Universal Basic Income: Costings for 1998/99

Keith Rankin, 27 May 1998


Universal Basic Income (UBI) is an tax-benefit system that (i) integrates income taxes and cash benefits, (ii) pays all tax-resident adults a universal income from public revenue, and (iii) ensures that no resident lives below the poverty line. UBI is based on individual rather than household entitlements.


A UBI system can be formally defined as follows:

for every tax-resident adult:

  Net Income    Gross Market Income less Proportional Tax plus Universal Income

or    NI = GI - PT + UI + SB

where NI is Net Income

      GI is Gross Market Income

      PT is Proportional Income Tax (or Production Tax)

      UI is Universal Income (or Social Dividend)

      SB is a Supplementary Benefit that abates with Gross Market Income

      SB0 is the level of Supplementary Benefit payable to a person without market income

and   UI + SB0 equals the "Social Minimum"; ie minimum poverty-free income for that person


For present convenience, I take existing benefit levels as defining the social minimum. Thus, the social minimum for single able-bodied persons with minimal housing costs equates to the present unemployment benefit. For particular single persons, with moderate-high housing costs, it will be higher, as is reflected by the present Accommodation Supplement. For a sole parent with two children and no market income, the social minimum will be taken to be the total amount s/he receives now (ie sum of DPB, Family Support and Accommodation Supplement).




The recent May 14 budget is summarised in the Table 1 below:


Table 1

Table 1

It needs to be noticed from the budget that the expenditure on Social Assistance Grants is less than the budget for Social Welfare and subsidies. The difference would appear to be the administrative costs associated with, in particular, the Department of Social Welfare. Likewise the amount spent on health and education purchases is significantly less than the total funding for health and education.


To cost the UBI, income tax is reassessed as a simple proportion of GDP at factor cost. (This is what it means to integrate the tax-benefit system. It means that unpaid taxes, subsidies and tax concessions are treated as benefits.) The remainder of public revenue comes from indirect taxes, government investments, and profits from state-owned enterprises.


My initial costing uses a tax rate of 33% (the present corporate and upper personal tax rate) and a UI of $85 per week. This gives a UBI formula of:

  Net Income    Gross Market Income less 33% plus $85 pw


The cost of social dividends for the 1998/99 year comes to just over $12 billion, as shown below in Table 2. In order to maintain a surplus in the operating budget of just over $400 million, I have allocated a round $10 billion to supplements and subsidies. Thus, it is from this "Subsidies and Supplements" fund of $10 billion, that all supplementary benefits (SBs) must be paid, whether means-tested or not. Administration costs relating to SBs also come from this fund.


Table 2

Table 2


In addition to SBs and Social Welfare administrative costs, fours kinds of subsidy must come from this fund. The first is the explicit subsidies accounted for in Table 1. The others are subsidies that equate to the categories of tax exemption, tax avoidance, and tax evasion. As a result of these subsidies, income taxes collected can never equal the levied amount. When accounting for a UBI, these are treated on the right side of the ledger as subsidies rather than on the left side as non-taxes, meaning that the numbers on both sides of the public ledger are higher in Table 2 than in Table 1. The most important form of tax exemption is that on the imputed rent attributed to ownership of residential homes.


Table 2 is taken from an EXCEL spreadsheet that allows the user to change the items with yellow backgrounds. Raising expenditure items will lead to a reduced budget surplus, or, more likely, a deficit. In order to restore the budget surplus, either other expenditure items must be cut or the tax rate must be raised.


In the process of raising the tax rate, while the expenditure on SBs will fall, the expenditure on subsidies will rise. Unpaid taxes are higher when the rate of tax is higher, and most subsidies are unpaid taxes. I have built in a formula to reduce the "Subsidies and Supplements" fund by $100m for each percentage point increase in the tax rate. Thus, a rise in the tax rate to 43% (ie a rise of ten percentage points from 33%) leads to a Subsidies and Supplements requirement of $9,000m. For a pure UI system - ie one without any subsidies or SBs - the value for the "Subsidies and Supplements" fund will be zero.




Further Examples:

Table 3: Tax Rate of 35% and UI of $100

Table 3


Table 4: Tax Rate of 42% and UI of $150

Table 4


Table 5: Tax Rate of 46%, UI of $150 plus Child UI of $75

Table 5


Table 6: Tax Rate of 45.5%, UI of $200, Child UI of $100 plus elimination of all supplements and subsidies.

Table 6


It should be noted that the proposal in Table 6, to simultaneously raise taxes to 45.5%, introduce such a generous UBI and also eliminate all subsidies, income tax exemptions, tax avoidance and tax evasion is not possible in a democracy. Not only would it require a massive "police" cost (budgeted at zero in Table 6), but it would involve massive zero-sum effects. It is not realistic to expect 50% of voters to support such a massive one-off change to the management and disbursement of public revenue.


The objects of UBI - as stated in the first paragraph - can be met without the distraction and division implicit in the "king hit" depicted in Table 6. The aim of creating an inclusive society through tax-benefit reform cannot be achieved through an inherently divisive process; a process that creates a significant number of losers. On the other hand, I believe that the example presented in Table 3 is politically viable and is saleable to the centre-ground of New Zealand politics.


This is not to say that a UBI such as that of Table 6 is not economically viable and will never be politically viable. It is just that people need to get used to an unconditional income set at an amount below the social minimum before they can accept a UI at or above the social minimum. And changes in the distribution of income have to be gradual to be acceptable to those who stand to receive less under a UBI system.


(As a general rule, a UBI effectively favours families, women, young adults, and below-average income workers; thus it relatively disfavours the childless, men, retired persons, and recipients of high gross market incomes. Of course, that does not mean that all people in these categories would be worse off under a UBI than at present.)


It is also not to say that, given an income tax rate of 45.5%, the best way to spend the revenue would be through an adult UI of $200 per week and a child UI of $100 per week. A version which paid say $150 to caregivers of children whose parents had no market income and $0 to caregivers of children of millionaires might be considered by voters to be more equitable. In addition, many voters might prefer increased expenditure on health, education and the environment, along with a lower UI supported by SBs.


Finally, for those who favour a UBI funded by taxes other than income tax, it is still appropriate to cost the proposal as if it were funded by income tax of 33% plus x. That way, we can see that the alternative tax is claimed to be equivalent in its revenue raising power to an increase in income tax of x percentage points.


© 1998

Rankin File | 1998 titles