Tax and Fiscal Policy

A Universal Basic Income (UBI): a price worth paying to cut regulations?

Suppose the government redistributed to every adult Briton a basic, unconditional income of £10,000 from tax revenues. Would aggregate employment levels a) rise, b) fall, or c) stay the same?

This is the blue-sky policy question that former Labour leader Ed Miliband has been toying with.

He’s not alone. Ideologically-diverse bedfellows from the neoliberal Adam Smith Institute through to the Green Party have weighed up the merits of giving everyone cold hard cash as insurance against fears of automation and lack of job security in the labour market.

There are legion concerns, trade-offs, and practical difficulties with such a policy. Yet the employment question arguably resonates most, and both proponents and opponents seem confused about it.

Last week on Newsnight, Miliband simultaneously argued that there would be little to no employment impact, but also implied that the ability to turn down work was one of the scheme’s virtues.

Critics assert that earning money is what brings human dignity, without seeing that this might be why people would continue to work even with this cash stream.

The idea that paying people unconditionally would lower employment is intuitive. Some people would pocket the income and not engage in formal labour market activity, especially if they currently feel compelled to work to get by, or due to the conditionality of existing benefits.

Students may prefer to focus on their studies. Parents of newborns may opt to spend more time with their children. With a generous safety net, those between jobs may take longer to find positions that genuinely match their skills and talents too.

All these things might lower the employment rate at any given time. As Miliband implies, for people in certain situations this might not be a bad thing.

Yet this is only part of the story. When assessing the impact of a basic income, we have to ask: compared to what?

The UK’s existing welfare state for working age people gives money with conditions and means-testing. This raises the incomes of poor people, but it paradoxically makes it harder for them to earn income.

As someone works more, or gets promoted, they face benefit withdrawal as well as taxes. Even under Universal Credit, this creates effective marginal tax rates of around 75 per cent – a severe disincentive to earn.

If a pure basic income replaced existing welfare, no such disincentive would exist. The overall impact on the employment rate of these two effects would therefore be ambiguous.

Here’s where specifics about the scheme matter and trade-offs come in. The key problem is that a generous basic income would be extraordinarily expensive. A £10,000 basic income for adults alone would cost £580bn, far higher than the current £252bn social protection budget (which includes the state pension).

Alone, then, a basic income would necessitate huge increases in taxes, which in turn reduce the return to earning for people who currently do not receive benefits. You could start with a much lower basic income, but then you would have to be willing to make some existing benefit recipients worse off to give money to people who currently “don’t need it”.

A compromise is a “negative income tax” – in effect an integration of a basic income guarantee into the tax system, whereby individuals either receive money from the government, or pay taxes, but never both, with an absolute floor.

This helps lower the fiscal cost substantially, but given that the amount transferred tapers with earned income, it reintroduces some of the work disincentives that a pure basic income eliminates.

If Miliband is right, though, that a basic income provides a generous-enough safety net to give workers the power to say “no”, surely significant chunks of existing employment legislation are no longer needed as well?

Minimum wage laws and statutorily enforced in-work benefits are often justified on the basis that employers would otherwise “exploit” workers. With the fall-back of a safety net, employment contracts are entirely voluntary.

Justification for other job-destroying protectionist policies in areas such as trade likewise fall away, since workers have a safety net that grants them time to retrain or find better job matches.

A basic income or a basic income guarantee need not reduce employment then. But it depends on the design and exactly what it replaces.

The challenge for this idea taking off at a political level is whether its proponents can compromise on these features.

Would libertarian advocates be willing to accept more redistribution for the elimination of intrusive welfare and damaging labour market regulations? Would leftists such as Miliband be willing to give up labour market rights in return for a more expansive safety net?

If this is to be any more than a theoretical idea, it’s time to flesh out the answers to these questions.


This article was first published in City AM.

Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK).

2 thoughts on “A Universal Basic Income (UBI): a price worth paying to cut regulations?”

  1. Posted 27/02/2018 at 09:21 | Permalink

    This is such a bad idea!
    UBI would empower the state giving it enormous power over our lives which would inevitably increase as time went on.
    Presently we witness the State failing in most areas it is involved, from the NHS to Charities to Rail, I could go on
    The primacy of the state would be enshrined forever – we would in effect be a totalitarian state – our values and our independence destroyed

  2. Posted 27/02/2018 at 09:38 | Permalink

    this idea should not get out of the starting gates. It would require a huge increase in taxes to finance it and you simply replace one set of disincentives (withdrawal rates) with another (high taxes). You cannot find rich people and take money off them to give to poor people without that being a problem unless you reduce the extent of redistribution. Also, this essentially drives a bus through the family which is why the left and some hyper-individualistic libertarians like it – it replaces the family with the state (a risk some libertarians are willing to take to promote an odd type of individualism). The family is the primary vehicle for redistributing income (between parents and children, sometimes old and younger and between spouses or partners). This replaces that function by finding individuals within the family who currently receive money from others in the family and having the state give them money instead. So, people in rich families who do not have personal income receive money from the state thus increasing costs further. The obvious thing to do is to integrate tax and benefits (through a negative income tax) with both levied at the household level, thus removing the current discrimination against family formation.

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