scale BI programme operating anywhere, so empirical study is limited.  However, there have been a couple of limited experiments:

  • The Canadian government provided a guaranteed annual income to allresidents Dauphin, Manitoba in a pilot project in the 1970s.  This showed little negative impact on labour force participation (though, because participants knew the scheme was temporary, this may have skewered the results).  Still, the benefits are worth noting:  hospital visits fell with fewer incidences of work-related injuries, fewer emergency room visits from car accidents and domestic abuse, a reduction in rates of psychiatric hospitalization, and in the number of mental illness-related consultations. Mothers stayed with their new-borns longer and teenagers returned to education.
  • Another experiment was conducted in a rural village in Namibia also found positive results:  poverty-reduction, positive health impacts, greater community participation and an increase in economic activity – in particular, the establishment of small businesses.

These are insufficient to draw conclusions but they are provocative – and suggest the need for more field experiments in BI, to assess its real impact, rather than relying on models whose assumptions can be value-laden.  However, rather than induce sloth, in both cases it induced increased social and economic activity.  This shouldn’t be too surprising – BI can be seen as an instrument of social certainty, a prerequisite for increased social activity.

Implementing a full-scale BI – even if considered desirable – would be impossible in the short-term.  But systems throughout Europe already contain BI elements – most notably, Child Benefit which is paid for each child regardless of the parent’s income or employment status.

There is one area where BI can help boost low-income groups –low-paid and casual workers.  These workers are disadvantaged under the current tax-credit system.  A worker in part-time or casual employment cannot use all the tax credits that other workers avail of.  For instance, a worker on €20,000 has an income tax bill of €4,000.  They have tax credits worth €3,300 which is used to reduce the tax bill.  They end up paying only €700 in income tax.

For the part-time and casual worker earning €12,000, their tax bill is €2,400.  Their tax credits reduce their tax bill to zero.  However, there is €900 in unused tax credits.  These are of no benefit to this worker.

We can understand personal tax credits as a type of BI – a flat-rate payment to all in employment regardless of income.  The only problem is that workers cannot fully benefit from this unless their income is above €16,500.

So what would happen if we turned the personal tax credits into a BI payment – paid to all regardless of their income or employment status?   For a single person, this would mean a BI payment of €3,300 a year, or approximately €63 per week.

First, it would have no impact on those whose income is entirely reliant on social protection payments (e.g. pensioners).  The BI payment would merely replace a portion of the social protection payment.  Second, it would have no impact on single persons with incomes above €16,500 – they already receive the full tax credit benefit.  The benefit would go to those in part-time or casual employment.

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Under the current system, a low-paid worker can’t get the full advantage of the tax credit because their income is too low.  Under a BI system, paying the same amount as the tax credit, the low-paid worker in the example above would receive an increase of nearly €1,000 annually, or 8.2 percent.

Another benefit would be for casual workers.  Currently, they face the prospect of going for weeks without social protection income due to administrative delays if they take up casual work for a few days.  Guaranteeing €63 per week could help alleviate this problem (though not eliminate it altogether).

Couples would also benefit. For instance, a couple where there is one person working receives a tax credit of €95 per week.  Under the BI system they would receive €127 per week. Currently, a couple on €20,000 is exempt from tax – but they have €950 of unused tax credits.  If the tax credits were converted to BI payments, they would receive a boost of over €2,000 in net income.

The only beneficiaries of converting tax credits into BI payments would be low-paid households.  The cost is difficult to assess.  This BI proposal operates on the same principle as a refundable tax credit – something Social Justice Ireland has consistently argued for.  Their excellent analysis shows that their scheme would cost approximately €140 million in 2010.  However, they have a number of conditions that distinguishes it from a straight BI system (time at work, minimum income, etc.).  The BI approach would cost considerably more.

However, this is the gross cost.  There would be savings in programmes like Family Income Supplement since net household income would rise.

But the main cost claw-back would be the economic boost arising from increased demand.  Increasing resources to low-income groups is merely a conduit for higher spending in the economy – which boosts tax revenue, business turnover and employment.

This is just one of many examples of how to introduce the principle of BI into the current system to create greater social equity and economic efficiency (another approach would be to introduce a Basic Pension – a guaranteed payment to everyone over the age of 66 – something championed by the Trinity Pension Group and Social Justice Ireland).

You don’t have to be a supporter of a full-blown BI programme to explore the benefits of introducing BI principles into our current system.  But what is necessary is to start thinking outside the box, to look beyond tinkering with the current system and develop more reforming measures.  The principles of Basic Income can be of help.

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