Analysis

Welfare Reform — A critique of a guaranteed basic income

INTRODUCTION

(Section 1 of 12)
Universal Basic Income and Negative Income Tax —

The idea of a guaranteed income can be approached in two ways. Either through a Universal Basic Income (UBI) or through a Negative Income Tax (NIT).

UBI is the easier approach to understand and hence why it’s more often plugged by politicians. It’s described as a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement” (with an example illustrated in Section 2).

NIT is the alternative method popularised by U.S. libertarian economist, Milton Friedman, in the 1960’s. Under this approach, people who self-earn below a certain level of income would pay no income tax, and would instead receive a subsidy from the state. 

In turn, this level of subsidy under NIT would reduce/taper off at a set rate as their self-earnings increased (with examples illustrated in Section 3).

In terms of how much is received monetarily, both approaches achieve essentially the same outcomes (as illustrated in Section 4). But of course, the major difference depends on how each approach is implemented.

Robert Jameson, author of ‘The Case for a Basic Income’, explains that “with [UBI], you know exactly how much the government will be paying into your bank account each and every week. You can completely rely upon getting that money”. 

Whereas with a NIT, he explains that “there could be some administrative complications, because the amount the government pays you each week will depend on their assessment of your income”.

Because of this, Jameson asks “how often are they going to make that assessment? What happens if the government’s figures for your income are out of date? How quickly will the government update its system?”.

However, whether it be through a UBI or NIT, proponents envision that a guaranteed basic income would replace the vast majority of existing welfare programmes. 

They also say that the idea would solve key issues that we witness under social security programmes currently in place around the world.

Issues facing existing welfare systems —

One of these issues relates to individual autonomy. Under existing welfare systems, benefits are highly conditional and often provided to people earning under a certain amount in the form of food stamps or housing vouchers for example. 

Many economists criticise providing benefits in this form as it takes away a person’s autonomy. They instead believe that providing benefits in the form of a cash payment will allow people to buy the goods and services that they think they will improve their lives the most. 

This is a completely legitimate argument based on numerous works of research (as analysed in Section 6).

The other key issue relates to the so-called ‘welfare trap’. Current welfare systems include this flaw when benefit recipients start to increase their self-earnings. 

Joshua Angrist, of MIT Economics, states that “the irony of our welfare system is that poor people pay very high taxes — for each dollar of earnings they lose benefits”.

Off the back of the welfare trap which exists in existing systems, “working people on welfare may actually find themselves worse off — particularly if they earn enough to lose benefits” (as illustrated and explained in Section 7).

You also have arguments that a basic income would eradicate the sky-high level of bureaucracy in the deliverance of welfare to the poor. 

Basic income is sold as a simple system that (in the UK) could save £6 billion a year in DWP administration costs, at the same time as targeting those who need help the most. But is anything ever that simple?

Under UBI or NIT, we’d effectively be integrating welfare into the tax system. There’s no denying that in its purest form, we’d be installing simplicity into the unconditionality of welfare deliverance. But does this come with a costly price tag as part of a very skewed system (as explored in Section 8)?

The whole problem with the guaranteed basic income debate is that proponents provide solutions to issues that we find in the existing system. However, they largely ignore some of the issues that we may end up creating.

Ultimately though, when deciding whether we should introduce a basic income, it could be a question of ‘is this system less worse than the one we have already?’. ‘Which sacrifices will cause the least amount of trouble?’. 

Don’t be fooled by the UBI and NIT enthusiasts – this is a much more complicated debate than they make it out to be. But nevertheless, it’s a debate which must take place. 

ILLUSTRATIVE EXAMPLE OF UBI IN ACTION

(Section 2 of 12)
$12,000/year UBI example —

Universal Basic Income (as mentioned in Section 1) is described as a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement”.

As an example, let’s very loosely use the proposal of Andrew Yang, plugged during his fail bid for the 2020 Democratic nomination for U.S. President.

He dubbed his UBI plan as the ‘Freedom Dividend’ and wanted to give every U.S. citizen over the age of 18 a basic income of $1,000/month ($12,000/year). They would have received this “no questions asked”.

However, citizens would still be subject to the income tax system. This means that the UBI cash payment received by people would be classed as (potentially) taxable income. 

To visualise this, let’s introduce an (arbitrarily chosen) 50% tax rate for anyone earning over an (arbitrarily chosen) threshold of $20,000, solely for purposes of illustrative simplicity.

For a first example, that means that someone with a self-earned income of $0 would receive the $12,000 basic cash payment, totalling an income of $12,000 before tax.

Because this would put them under the $20,000 income tax threshold, they wouldn’t have to pay any tax on their income. This means that their total take-home income would be $12,000 (made up entirely of the UBI payment).

For a second example, someone with a self-earned income of $20,000 would receive the $12,000 basic cash payment, totalling an income of $32,000 before tax. 

Because this would take them $12,000 over the income tax threshold, they would pay 50% of that $12,000 in tax. This tax bill would amount to $6,000, bringing their total take-home income to $26,000 after tax.

For a third example, someone with self-earned income of $25,000 would receive the $12,000 basic cash payment, totalling an income of $37,000 before tax. 

Because this would take them $17,000 over the $20,000 income tax threshold, they would have to pay 50% of that $17,000 in tax. This tax bill would amount to $8,500, bringing their total take-home income to $28,500 after tax.

The tax rates, income tax threshold and/or the UBI cash payment have the potential to be altered under such a system. Additional tax brackets could also be implemented under a UBI system.

But bear in mind that the tax rate, income tax threshold, and the fact that we opted for only two tax brackets (including the non-taxable bracket) used in these examples are (to reiterate) arbitrary chosen and primarily intended for illustrative purposes only.

ILLUSTRATIVE EXAMPLE OF NIT IN ACTION

(Section 3 of 12)
NIT example with a £5,000 basic payment at a 50% withdrawal rate —

The Negative Income Tax (as mentioned in Section 1) is an approach where people who earn below a certain level of income would pay no income tax, and would instead receive a subsidy from the state. 

In turn, this level of subsidy would reduce/taper off at a set rate as their self-earnings increased. 

For example, let’s see how an (arbitrarily chosen) £5,000 basic NIT payment would work with a 50% marginal withdrawal rate (meaning for every additional pound earned, the worker will receive 50p less in their NIT payment). 

Using this example, in other words, the so-called ‘income threshold’ would stand at £10,000 (representing the cut-off level at which someone would stop receiving subsidy from the state, and start paying tax as their self-earned income rose above it).

On this basis, someone with a self-earned income of £0 would receive an NIT payment of £5,000 (see Figure 1 below).

Figure 1 (above): NIT based on £0 in self-earnings with a £5,000 NIT payment

As a second example, if someone self-earned an income of £5,000/year, they would receive an NIT payment of £2,500/year (see Figure 2 below).

Figure 2 (above): NIT based on £5,000 in self-earnings with a £5,000 NIT payment

As a third example, if someone self-earned an income of £7,500/year, they would receive an NIT payment of £1,250/year (see Figure 3 below).

Figure 3 (above): NIT based on £7,500 in self-earnings with a £2,500 NIT payment

As a fourth example, if someone self-earned an income of £10,000/year, they would receive nothing in NIT payments (see Figure 4 below).

Figure 4 (above): NIT based on £10,000 in self-earnings with a £0 NIT payment

On the flip side under this example, people earning over the £10,000 income threshold would instead pay tax to the state at a 50% rate (meaning for every additional £1 earned over the threshold, they would pay 50p in tax).

So if someone self-earned an income of £15,000/year, they would pay £2,500 in tax (see Figure 5 below).

