The 1997 Rankin File: #6

© 1997 Keith Rankin

Three New Reasons for a Universal Basic Income

Wednesday, 24 September 1997

What is a Universal Basic Income?

A universal basic income (UBI) is a monetary payment to every "citizen" (ie 'tax resident'), funded from public revenue. A UBI is a central component of a "basic income system", the other parameter being a moderate-high rate of income tax. The standard formula for each citizen under a basic income system is:

Net Income = Gross Earnings less Income Tax plus UBI

Under a full UBI system, there are no other benefits other than UBI, and no income tax concessions or surcharges. Under a partial UBI system, the formula allows for additional benefits:

Net Income = Gross Earnings less Income Tax plus UBI plus Benefit

where the value of the "benefit" is typically but not always zero. (The term "benefit" should be understood as an accounting item, bereft of any value-judgement re its status.)

In New Zealand at present, every person with annual earnings over $34,200 conforms with the following partial UBI formula:

Net Income = Gross Earnings less 33% plus $3,933 plus Benefit

where the value of the benefit is almost always zero. The most common benefits paid to people in this income range is the "Independent Family Tax Credit" payable to many working caregivers, and New Zealand Superannuation.

From July 1998, every person with annual earnings over $38,000 will conform with a new partial UBI formula; a new formula that is the equivalent of an increase in the UBI:

Net Income = Gross Earnings less 33% plus $5,130 plus Benefit

where the value of the benefit is almost always zero.

For people earning less than $34,200, the present formula can be presented as:

Net Income = Gross Earnings less 33% plus $3,933 plus Net Benefit

where Net Benefit may be positive but is in fact negative for most wage-earners and caregivers.

In order to convert New Zealand's present tax-benefit system into a partial UBI system, all that needs to be done is to pay a top-up benefit to everyone whose "Net Benefit" is currently negative. Given the present range of means-tested benefits payable to low-income working families, the financial cost of providing such top-ups is less than the financial cost of the 1998 tax cuts.

Common Reasons advanced for converting to a UBI system.

  1. administrative efficiency, simplicity
  2. recognition of social value of unpaid work
  3. dignity of beneficiaries by eliminating punitive conditions associated with benefit "targeting"
  4. elimination or reduction of poverty traps arising from benefit abatement
  5. elimination of benefit fraud which occurs when beneficiaries remain on a benefit after they become employed
  6. encourages unemployed people to accept part-time employment when full-time jobs are not available
  7. incentives for the underemployed to work more and for the overemployed (especially parents) to work less
  8. income reallocation favouring care-givers of children

New Reasons for a Universal Basic Income

Much of the fixed capital stock which contributes to production and productivity is not privately owned; indeed cannot be privately owned. In order to treat such publicly-owned assets on the same footing as freehold assets - as the logic of economics demands - then such capital must be attributed to the sovereign - ie to the "crown" - as a kind of supreme freeholder.

Such capital stock includes our environments (natural and artificial), our stock of knowledge, our technologies, our infrastructure, our cultures, our institutions and our legislation. It is in the public domain; indeed, in a democracy in which the people are sovereign, most of it is the collective inheritance of humankind. As a corporate (ie collective) inheritance, it should be regarded by economic theory in much the same way as privately inherited capital stock.

The economy is inefficient if the owners of certain kinds of productive assets are not rewarded while the owners of other productive assets, although no more important as productive assets, are rewarded generously. The sovereign should have the same rights to receive property income as do private corporations and private individuals.

From this perspective, a UBI - partial or full - is simply a social dividend; an equal division of a part of the "social profit" or "social wage"; an equal division of the sovereign's income. Taxes become just like wages and royalties; a cost to the users of a resource, and an income to the owners of the resource. Increases to the UBI can be regarded, in the jargon, as "total factor productivity dividends".

It is an axiom of economics that more is better than less. Thus if more can be produced at the same cost as less, then more should be produced. The problems come in the distribution of the more.

Societies have always been concerned at unemployment caused by labour-saving technology. They have been suspicious of knowledge that, while enabling more to be produced without incurring more material and labour cost, has caused particular jobs - indeed whole occupations - to be lost.

Generally, as basic labour ("commodity labour") becomes both less scarce and less important as a contributor to final production, then incomes - the entitlements to consume final production - become increasingly concentrated in the hands of the owners of capital assets. If there is no explicit social profit, then, by default, the income in such a growing economy must be concentrating in the hands of private freeholders.

Economics 101 justifies a process of economic growth accompanied by increased inequality through the "compensation principle". This means that, in theory, the winners (the capitalist freeholders) can compensate the losers (the workers who lose their jobs or who must accept lower wages in the face of increased competition in the labour market) and still come out ahead. A universal basic income is just a practical realisation of this theoretical principle. Compensation is paid as higher taxes.

While the people are collectively sovereign, they are also individually subject to the laws and to the executive will of their constitutionally elected sovereign governments.

Government, as the executive, legislative and judicial arm of the sovereign, is responsible for the wellbeing of its subjects much as "breadwinners" and "caregivers" are responsible for their families. Hence the welfare state. Subjects agree to be bound by the rule of law and the demands placed on them by the executive, in return for "protection"; security and a minimum standard of living that reflects the wealth of the society as a whole. Thus the poorest subjects of a rich society should have a higher guaranteed standard of living than the poorest subjects of a poor society. Put another way, as a society becomes richer, then the least rich subjects of that society should get richer in proportion.

Recent discussions relating to the establishment of a code of social responsibility have focussed on the responsibilities of parents to their subject children. Implicit in the social responsibility proposals are "stick and carrot" incentives which can fairly be labelled "social engineering". They reflect a mood signposted by the 1991 Child Support Act, which clearly expressed the principle that children are entitled to a standard of living proportionate to the standard of living of their natural parents.

This is clearly a principle that has widespread support, and not only in conservative political circles. It is therefore natural - at least for those who support the principle - that it should be extended to the government itself. Governments must not only be socially responsible; they must also be seen to be socially responsible. Being socially responsible means being committed unconditionally to the support of and the care for all the "subjects" to whom one (a constitutional government or a legal guardian) is constitutionally, legally and morally responsible.

The provision of a Universal Basic Income is a moral act of social responsibility.


1997 Rankin File Titles

Rankin File