A Modest Universal Basic Income Proposal
Keith Rankin, 28 September 1998
New Zealand can have a fully functioning Universal Basic Income (UBI) before the end of the year 2000. But it will only happen if the proposal is modest in scope, is not oversold as the cure for every socio-economic ill, and does not require a reduced budget surplus. While a UBI may be a useful complement to an expansionary macroeconomic policy, to be successfully sold to an electorate fearful of additional burdens, it should be seen as independent of any macroeconomic stance.
A Universal Basic Income proposal should:
The following is a modest proposal that could be adopted as a credible proposal by an innovative party for their 1999 election manifesto. With its parameters drawn to satisfy present budget constraints, there are no big winners and no big losers. Its most radical element is its presumption that publicly sourced incomes are as legitimate a part of our incomes as are those derived from paid employment and from private investments.
The proposal is to:
The proposal effectively integrates all benefits currently paid as tax concessions or tax credits with benefits paid through the New Zealand Income Support Service (NZISS), soon to become the Work and Income Agency (WIA). In raising the average and marginal rate of income tax to 39%, it is a proposal that should be most attractive to a left-of-centre political party.
As well as integrating income taxes and benefits, the proposal effectively integrates the student loan living allowance and the student loan repayment regime (see "Deriving a Universal Income from the Student Loan Scheme"). For ex-tertiary students, the marginal rate of income tax comes down to 39% from a present top rate of 43%.
The GMTB provides vertical equity (enables people in different situations to be treated differently), whereas the UTC provides horizontal equity (treating equals equally), enabling all citizens to have an equal Citizens' Income, reflecting their equality with respect to public property rights.
The GMTB would, at least on the initial implementation of the UBI package, be set at the same level as benefits are today. That is, each person or family would be assessed for an entitlement on the basis that they have zero privately sourced income. The actual amount payable would be set at that base amount, less 25% of privately-sourced gross income.
The GMTB would incorporate all present means-tested benefits (excluding the youth and married Unemployment Benefit which would be fully replaced by the UTC; and excluding student allowances): Domestic Purposes Benefit, Invalid's Benefit, Single Adult Unemployment Benefit, New Zealand Superannuation, Family Support, Independent Family Tax Credit, Guaranteed Minimum Family Income, Accommodation Supplement, students Accommodation Allowance, Special Benefit.
For example, a person without privately-sourced income currently receiving an Unemployment Benefit of $145 per week plus an Accommodation Supplement of $48 per week would continue to get a total of $193 per week. But it would be broken down into a UTC of $123 and a GMTB of $70. Only the GMTB component would be subject to abatement as that person moved into part-time or full-time work.
The following graphs show how certain groups in the population would fare under the modest UBI package, in comparison with how they fare today. All of the Accommodation Supplements have been assessed at Wellington rates.
Generally single persons with privately-sourced gross weekly incomes from about $140 to $620 would be better off under the UBI proposal. Low and middle income families with children will be better off, as will retired couples with minimal privately-sourced income. Persons on higher incomes would generally be less well off, on account of the higher rate of income tax.
Relative to the present, the UBI package favours the young, and families with children. Retired persons with significant privately-sourced income will be worse off under the UBI package on account of the loss of tax concessions (which will have been integrated with the UTC) and on account of the GMTB part of their pension being means tested. (See New Zealand Superannuation: a form of Universal Basic Income?, which compares New Zealand Superannuation with a UBI package based on a UTC of $85 per week and a GMTB abatement rate of 30%.) Nevertheless, the UTC serves as a universal pension, while the GMTB serves as an age benefit. The UBI package is a solution to the ageing of the baby-boom generation.
The following table represents a costing of the proposal, based on 1998 budget estimates of government expenditure. It provides for a fund of $10 billion to cover GMTB payments and existing subsidies. Implicit subsidies include corporate tax exemptions and tax avoidance as well as tax exemptions on the rent accruing to mortgage-free owner-occupied homes. If all explicit and implicit subsidies could be eliminated, GMTB payments averaging just over $70 per adult could be paid.
GMTB payments, which incorporate the present Family Support scheme, are paid only to adults (ie caregivers) although they are payable for the support of children. Likewise, the UTC is an adult social dividend. I have defined adults as persons over the age of 17. Typically, teenagers turn 17 during their 7th form year at school.
One reason for introducing a UBI is to reduce bureaucracy. By retaining the present complex formulae to determine benefit entitlements, the system as proposed will initially maintain the need for much of the present bureaucracy. Bureaucracy would be reduced, nevertheless, by integrating the Income Support wing of the new Work and Income Agency with the Inland Revenue Department, leaving the WIA as an employment agency that develops both paid work and community work initiatives.
Major reductions in administrative costs would eventually be made, however. Once the UBI package is in place, further reforms should follow. Political parties would offer contestable solutions to streamline the setting of GMTB payments. With gradual economic growth and inflation, some components of the GMTB would be raised whereas others would be allowed to fall in real terms.
Ultimately, I can see the GMTB becoming a fully customised benefit, with flexible emergency provisions to ensure additional payments to those with acute needs, and special provision for those with highly specific long-term needs. As such, the GMTB should be able to fully replace ACC (Accident Compensation Commission) benefits as well. The graphs above all incorporate a 1.2% ACC levy as an additional income tax.
My UBI proposal is a modest one. An income tax rate of 39% is consistent with tax rates of the economically developed societies we like to compare ourselves with, and is considerably below the 48% rate of ten years ago. The combination of UTC and GMTB payments and some subsidies as the only benefits is able to ensure equity while relieving poverty. And the level of non-means-tested universal income (set below the poverty line at $123 per week) is not so high as to facilitate a work-avoidance life-style. Rather it encourages more flexible patterns of work. $123 per week, while not enough to live off, may well be enough to tide most people over between variable pay-days. Unlike the present system in which NZISS benefits are set in accordance with regular wage incomes, the UBI package does not discriminate against self-employed and casually employed workers.
I envisage that the $123 would be paid to wage/salary earners as a credit item in their regular pay. Employers would simply deduct UTC payments from the money they remit to Inland Revenue. Personally, I would also favour UTC payments to unemployed young people living in their parents homes to be paid through their parents. I see the UTC as an incentive towards self-reliance among young people, and not as a payment that enables them to live in their parents homes without contributing to the wider economy.
While UTC payments would be automatic - ie paid through a "P" (primary) tax code - people seeking GMTB assistance would need to apply for their benefit. It would be up to the government of the day to introduce or remove additional compliance measures that might affect recipients of the GMTB. Unlike the UTC, the GMTB is a "targeted" benefit. The particular targeting regime prevailing at any point in time should be determined by the normal processes of democratic government. What matters is that the integrity of the UBI package depends on the sanctity of the UTC, and on the acceptance that the GMTB should be sufficient to ensure that no one need be living below the poverty line.
The year 2000 is almost here. It seems like a good time for us to enter the 21st century.
PS: The amount of the universal tax credit should be indexed to the trend growth of GDP (gross domestic product) per capita (currently $520 per week). Thus $123 per week should be raised annually. Actually, over time, the ratio of the UTC to GDP per capita should rise. Historically, economic growth in the developed world has been disproportionately due to the growth of common inputs - eg technology, knowledge, government - rather than the private inputs of labour and capital. The UTC is a social dividend; an economic return on an increasingly important common resource. Thus, gradually over time, the UTC should rise above 23.65% of GDP per capita, and the tax rate should gradually rise above 39% as labour and capital inputs become relatively less important sources of national and global wealth.
Rankin File | 1998 titles