Figure 5 (above): NIT based on £15,000 in self-earnings with £2,500 paid in tax

Under this system, it’s possible for the NIT withdrawal rate, tax rate, and the income tax threshold to be altered (as covered in Section 8). It’s also possible for additional and tiered tax rates to be implemented, making the system more progressive.

But (again) bear in mind that the NIT withdrawal rate, tax rate, and the income tax threshold in these examples are arbitrarily chosen and primarily intended for illustrative purposes.

OUTCOMES OF UBI AND NIT ARE ESSENTIALLY THE SAME MONETARILY BUT COULD DIFFER BEHAVIOURALLY

(Section 4 of 12)

Identical monetary outcomes —

UBI and NIT are two different approaches to delivering a basic income. However, the monetary outcomes of such approaches are essentially the same. 

Scott Santens, U.S. UBI advocate, explains this by saying “a NIT is like giving someone $50 and asking for nothing back, and a UBI is like giving someone $100 and asking for $50 from their next pay cheque”. 

Santens concludes that “both result in the person getting an extra $50. The question of which is better depends on the details involved and how the person feels about them”.

Where NIT just limits subsidy to ‘poor’ people and gives nothing to the ‘rich’, UBI gives everyone subsidy but ‘claws back’ that subsidy through taxation. Simple.

However, a number of people analysing how UBI and NIT do differ often highlight something known as the ‘endowment effect’. 

In behavioural economics, the endowment effect refers to “an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value”.

The endowment effect —

This whole idea of the endowment effect relates to loss aversion. Mr Santens argues “that phasing-out [a basic income] directly through means testing, versus phasing-out [a basic income] indirectly through higher tax rates, while analytically identical as far as disposable income is concerned, have different behavioural implications”.

Evidence on the endowment effect is often cited through research carried out by Silvia Avram of the Institute for Social and Economic Research, testing how people reacted to loss of future earnings as opposed to losing part of a benefit they had already received. 

The study was “concerned with replicating the labour supply decision” by being “faced with the decision of how much time and effort to put into a labour task”. To do this, they had subjects perform the so-called ‘slider task’.

One analysis of this study summarises it very well. They state that subjects were asked “to complete a boring, tedious task in order to receive money. Subjects were to use computers to move virtual sliders along a continuum to a certain point. If they did this successfully, they would receive money”. 

“For the control group, the first 250 sliders completed earned them £0.01 per slider, from that point on they received £0.02 for each slider. They could complete as many sliders as they wished for an hour and could stop whenever they wished”.

“Both treatment groups received £0.02 for each of the first 250 sliders completed. The first treatment group was told they would be taxed 50% of their earnings for the first 250 sliders. Another treatment group was told they would receive the £0.02 for each slider but have to pay it back upon completing the slider — they perceived the transfer as losing a benefit”.

“The outcome is the same, both groups received £0.01 per slider. However, more of those in the benefit treatment group stopped early then those in the tax treatment group”. 

“The effects were greater for those individuals who ranked as loss-averse on a post-treatment test. If you are more loss-averse you weigh avoiding losses more heavily then increasing gains”.

Endowment effect could apply to UBI/NIT differences but evidence not conclusive —

This analysis accepts the endowment effect as an explanation of the results, stating that “we value things we currently own more than the same thing if we don’t own it. It hurts more to lose money we already have then to earn less money in the future, even if the outcome is the same”.

However, the same piece of analysis rightly highlights why we should not take this study as solid evidence that the endowment effect would apply to any behavioural differences in a UBI and NIT.

The study states that “these findings should not be interpreted as conclusive. The author notes an experimental drawback since subjects were in the same room when they completed the tasks”. 

Because of this, it’s said that “some of the effects may have been peer-effects — people stopped because they saw other people in the room stop as well”.

However, the analysis does not completely discard the study by saying “the behavioural framing of transfers is important in weighing a universal basic income versus a negative income tax”. 

“The UBI loss of a benefit for those above a certain income threshold may be more of a disincentive then not giving this benefit — the forfeiture of the UBI wage may influence their decision to work”. 

Scott Santens writes that this may “nudge people away from pursuing lucrative careers, perhaps impacting income inequality. Some governments may wish to pay everyone the UBI and use these behavioural incentives to drive people to certain actions”.

They then go on to say that “these questions beg follow-ups — should a government be attempting to nudge people away from high incomes? Does a $10,000 UBI payment really matter to someone making $350,000?”. 

“The conversations surrounding UBI and NIT remain robust and contentious. Future research will continue to influence whether either of these options is adopted as a viable future welfare and tax structure”.

THE AUTOMATION ARGUMENT FOR BASIC INCOME SHOULD BE DISCARDED

(Section 5 of 12)
Technological progress will lead the transition of jobs, not the loss of them —

The idea that the robots will replace our jobs is one widely used to plug a basic income. The reason why basic income proponents cite the automation argument is because they worry that if human jobs are replaced, that would obviously leave huge chunks of certain populations out of work. 

If these people are out of work, they will self-earn zero income. And if large swathes of the population aren’t self-earning, they believe that the state would have to step up to provide them with a basic income in order to live adequately.

However, whilst automation does and will directly impact human jobs, it will certainly not replace them. Instead, we’d be wiser to view the automation revolution as a transition of jobs, rather than a replacement.

It’s not like we haven’t seen anything like this before. Just take the industrial revolution for example. 

Editor of Interact Software, Louise Roberts explains that during the industrial revolution, “despite fears of mass unemployment, it became increasingly apparent that technological progress was benefiting all sections of society, including the working class”.

Of course, you can’t deny that technological advancements and automation have fired the starting pistol on the transition of many jobs. 

For example, the banking industry has harnessed tools ranging from ATM’s to online platforms, the agriculture industry have invested in equipment to reduce their reliance on human labour, and manufacturing factories are also now full to the brim with automated assembly lines.

So on the surface, you’d be more than forgiven in worrying about human jobs being made completely redundant. But the counter-argument is far more stronger as outlined by Virender Jeet of Newton Software.

Automation will push people to pursue better skills and enhanced knowledge —

Mr Jeet rightly argues that “automation is not actually taking away jobs. It is only nudging people to perform more fulfilling and progressive tasks. It is allowing businesses to create a more balanced working environment, where people can apply their experience and decision making skills”.

As a result, he concludes that “automation, in this sense, is a major boost to knowledge worker empowerment”. Far from something to worry about. Therefore in reality, automation is not a damaging factor when thinking about jobs. In fact, automation means the complete opposite. 

Instead, automation will push people to pursue better skills and enhanced knowledge. We’d not only have a more productive economy, but we’d have a smarter one too. Automation is the next natural step in improving our economies.

So bearing all that in mind, the automation argument is baseless in trying to plug a basic income. The emergence of technology and automation has created (and is creating) better quality jobs as part of more productive industries.

Generations and economies have survived revolutions like these before. Actually, they’ve more than survived. A greater number of better jobs have been created as a result of these revolutions – and we’ll see the same trend of results come from the emergence of automation.

INCREASED AUTONOMY PROVIDED THROUGH BASIC INCOME

(Section 6 of 12)
Highly conditional benefits aren’t all they’re cracked up to be —

Due to its aim to deliver an unconditional cash payment to recipients, basic income would install a great deal of autonomy into people’s lives. 

Existing social security set-ups, where recipients often receive welfare in the form of highly conditional, in-kind forms of benefit such as food stamps and/or housing vouchers, just can’t offer this level of autonomy.

It’s far from daft to think that delivering welfare via highly conditional benefits is a wiser and a smarter approach to delivering welfare than it would be in the form of simple cash-transfers. 

The very first question that comes to mind is ‘if we give these people cash instead of food stamps for example, won’t they just go and blow it all on booze and cigarettes?’. 

A very rational question to ask. However, the evidence out there contradicts the anti-autonomy arguments of those who’d prefer these more conditional benefits. 

Senior fellow at the Centre for Global Reform, Charles Kenny, has analysed this very evidence across a number of social security programmes.

For example, he highlights India as a place where the highly conditional form of benefits are not all they are made out to be. He explains that “in India, the poorest can buy subsidised grains or kerosene [a type of oil commonly used as fuel]. 

Pointing out the flaws, Kenny states that “especially in the developing world, these systems are often inefficient and expensive to run. The Indian government, for instance, has estimated that two-fifths of the kerosene involved in its subsidy scheme goes missing before it is distributed and only half of what is left flows to the poorest families”.

He then goes on to state that these types of “programmes are almost certainly less effective at reducing poverty than simply giving poor people cash. When governments give people in-kind support like food, it frequently costs more to deliver that support than it would to distribute cash—and for the same or even a lesser impact”.

Cash transfers lead to positive nutritional outcomes and a multiplier effect —

Mr Kenny then moves on to cite a randomised trial conducted in rural Mexico by Jesse Cunha of the Naval Postgraduate School. 

This trial examined how welfare delivered via cash payments would differ in outcome to welfare delivered via highly conditional, in-kind benefit food programme.

This study found that cash recipients didn’t spend more on tobacco or alcohol, and concluded that those who received cash experienced the same improvements in nutrition and child-health measures as those who received food.

Even more, “the food program cost at least 20% more to administer, and the cash program led to significantly higher non-food consumption by recipients”. 

In other words, Kenny said that “at less cost to the government, cash programs led to the same health outcomes as food-based programs, but also provided additional resources for recipients to spend on schooling, medicine, and transport”.

Mr Kenny then importantly points out that these results were not just one-off findings. He says that “in many cases, cash programs are simply much more effective than [highly conditional] in-kind transfers at turning dollars spent into positive nutritional outcomes”.

The next piece of evidence he cited to support this was a 2013 study by Sarah Bailey for the Canadian Foodgrains Bank which involved Zimbabwe, Ecuador, Malawi, and Yemen, amongst other countries.

This piece of research found that “cash transfers usually led to far greater increases in a ‘food consumption score’ of dietary diversity and food frequency than did similarly priced food delivery”.

In Malawi, “the food consumption score increased by 50% for cash recipients compared to 20% for food recipients”.

This was in spite of the fact that “households in the countries surveyed only report spending between 45% and 90% of the cash they receive on food, with the rest going to expenses like debt repayment, household items, and school fees”.

To back the superiority of benefits provided through cash transfers, Mr Kenny argues that “cash also has a larger multiplier effect”. 

On this he declares: “bring food from elsewhere to an area, and the impact of that food stops with those who eat it. Give people cash and they spend it on goods provided by local farmers and traders, who are often poor themselves and benefit as well”.

He solidifies his argument further by citing a 2010 study carried out in Zimbabwe by Cormac Staunton of Concern Worldwide, and Micheal Collins of Trinity College Dublin.

Staunton and Collins “compared food transfers to cash transfers, and estimated that each dollar provided by cash transfers circulated 2.59 times around the local economy before being spent on goods and services from elsewhere. That compared to the 1.00 multiplier of food that was simply consumed”.

Cash transfers lead to productive investments —

Furthermore, Kenny then moves to emphasise how “cash transfers often lead to productive investments” using a charity called GiveDirectly “which transfers cash from rich people in the West directly to poor people in Africa using mobile-phone payments”.

To illustrate this, he draws off of a randomised evaluation from 2011, co-designed by a GiveDirectly founder, which “evaluated the organisation’s activities in Kenya and focused on one-off, unconditional payments to families that ranged from $404 to $1,520”.

To put these dollar values into perspective, Kenny makes clear that “$400 was more than twice the average local monthly household expenditure. In relative terms, it would be the equivalent of handing $12,000 to a household in the United States”.

The study found that “as long as 14 months after the transfer, evidence suggested that households were still spending more on food, health, and education than non-recipients”. 

On the back of this, Kenny explains that “one reason why is that they had invested in physical goods, particularly in metal roofs to replace thatched shelter and in livestock to provide milk and meat”. 

As a result, he says that this “translated into rising incomes from farming and enterprises in the short term, and—thanks to higher spending on nutrition, health care, and education—the hope for greater earnings potential in the long term as well”.

It’s also worth mentioning that as with the Mexican cash-transfer program, “spending on alcohol and tobacco did not rise after the transfer. Perhaps that’s because recipients felt less need for a pick-me-up: They reported feeling happier after the transfer, and tests of cortisol in saliva revealed lower biomarkers for stress”.

Another piece of evidence involves a pilot programme carried out in India between 2011 and 2012. 

This programme “transferred cash—roughly $4 to $6 for adults, and half that amount per child—once a month to every household in select villages in the state of Madhya Pradesh”. 

“According to evaluations in 2014 by India’s Self Employed Women’s Association, households in recipient villages proved more likely than those in non-recipient villages to have modern toilets and to use public taps or hand pumps for water rather than wells”.

“They also used cooking fuels that produced less indoor air pollution, which is linked with poor respiratory health. Along with money spent on food, all this helps explain why children in transfer villages were healthier”.

“Program villages saw twice the rate of progress in reducing the number of underweight girls as control villages. The proportion of 14- to 18-year-old girls in school was 65 percent in villages that received transfers, compared to 36 percent in villages not benefiting from the program”. 

“As in Kenya, the cash transfers were associated with people working longer hours and making more money thanks to investments in assets including livestock”.

The final piece of evidence that Kenny cites comes from a study carried out by Chris Blattman of Colombia University and colleagues in Uganda.

This work found that “where a $150 cash grant to poor women in the northern part of the country doubled their earnings within a year, while one-off $382 transfers to 16- to 35-year-olds were associated with 40-percent higher earnings four years later”.

Kenny concludes that “if resources for indirect subsidies from housing through food were redirected toward cash payments to the poorest, more (and more sustainable) poverty reduction could be achieved at less cost”.

This seemingly endless string of evidence concluding that cash payments produce a hell of a lot better results than that of highly conditional, in-kind forms of benefit definitely bodes well for basic income proponents. 

It’s clear that promoting welfare autonomy via cash payments will give the poorest the best opportunity to invest in what they believe will help improve their lives the most. Especially as they move into the future. A potentially great benefit of a UBI or NIT system.

AVOIDING THE WELFARE TRAP

(Section 7 of 12)
Existing welfare systems discourage people to get off welfare —

The welfare trap (also referred to as the ‘benefit trap’) is arguably one of the largest flaws associated with orthodox welfare systems around the world.

For individuals who receive means-tested welfare, benefits are decreased as more income is earned. Alongside this decrease in welfare, individuals also see their earnings reduced through the likes of income tax, transport and other factors.

These reductions and deductions that come with earning more can make it more profitable to remain unemployed (or working less hours) than it is to get a job (or work more hours) to self-earn more income.

For example, let’s imagine an unemployed individual on welfare who receiving £40/week in benefit, decided to get a part-time job working 8 hours a week for £5/hour.

This would mean their self-earnings (before tax) would total £40/week. If this example stopped there, they’d have a total income of £80/week (including the benefit). But rather than stopping, it’s instead time to inject some reality into this example.

Let’s suppose that when someone started self-earning £40/week, their benefit would now reduce by £20/week. Taking this into account for our exemplar individual, their total income would now amount to £60/week. However, reality wouldn’t cease there.

The individual could now be subject to income tax on their £40/week in self-earning. For instance, we could suppose that the tax rate on that £40 was 20%. This means that they’d have to pay £8 in tax, bringing their total income figure down to £52/week. However, reality would still refuse to stop there.

Because the individual took this job, there’s a good chance that they’d have to travel. For instance, they might have to fork out £6/week on transport costs. This would then bring down their total income to £46/week.

So if you stopped the reductions and deduction there, it’s easy to see that this individual would only gain £6/week more by working, than if they decided to remain unemployed (£46 when working versus £40 when unemployed).

To make it worse though, there’s a good potential that this individual could also see their income reduce even further. For example, if they’d might need to pay for extra childcare costs.

If such childcare cost them £10 per week, they’d see their total income fall to just £36/week. In this scenario, they’d actually have £4 less in income whilst working, than they would if unemployed.

This just illustrates how the system can ‘trap’ people on welfare. It just emphasises how work can be majorly discouraged, primarily those jobs offering low wages. The rate that a benefit is withdrawn is often just too steep in proportion to the rate at which self-earned income increases.

This dilemma applies what’s often described as an ‘implicit tax’. Ignoring the childcare cost deduction in our example, this individual (by working for £40/week) would see their earnings reduce by 85%. In other words, they’d face an implicit marginal tax rate of 85%.

Alan Cole, who is a Senior Economist at United States Congress Joint Economic Committee, argues how this kind of system leads to people not seeing much benefit from earning additional income.

He draws on evidence from a study from the U.S. Congressional Budget Office. This study found that “the implicit marginal tax rates on some poor folk are frequently above 50%, and sometimes above 80%. That is to say, that when they figure out how to increase their income by a $100, they lose $50 or more in new taxes or lost benefits”.

UBI and NIT make it much more beneficial to work than to remain on welfare —

The fact that a basic income could eliminate such a trap was one of the flagship reasons paraded by Milton Friedman in his advocation of a NIT.

Friedman argued that the subsidy withdrawal rate shouldn’t be any higher than 50% (a rate used for the NIT illustrative examples in Section 3), as he believes that it would discourage work if it were raised past that point.

Mr Friedman’s approach to replacing orthodox welfare would stop people being caught out by the point at which making more money at work causes welfare payments to go down by a larger amount, leaving the recipient worse off.

Daniel Pryor, writing for the Adam Smith Institute, agrees. He states that a welfare state designed around a basic income would meet aims to “avoid [welfare] traps created by high and inconsistent marginal tax rates: some people on Universal Credit only keep 20p of every extra £1 they earn”.

Policy analyst, Matt Bruenig, backs this up in the scope of UBI by explaining that it “solves the benefit trap problem by making benefits the same for employed people and unemployed people”. 

He says that this “removes the loss of benefits that comes from taking up work, which also tilts the balance somewhat away from idleness and towards employment”.

It is true that both UBI and NIT do eliminate the welfare trap through avoiding high implicit marginal tax rates. 

However, it’s worth mentioning that UBI and NIT may not necessarily automatically lift people out of poverty. The system still needs to be implemented smartly. 

If not done smartly, there’s still a chance that it would leave people subject to the similar but so-called ‘poverty trap’ (which is not to be confused with the ‘welfare/benefit trap’).

Whilst basic income may remove the incentive to remain in the grasp of the welfare state, they may however still remain in poverty. 

That side of things relies on how poverty is defined, and how much the state classes a basic income subsidy payment as ‘adequate’ enough to lift people above a defined level of poverty.

THE PROBLEM WITH UNIVERSAL INCOME THRESHOLDS AND DIFFERING POVERTY LINES

(Section 8 of 12)
A pure universal deliverance of a basic income raises tricky questions to answer —

Whether it be UBI or NIT, the whole idea of basic income is promoted by proponents to be universal, simple and unbureaucratic. At least compared to existing systems anyway. But like with anything described as this, you can only ask ‘is this too good to be true?’. 

In terms of the setting of thresholds in such a system, I’d argue it is indeed too good to be true – especially if you want to protect (of what I’d see as) the core principles of a social security programme.

At its principle, a welfare system should be designed to provide the poorest with a level of income that provides opportunity to live life to an ‘adequate’ quality. 

A welfare system should also do its very best to not discourage work, at the same time as being affordable for the taxpayers who ultimately fund such subsidies.

However, basic income in its purest forms, creates a number of problems and irregularities that go against these principles. Such irregularities arise when we analyse the implementation of uniform and universal thresholds applied to both individuals and households.

For a pure UBI, the level of subsidy delivered to recipients would remain the same for everyone. So the key things that need to be decided are the basic UBI payment, the income threshold (the point at which the state starts to ‘claw back’ subsidy), and the tax rate.

For NIT, the level of subsidy delivered to recipients can differ depending on income. So the key things that needs to be decided are the basic NIT payment, the income cut-off threshold (the level at which they’d cease to receive subsidy and start paying tax), and the tax rate (applied to income above the cut-off threshold).

Either way, when setting-up a basic income programme, we need to decide what level of income is classed as ‘adequate’ enough to live. Usually, we’d aim for some sort of defined poverty line, but before you can even start talking figures you’d already be facing huge stumbling blocks.

Because a pure basic income system is envisioned to be universal, you’d expect  single and standard poverty line to be implemented in order to keep subsidy payments uniform for all recipients. 

This begs the question; do you set the poverty lines based on the needs of an individual or a household (of two or more people)?

Base example of how it would NIT could be applied to a household of two adults —

For a start, it goes without saying that the poverty lines for an individual and a household (of two or more people) are not going to be the same.

In the vast majority of cases, the amount that an individual living on their own needs for an ‘adequate’ income will not be the same as multiple individuals living together needs for an income to be ‘adequate’.

Therefore, it’s categorically impossible to set one, single poverty line for everyone and still expect be taken seriously when putting forward a UBI or NIT proposal.

To put this issue into perspective, let’s start with an example of the income cut-off threshold being on par to the poverty line for a adult couple, as part of an NIT system. 

Solely for illustrative purposes and simplicity, let’s arbitrarily say that the household poverty line (and therefore too the income cut-off threshold) stands at £15,000 coupled with a 50% withdrawal rate.

For this example, we’ll look at the subsidy outcome under the NIT system for an adult couple living together and how that relates to the household poverty line.

Let’s say the adult couple each self-earn £7,500 each. This straight away brings their household income to £15,000 and in line with the poverty line, even before any subsidy could even be considered for application. 

However, because the system is delivered on an individual basis, both adults still qualify for a subsidy payment. Both are (individually) £7,500 short of the £15,000 income cut-off threshold. 

So when you apply the 50% withdrawal rate, this means that they both quality for £3,750 of basic income subsidy.

When you add all these figures together with each of their self-earned incomes, their household income would total £22,500. 

This means that their household would be receiving £7,500 above the household poverty line. Essentially they’d be given a sum of £7,500 that they technically don’t need.

This issue would hugely diminish the incentive for either of the adults in this couple to work or self-earn more. It could even encourage one or both of them to drop out of work altogether.

For example (still using the £15,000 income cut-off threshold) if Adult 1 continued to self-earn £7,500 but Adult 2 decided not to work and self-earn nothing, they’d still end up with enough subsidy to meet their household’s agreed poverty line.

Adult 1 would be £7,500 short the £15,000 threshold. So if you apply the 50% withdrawal rate to the amount they’re short by, this would give Adult 1 a subsidy of £3,750.

However, Adult 2 would also qualify for subsidy. They would be the whole £15,000 short of the income cut-off threshold. So if you apply the 50% withdrawal rate to that figure, this would give Adult 2 a a £7,500 subsidy.

Adding these figures together would total a household income of £18,750. Even with just one of the adults working, they would be £3,750 above the household poverty line. Again, a sum of money that they effectively do not need to live ‘adequately’.

Off the back of realising how skewed this system is, both adults might decide not to work altogether, therefore self-earning nothing. 

This would put them both the whole £15,000 short of the income threshold. Apply the 50% withdrawal rate and this would give them each a basic income subsidy of £7,500.

By adding both of their subsidy payments together, their total household income would be £15,000 – level with the household poverty line. 

So using this threshold level, both could afford to not work at all and still receive a defined ‘adequate’ level of income. A situation which pretty much eliminates any essential incentive to work.

To combat this, you might ask ‘why not just reduce the income threshold below the household poverty line?’. You could do this, but all you are doing is patching up half the holes in a leaky bucket and causing different problems as a result.

Poverty lines are not universal meaning a universal level of subsidy creates disparities  —

To illustrate, let’s leave the (still arbitrary) poverty line at £15,000, but reduce the income cut-off threshold to £7,500.

If both adults in the couple could self-earn £7,500, they each would not qualify for a subsidy, but their household income would total £15,000. 

That seems more acceptable, right? Their household income is level with the household poverty line, without having to provide them with subsidy. But what about an individual living on their own? How would this impact them?

Because this is meant to be a universal and uniform system, the same income cut-off threshold which applies to a household (of two or more) would also apply to a single adult individual living on their own.

The single adult could also be self-earning £7,500 and therefore, like the couple, not qualify for subsidy. However, the amount that a single adult needs to live ‘adequately’ is (in general) realistically never the same as that of a household of two or more people. 

Poverty lines in reality differ depending on your situation and how many are in a household. 

That means that one or the other (depending on where you set the uniform poverty line under a basic income system) would receive a disproportionate amount of subsidy.

Illustrating the disproportion by using real defined poverty lines —

To make this clearer, let’s bring our examples into the real world by using the 2018 UK poverty lines (after housing costs are deducted) as defined by The Children’s Society. 

For an adult couple (with no children), this poverty line (on an annual basis) would stand at £14,092. On the other hand, for an single adult (also with no children) living alone, their poverty line (on an annual basis) would stand at £8,164.

Straight off the bat, you can see that an individual adult living on their own bears £1,118 more of a burden (over the course a year) than each of the individual adults would who are part of the couple.

This additional burden is calculated by dividing the couple’s defined poverty line of £14,092 by 2 and subtracting this resulting figure from the individual’s poverty line of £8,164 to equal £1,118.

The fact that the single adult bears more a burden, highlights the problem with everyone being subject to the same uniform NIT income cut-off threshold (or basic subsidy level/income tax rates in the case of UBI). 

Subsidy will always be delivered disproportionately if thresholds are implemented uniformly with no consideration for differing burdens in differing situations and household make-ups.

To illustrate this further, let’s use the example where we’re still under a NIT system with a 50% withdrawal rate. 

Let’s also suppose that the income cut-off threshold was set at half of the poverty line for an adult couple (£14,092), as defined by the Children’s Society. This would set the income cut-off threshold at £7,042 (for every individual).

So for simplicity, if both of the adults as part of the couple (with no children) both self-earned £7,042, they would be level with the income threshold and would therefore not qualify for any basic income subsidy. 

Their household income would total £14,092 and bring them in line with the poverty threshold for an adult couple. In other words, they’d be defined as living ‘adequately’.

On the other hand, let’s also say that the single adult living their own also self-earns £7,042. This would mean that they would be level with the income threshold and would not qualify for subsidy. Their total income would remain at £7,042. 

However, unlike the adult couple who meet their poverty line based on their situation, the single adult living on their own would be £1,122 short of his/her defined poverty line. 

Under this example, the individual will always be disproportionately impacted. The state would effectively be saying to the single adult; ‘You live on your own?  Well hard luck, buddy’. 

You can mess about with the income cut-off threshold all you want. Even factor children into the mix. Try it. But you will still always come out with the same result. 

Under a pure basic income programme (like many propose) someone will always be disproportionately impacted under a universal and uniform system of setting thresholds and subsidy.

To resolve this issue, you’d have to set thresholds according to each individual’s situation (as covered in Section 9). But this would inevitably contradict the anti-bureaucracy and pro-universal vision that proponents of a basic income claim to cherish. 

Without delivering subsidy based on individual/household situation and make-up, you’re propping up a basic income system that gives subsidy to those who don’t need it, leading to a very expensive programme compared to existing systems.

It’s either that or you’re delivering subsidy disproportionately and leaving a chunks of the population behind. 

SETTING DIFFERING THRESHOLDS IN ACCORDANCE WITH DIFFERING POVERTY LINES

(Section 9 of 12)
Setting bespoke poverty lines for each individual or household situation —

After accepting that there’s a problem with uniformly setting thresholds and subsidy levels (as illustrated in Section 8), you may want to resolve the issue and experiment how we could still retain a basic income system. 

This would have to be achieved by setting different thresholds on a more individual basis, in accordance with more situational-based poverty lines.

To avoid distributing subsidy unfairly and disproportionately, we would have to start by taking into account that poverty lines, depending on individual/household make-up and situation, do indeed differ.

For example, we could decide to go by the 2018 The Children’s Society poverty line definitions (after housing costs are deducted). 

Obviously, the way that poverty lines are calculated is a much debated topic, but for simplicity we’ll assume that these 2018 lines are accurate and reflect an ‘adequate’ level of living in reality, for illustrative purposes.

To state a few examples using their definitions (on an annual calculation), the poverty line for a single adult with no children would be £8,164. 

For a single adult with one child aged between 0 and 13, the poverty line would be £10,972.

For a single adult with two children aged between 0 and 13, the poverty line would be £13,780.

For an adult couple with no children, the poverty line would be £14,092.

For a single adult with one child aged between 0 and 13 and one child aged between 14 and 17, the poverty line would be £16,900.

For an adult couple with one child aged between 0 and 13, the poverty line would be £16,900.

For an adult couple with two children aged between 0 and 13, the poverty line would be £19,708.

For a single adult with two children aged between 14 and 17, the poverty line would be £20,020.

For an adult couple with one child aged between 0 and 13 and one child aged between 14 and 17, the poverty line would be £22,828.

For an adult couple with two children ages between 14 and 17, the poverty line would be £25,896.

I have stopped as far as listing poverty lines 2 adults and 2 children, for purposes of brevity – but even by just stopping there, you can see how vastly poverty lines can differ depending on individual/household make-up and situation. 

This (again) reiterated why one uniform cut-off threshold would create nothing but unfair disparity between subsidy received by different recipients.

It’s also worth mentioning that these poverty lines do not account for those at retirement age, but that will be something that is covered soon.

Bearing this in mind, how would we be able to implement different thresholds and poverty lines into a real-world basic income system? Well this is where the basic income proponents have helped us.

Integrating welfare and tax helps us retain a good degree of efficiency whilst achieving parity of subsidy —

As previously mentioned, both UBI and NIT would integrate the majority of the welfare state into the tax system.

Even though this would cause basic income to become more complicated than it would be if it was in its purest form, it would still allow people to file tax returns depending on their individual/household make-up or situation. 

For example, a single adult with no children would obviously file as an individual, whereas an adult couple with one child aged between 0 and 13 would file as a household accordingly. 

Under UBI, this would mean that rather than an income tax rate being applied on each individual of a household, it would be preferable to instead apply the rate to total household income (in line with their qualifying tax brackets).

On the other hand under NIT, this would mean that rather than subsidy being delivered based on an individual’s self-earnings, it would preferable to instead deliver it based on a household’s total self-earnings.

If you’re willing to sacrifice simplicity for greater parity between subsidy payments, whilst affordably ensuring cash is targeted at those who most need it, it’s acceptable to still believe a basic income system could still work well.

Furthermore, something that is so important to think about is the way in which we set subsidy and thresholds for the likes of individuals living together, but not necessarily as a family. Flat shares being a prime example of this.

Would we want to classify them like any other household, or would we want to tailor a poverty line specially for them? This is because they might not share resources in the same way that a conventional household might do.

The way in which thresholds would correspond with poverty lines —

Once the poverty lines have been agreed, proponents would then be able to use this as a foundation for the decision on where to set the thresholds. This is where you’re still able to retain a hint of uniformity. 

That hint of uniformity would lie in thresholds having to correspond with each defined poverty line on consistent basis. 

For example under a NIT system, it would not be fair to set the income cut-off threshold on par with one defined poverty line, only for another income threshold to be, say, half of another defined poverty line. This would take us back to square one, with subsidy being delivered disproportionately. 

The only potential exception to this would be if we created a separate threshold that was reserved for students (should that approach be agreed). This could be a permissible option when you factor in that students often take advantage of maintenance grants.

However, eligibility for maintenance grants are currently based on household income (e.g. the income of parents). So it could also be an option to calculate basic income subsidy for a student if they were to file tax returns as part of their ‘core’ household (probably made up of their immediate family, such as parents).

Regardless, we’d be granting ourselves the opportunity to replace maintenance grants and phase them into a basic income programme, along with efficiently testing eligibility for them through the tax system.

An example of an NIT system that retains an incentive to work —

One of the other key factors which influencing the level at which a threshold should be set relates to the principle of retaining incentives to work. 

The amount of basic income subsidy that a person receives should be high enough so that a person has the realistic opportunity to earn an ‘adequate’ income. But not so high that it discourages work. 

This was also the view of Milton Friedman in that the level of state subsidy should always fall below what would be needed for an ‘adequate’ income.

This is so that the incentive to work is always retained in the respect that they’d need to work in order to meet that ‘adequate’ level of income.

So for example under a NIT system with a 50% withdrawal rate, let’s again use The Children’s Society poverty line definition of £8,164 for a single adult with no children.

In this case, we wouldn’t want to set the income cut-off threshold at £16,328. That’s because if this single adult was unemployed and self-earned nothing, they would be the whole £16,328 short of the threshold. 

Therefore after applying the 50% withdrawal rate, their subsidy would total £8,164. This would put them bang in line with the poverty line. They’d essentially be able to remain unemployed but still receive an ‘adequate’ income.

Instead, we could opt to set the income cut-off threshold on par with the poverty line at £8,164. So in this example, if they self-earned nothing at all, they’d be the whole £8,164 short of the threshold. 

Therefore after applying the 50% rate, this would give them a subsidy (and ‘take-home’) of £4,082. This time, they’d be £4,082 short of the poverty line. Not enough to provide an ‘adequate’ income and therefore retains the incentive to work so that they can make up the difference

Next with the income cut-off threshold still at the same level as the poverty line at £8,164, let’s say that this person decided to get off their backside and self-earn £5,000. This would put them £3,164 short of the threshold. 

Therefore after applying the 50% withdrawal rate, this would give them a subsidy of £1,582. Add this subsidy to their self-earnings, and their take-home income would total £6,582. 

In this scenario, they’d be £1,582 short of the poverty line, and an ‘adequate’ income, therefore retaining the incentive to work and increase hours so that they can make up the difference.

Finally for this subsidy example, let’s keep the cut-off threshold the same but say that this person started self-earning £8,164. 

This would put them in line with the income cut-off threshold and would therefore mean that they qualified for no subsidy. However, they would now find themselves level with the poverty line. 

This example for a single adult with no children illustrates how incentive to work can be retained by ensuring that the income cut-off threshold goes no higher than the poverty line.

An example of a UBI system that retains incentive to work —

To put this idea into the perspective of UBI, we could give a single adult a basic income subsidy that works out at £4,082 (over the course of a year).

To keep the example as simple as possible for illustrative purposes, let’s set the threshold at which they start paying tax at half of the single adult’s poverty line (of £8,164), as still defined by the Children’s Society. 

This would set the tax threshold at £4,082 (calculating by taking the single adult/no children poverty line of £8,164 and dividing it by 2). Let’s also say that a single adult would be taxed 50% on any of their income that goes above that threshold.

So if the single adult in question was unemployed and self-earned nothing, they’d receive the £4,082 basic income subsidy. 

Because they would fall in line with the tax threshold, they would not have to pay tax, so the subsidy would account for their whole income. 

This would leave them £4,082 short of the poverty line and an ‘adequate’ income. In turn, there would be an incentive for this person to work in order to make up the difference.

But for example, if this single adult got a job and started self-earning £5,000, they’d receive the £4,082 subsidy on top of this, bringing their total income before tax to £9,082.

This would take them £5,000 above the income tax threshold. Therefore after applying the 50% tax rate to the £5,000, they’d have to pay £2,500 in tax. 

This would mean their take-home income after tax would total £7,500. They’d still be £664 short of the poverty line and an ‘adequate’ income. This again retains an incentive for this person to work, albeit more hours. 

Now, let’s say that the single adult started self-earning £8,164. They’d receive the £4,082 subsidy, bring their total income before tax to £12,246. 

This would take them £8,164 above the income tax threshold. Therefore, after applying the 50% tax rate to the £8,164, this would mean they’d have to pay £4,082 in tax. 

At this level, they’d essentially be paying their basic income subsidy back, but leaves them with a total take-home income after tax of £8,164. 

So even though they’d have paid back their subsidy in tax, they’d still be left with a take-home sum that’s level with the poverty line and, in turn, an ‘adequate’ level of income. 

Their incentive to work would still be retained, because if they reduced their self-earnings, they’d fall below the poverty line. 

For example, if they reduced their self-earnings by £164 to £8,000, combined with the £4,082 subsidy, this would bring their total income before tax to £12,082. 

They would be £8,000 above the tax threshold. Therefore, after applying the 50% tax rate to the £8,000, they’d have a tax bill of £4,000. 

This would leave them with a total take-home income after tax of £8,082. They’d then be £82 short of the poverty line and an ‘adequate’ level of income.

The potential of tiering tax rates to make the system more progressive —

To reiterate, as these examples are for illustrative purposes, there’s nothing to say that you couldn’t tier the tax rates to make the system progressive. All as long as you retain the incentive to work by not allowing subsidy get too high in relation to the poverty line.

For example in the scope of UBI, you could set the basic income payment for a single adult at £2,041 (per annum). You could then set the tax threshold at this same level (£2,041). Next, we could set numerous tax rates.

For instance, we could set a rate of 25% for anyone earning between £2,041 and £20,000, 35% for anyone earning between £20,001 and £40,000, and then 45% for anyone earning £40,001 or over.

Using this tiered and progressive tax structure, an unemployed single adult self-earning nothing would only receive their £2,041 basic income payment. 

Because this would account for their total income, they’d be level with the tax threshold and would therefore not have to pay any tax. This would leave the single adult £6,123 short of their defined poverty line, meaning incentive to work is still retained.

However, if the single adult started self-earning £4,082, combined with the £2,041 basic income subsidy, their income before tax would total £6,123. 

This level of income would take them £4,082 above the tax threshold. Therefore, after applying the 25% tax rate, they’d have to pay £1,020.50 in tax. 

This would bring their total take-home income after tax to £5,102.50. This would leave the single adult £3,061.50 short of their defined poverty line, meaning they’d still have an incentive to work.

Next, if the single adult then started self-earning £20,000, combined with the £2,041 basic income subsidy, their income before tax would total £22,041.At this point, their income before tax would sit above two different tax thresholds. 

£17,959 of their total income before tax would be caught within the 25% tax bracket, meaning that (on this amount) they’d have to pay £4,489.79 in tax.

Furthermore, £2,040.99 of their total income before tax would be caught within the 35% tax bracket, meaning that (on this amount) they’d have to pay £714.35 in tax.

When you add the two figures together, it means that they’d have to pay a total of £5,204.14 in tax. This would bring their total take-home income after tax to £16,836.86. 

This would put the single adult £8,672.86 above their defined poverty line, having paid their £2,041 basic UBI subsidy back, plus an extra £3,163.14 (via standard taxation).

Illustrating a flat tax rate example alongside an example of progressive rates —

The difference between this tiered and progressive tax system, as opposed to the initial UBI 50% flat tax example, would be the impact on those with a take-home income above the poverty line. They’d be facing a less steep rate of tax.

For example, let’s look at a single adult self-earning £30,000, under a UBI system with a basic income subsidy of £4,082 and a flat 50% tax rate for anyone with an income over £4,082. 

Their total income before tax would work out at £34,082, putting them £30,000 above the (£4,082) tax threshold. Therefore, after applying the the 50% rate, they’d have to pay £15,000 in tax. This would mean their take-home income after tax would total £19,042.

To compare, let’s that that under a tiered and progressive tax structure example, the single adult still self-earned £30,000, but this time received a lower basic UBI subsidy of £2,041.

Also for this progressive example, income between £2,041 and £20,000 would be taxed 25% and income between £20,001 and £40,000 would be taxed a 35% rate. 

Therefore, the single adult’s total income before tax would work out at £32,041. This would mean that they’d be taxed 25% on £17,959 of their income, and 35% on £9,999 part of it. 

This would mean that they’d have to pay a total of £7,989.40 in tax. After tax, they’d then be left with a total take-home income of £24,051,60.

So as you can see by comparing the systems, those with an income above the poverty line would be less hit by a progressive tax structure, than they would be if they were subject to a 50% flat tax structure.

This result occurred even though the progressive tax structure offered a lower basic income subsidy and a lower initial tax threshold level. This at the same time as delivering income to the poorest, whilst retaining incentive for them to work.

Whichever way you look at it, In order to deliver a basic income that doesn’t disproportionately deliver income, as well as avoiding delivering income to those who don’t need it, you’d have to sacrifice any hope of simplicity through total unconditionality. 

KEY WELFARE BENEFITS POTENTIALLY NOT COVERED BY A BASIC INCOME PROGRAMME

(Section 10 of 12)

Considering those who can’t work —

As briefly mentioned, a basic income programme would aim to replace the vast majority of existing welfare programmes. 

However, it doesn’t matter how much you try, you’re still going to have to find methods of providing an ‘adequate’ income to certain groups of people who may be left behind if we don’t consider them.

Probably the most prevalent instance of this includes those who are unable to work. It goes without saying that there’s a huge difference between those who can’t work and those who won’t work. Those who ‘won’t’ work are often described as ‘idle’.

But with those who can’t work, it would obviously make no sense whatsoever to set thresholds aimed at creating and retaining incentives to work.

For example, it would be unfair to provide a basic income subsidy to someone unable to work that ends up at a level lesser than their defined poverty line. There’s no way that they could work to make up the difference and there’s no way that you could expect them to.

So in this case, it would make sense to deliver them a basic income subsidy that was level with (or moderately surpassed) the poverty line. This would ensure that they’re guaranteed an ‘adequate’ standard of living. 

Eligibility for such a level of subsidy would have to be assessed and (even though they wouldn’t be self-earning) proof of which could potentially be filed along with a tax return.

Considering those at retirement age and those on other forms of existing benefit —

Another group of people that we need to consider are those at state pension age. Once someone reaches retirement age, we can’t morally expect to force them to work in order make up the extra amount of income.

So for those at or above this age, we may want to look at integrating existing pension considerations into a basic income system, potentially supported by appropriate thresholds and subsidy, to ensure that they don’t fall below the poverty line.

We may also have to consider those who, under existing welfare systems, receive attendance allowance or any other form of disability benefit.

If they are deemed eligible, we could provide these types of benefits as part of a basic income programme (and therefore as part of the tax system) or we could just decide just leave provision for these benefits as part of an orthodox welfare set-up (separate from the tax system).

We’d also have to consider any child benefits that people may receive under existing systems. 

Even though we’d have the ability to calculate poverty lines for households with children, we still may have to provide some extra subsidy. This depends on whether the defined poverty lines agreed upon accounted for the likes of childcare costs.

It’s worth pointing out that these are just a select number of examples that we’d need to consider. A great number of which could certainly be factored into a basic income system (alongside guidelines outlined in Section 9).

THREE EXAMPLES OF BASIC INCOME EXPERIMENTS CARRIED OUT ACROSS THE WORLD

(Section 11 of 12)
Experiment carried out in India —

Firstly, let’s look at a basic income experiment carried out in India which included a total of twenty villages. Eight of these villages were tested with basic income, whereas the others acted as control groups.

In the eight villages, every man, woman and child were given a monthly income. Each adult initially received 200 rupees and each child received 100 rupees (paid directly to a parent or guardian). These were later raised to 300 rupees for each adult, and 150 rupees for each child.

The results of the study found that many in the eight (basic income treatment) villages used the money “to improve their housing, latrines (communal toilets), walls, roofs, and precautions against malaria”. 

It also found that “nutrition was improved”, and so did the “average ‘weight-for-age’ of young children”. 

The experiment also resulted in a “shift from ration shops to markets”, leading to “improved diets”. 

School attendance was also found to have improved, and this was put down to the improved health of child recipients. 

It was also concluded that the basic income led to “small-scale investments”, such as “better seeds, sewing machines, establishment of little shops, repairs to equipment, and so on”.

The basic income subsidy also “led to more labour and work” and “there was a shift from casual wage labour to more own-account (self-employed) farming and business activity”. 

The study also found that “those with basic income were more likely to reduce debt and less likely to go into greater debt”. They put this down to the fact that “they had less need to borrow for short-term purposes, at exorbitant interest rates of 5% a month”.

Experiment carried out in Finland —

Next, let’s look at an experiment carried out in Finland where 2,000 recipients aged 25-58 and already receiving unemployment benefits, were given an unconditional basic income of €560 per month. 

This study also included a (non-basic income orientated) control group to compare against.

Preliminary results from the experiment found that “while some individuals found work, they were no more likely to do so than a control group of people who weren’t given the money”.

However, it also found that “people who received a basic income saw their wellbeing as being better than the control group, with 55 per cent of the recipients of basic income saying their state of health was good or very good”. 

On the other hand, “46 per cent of the control group said the same. Broadly, people who were on basic income said that their levels of stress went down too”.

Experiment carried out in California —

Now, let’s look at a smaller experiment based in California where 125 people classed as living at or below the median income line, were given $500 a month.

Provisional data from this study found that recipients spent “most of it on things like food, clothing and utility bills”.

The first data from these results also found that “around 43% of participants had a full or part-time job, only 2% were unemployed and not actively seeking work”.

We don’t huge amounts of real-life basic income data to draw upon

These are just three examples of experiments carried out on basic income. There are other examples but the truth is that despite being an idea that is once again gather pace in popularity, we don’t have huge amounts of real-life basic income data to draw upon.

In addition, it’s so hard to use this evidence to sensibly predict what the outcomes would be if we applied a basic income to a population as a whole. Most experiments only have small cross-sections of societies taking part.

Also, who’s to say that the limited timeframe that’s involved which such pilot schemes didn’t or won’t influence the behaviour of recipients? How is their incentive to find a job, for example, influenced if they know that this basic income will eventually be halted?

There are still so many questions to be answered of how a basic income would work in the real world. As of present, the data that we possess only gives us a hint of a taste of how successful (or unsuccessful) they’d be if implemented across a whole population for real.

This unfortunately would likely still be the case even if we could analyse a million experiments, similar to the scale of these select few examples. 

CONCLUSION

(Section 12 of 12)
The discussion on UBI or NIT is still at a very premature stage —

Despite what proponents might claim, implementing a basic income (whether it be via UBI or NIT) will never be as simple as it seems.

Coincidentally, before sitting down to write the conclusion to this, I saw a Twitter poll posted by Martin Lewis stating “Some now call for a PERMANENT Universal Basic Income (state pays everyone set amount eg £800/month). Do u support? For’s arguments inc: safety net, simplifies benefits, rich repay via tax. Anti’s argue inc: Incites many to stop work, lowers productivity”.

It’s tweets, statements and questions like these that lead to so much confusion about the real, intricate obstacles we’d face when trying to put a basic income system in place. This as well as potentially paths towards solutions.

The discussion around a basic income is still very much in its prototype stage. It has been for 500 years. The debate is stuck in the mud, hugely because basic income means so many things to so many different people.

A pure UBI could be implemented, but shouldn’t be implemented —

Granted, there’s nothing stopping us from implementing the more popular UBI in its purest form. Everyone gets an unconditional sum, likely on a monthly basis, and we aim to claw that back through taxing the rich.

It seems simple. A pure UBI is indeed simple on the surface. But (as illustrated in Section 8) it would go against everything that a basic income and welfare programme would and should aim achieve.

For example, you’d have poor people in rich families/households receiving cash that they just don’t need. 

Yes, there are so many problems that existing under orthodox welfare systems, but at least those systems don’t tend to give huge chunks of money, en masse, to people who don’t need it. 

That’s why the arguments that a pure basic income programme would cost essentially the same as existing welfare systems is totally false. You just wouldn’t be able to ‘claw back’ the subsidy provided to poor people who are part of rich households. 

The reason for this is simply because a pure basic income system would look at subsidy provision in the scope of an individual and not the household. 

This individual would be classed as poor, so UBI wouldn’t require them to pay that subsidy back through tax, even if the household that they are a part of was loaded.

Proponents argue that a basic income wouldn’t be expensive. They fight tooth and nail to rebut claims that a basic income would cost way too much. 

However, these rebuttals are based on the flawed idea that a basic income would simply target subsidy at those who most need it, and retrieve it back from those who don’t via taxation (under a UBI, for example). 

Despite all the rebuttals, it’s a fact that a basic income delivered in its purest form just wouldn’t allow this, whether proponents like it or not.

A pure basic income programme assumes that every individual in a nation requires the same amount of subsidy in order to give them the opportunity to live ‘adequately’. But that is far from the case.

If you implemented a pure and generous basic income system, you might be able to give everyone the minimum needed to live ‘adequately’. You might be able to target the poorest, but you’d also be targeting it towards those who aren’t in need.

The obstacle of different individual/household make-ups and situations needing different minimum levels of income would only lead to a pure basic income programme producing huge amounts of waste.

On the other end of this spectrum, if you tried to scale down the levels of subsidy delivered to reduce programme costs, you’d just end up leaving so many poverty-stricken households behind.

Ultimately, the moral of the basic income story is that it will never reasonably or affordably work in its purest form.

Instead, in order to deliver a basic income (whilst retaining work incentives and keeping it affordable for the taxpayer) you have no choice but to sacrifice its pure simplicity.

Of course, if you’re happy to run a generous basic income system and allow money to go into the hands of those who don’t need it, that’s your prerogative. A dumb prerogative, but your prerogative nevertheless.

You may think that it’s totally acceptable to pay over the odds, to only deliver disproportionate levels of subsidy and bash work incentives for a chunk of the population. Again, your prerogative if you want to target poor people.

But it’s worth mentioning that putting money into many hands of those who don’t need it (and won’t pay it back) will of course have to be paid for through vastly higher taxes, increased borrowing and the (likely) ‘printing of money’. The latter of which would lead to a hike in inflation. 

Even after all this, you still might be okay with this. And if you are, then carry on (blindly) cheerleading for it. I’ll even buy you the pompoms. But for the sake of retaining simplicity, I don’t believe it’s worth ruining the nation’s finances over. 

This is especially true when you consider the affordable alternative of sacrificing a degree of simplicity so we can instead implement a system which would target the poorest, at the same time as retaining work incentives – a system which could just potentially work.

Different thresholds based on different poverty lines would be needed for UBI or NIT to work —

The favoured alternative to a pure UBI/NIT would involve setting thresholds and/or levels of subsidy based on an individual’s or certain household’s make-up/situation (as explained in Section 9)

This kind of set-up would rightly take into account that situations for different individuals/household vary from case to case. 

For example, the minimum amount a single adult needs to live ‘adequately’ differs from the amount that an adult couple needs for an ‘adequate’ living. This set-up accepts that there are a number of different poverty lines.

That brings us neatly onto expressing the importance of setting defined poverty lines. Consensus will need to be reached on what should be accounted for in the setting of a poverty line. 

To be able to deliver a basic income subsidy which gives people the opportunity to live ‘adequately’, the level at which the poverty lines are set (and how accurate they’d be in relation to reality) would be crucial.

Once this had all been agreed upon (and even if we opt for a more intricate UBI or NIT design as opposed to a pure form), the outcome would still more than likely to end up being much more simple and efficient than existing welfare systems.

It seems that UBI or NIT would solve issues currently that are engrained in existing welfare systems —

In addition, the integration of the vast amount of existing welfare programmes into the tax system would still result in us solving so many of the issues that we currently face today.

Basic income would give us the chance to harness the positives that come with the autonomous nature of delivering benefits through unconditional cash payments (as explained in Section 6).

We’d also be given the chance to eliminate the welfare trap, at the same time as retaining work incentives (as explained in Section 7).

Of course, I do believe that we need to carry out so much more experiments in order to analyse the effects of the likes of increased autonomy and work incentives under a basic income system. 

But nevertheless, we’d still have to accept that we’d never be able to fully understand the effects it’d have if implemented permanently nationwide, solely through little experiments. 

In that, I mean that we’d never truly and fully understand the effects and outcomes until we actually implemented a UBI or NIT for real.

The next step is to put forward realistic proposals for a guaranteed basic income —

Whichever way you look at it, if we want to free ourselves from basic income’s prototype stage we must take action to step much closer to a credible consideration for implementation.

To achieve this, we need economists to put forward full UBI/NIT proposals that can be scrutinised, analysed and improved.

Rather than analysing the very simplistic proposals that we currently have on offer, we instead need proposals that can actually be implemented in the real world.

Such proposals should revolve around the key principles that a welfare programme should possess. These principles include helping the poor, retaining work incentives and delivering affordability to the taxpayer. 

To reiterate, proposals that try to plug a basic income in purest form just won’t (and can’t) be acceptable.

However, until we manage to move the basic income debate forward, realists will always view the simplistic arguments for a basic income as nothing more than a poorly developed thinking exercise.

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