Olivia Wigmore
Dr. Frank Strain
ECON 4991
December 7, 2018
Universal Basic Income: A Utopia, or Inequitable Treatment?
I. Basic Income: A Brief Timeline
Basic income is a payment made to every adult citizen, regardless of their employment, economic status, or any other attribute. In recent years it has become an increasingly more common suggested solution to unemployment. With several countries, like Finland and India, holding basic income trials with sample groups, and others, like Switzerland, holding referendums on country-wide adoption, more and more people are seeing basic income as a real possibility. However, a universal basic income is not a novel idea. It’s emergence as a serious, studied idea dates back to the 16th century. It’s first iteration, as noted in a history of basic income by Steven Shafarman, can be found in Thomas More’s fictional work Utopia as a preventative measure against theft.
“No penalty on earth will stop people from stealing, if it is their only way of getting food. It would be far more to the point to provide everyone with some means of livelihood.”
Where More’s conception of basic income found its place in fiction, his contemporary Johannes Ludovicus Vives detailed a comprehensive, multi-faceted argument for basic income. In the 18th century, Antoine Caritat, Marquis de Condorcet, developed an idea of social insurance that would aim to reduce poverty and inequality. Thomas Paine proposed agrarian justice, where universal, unconditional payments would be made out to every citizen, the product of what he called a “ground rent,” to be paid for by landowners. This construal of basic income addresses the magnitude of land ownership and attempts to even out wealth distribution in a manner sensitive to those who do not own land. Basic income was tied to land ownership again in the National Homestead Act of 1862, proposed by Abraham Lincoln. This act entitled adult head’s of family to 150 acres of land should they intend to cultivate it for at least 5 years. Variations on More’s basic income continued to pop up for centuries since he first put forth the idea, but it wasn’t until 1968 that actual experiments were carried out by the United States’ federal Office of Economic Opportunity. A group of more than 8,500 people were given monthly payments that ensured their place above the poverty line. While the results remain incomplete to this day, they are often cited and misconstrued. That does not mean the final, yet incomplete, analysis is of no use to an study of basic income. In fact, a misconstrual of premature results showing an increase in divorces and decrease in work hours resulted in a defeation of Nixon’s Family Assistance Plan, which aimed to provide “working and nonworking poor families with a guaranteed annual income.” This is a common understanding of basic income, and one proposed by a conservative president, at that. Basic income has been in the political mainstream for centuries, but still remains a radical idea because of the structural changes that would be required should governments adopt the policy. So, jumping ahead to more recent times, we see countries like Finland, India, Switzerland and more, toying with the idea of a guaranteed basic income.
II. Issues with Existing Welfare and Social Assistance Policy
Germany is a commonly referenced case where existing social assistance programs could, in theory, be effectively replaced by a basic income plan. Bernard Michael Gilroy, Anastasia Heimann, and Mark Schopf covered a comprehensive case study of the would-be implications of enacting basic income in Germany’s “highly developed social market economy.” Their case study purports that, even within the confines of a neoclassical labour supply model that assumes homo economicus and exclusively extrinsic motivations to work, a basic income would increase participation in the workforce. What they work against in this argument, is the – relatively common – idea that because homo economicus works not because of intrinsic motivations, but for external ones like money, that labour supply would decline. Germany already has a social assistance policy in place that bears similarities to basic income: Unemployment Benefit II. This is a system that requires many different criteria to be met and amount of payment varies depending on a number of variables. Where basic income is unconditional and universal, Unemployment Benefit II depends on “the number of family members, the level of earned or unearned income, the ability or willingness to work,” whereas basic income remains a flat rate no matter the individual’s income, familial structure, or mobility.
As mentioned earlier, Gilroy, Heimann, and Schopf use the neoclassical labour supply model to frame the differences between having no social assistance and having an unconditional basic income. Figure 1 illustrates commodity and leisure goods consumption of three different people with different spending preferences. Figure 2 shows the changes after introducing an unconditional basic income.
Figure 1: Commodity good consumption on the vertical axis is ci, leisure consumption on the horizontal axis is li, a budget constraint starts from the maximum leisure consumption t. The slope of the budget constraint corresponds to the real net hourly wage, intersecting the vertical axis at the maximum commodity good consumption ci. There are three individuals with a high (low) (A), a medium (medium) (B), and a low (high) (C) consumption (leisure) pattern. They choose their optimal consumption-leisure-combinations on the budget constraint (A;B;C), depending on their preferences. Their optimal consumption-leisure combinations are represented by the shapes of their indifference curves, on which each individual’s utility level is constant.
Figure 2: Without social security is in grey, and with an unconditional basic income is in black. After the change to an unconditional basic income, for those who had a consumption-leisure-combination on the left of the budget constraint intersection at A', the substitution effect – how much leisure one sacrifices for increased income – is positive, the income effect is negative, but the general effect is ambiguous. Otherwise (B';C'), the substitution effect and the income effect are negative and shows a positive effect on leisure consumption.
Figure 3: This illustrates the substitution of no social security for a conditional social security (in black).
There is also a new, two-part budget constraint which consists of a straight line employed people (flatter than the original budget constraint because the social security funds come from direct taxes which decrease their nominal net hourly wage, or from indirect taxes which increase the price level. The new budget constraint intersects the vertical axis at the new, lower maximum commodity good consumption ci''. There is also a horizontal straight line for the unemployed, which intersects the vertical axis at the social security which also represents the minimum commodity good consumption cᵢ.
From these three figures, Gilroy et. al. draw that in the neoclassical labour supply model, there would in fact be a decrease in overall labour supply, with one caveat: this decrease would be limited to situations where there was no social security before the introduction of unconditional basic income. They acknowledge that in the neoclassical model, should there be no social security, that would most likely be the main motivator to work – since there is no safety net, people must work to survive. In the reality of the German case, there is existing social security – guaranteed by the constitution – provided to those who are not working. As mentioned above, the funds for social security come either from direct or indirect taxes, decreasing the nominal net hourly wage. After the switch to an unconditional basic income and doing away with the conditional social security system, they discovered that individual A might increase or decrease their labour supply. The effect of the unconditional basic income on A’s labour supply is ambiguous. For B, because they can still consume as much as before the tax increase, their labour supply will decrease. They have the ability to consume the same amount but work less, “because the unconditional basic income outweighs their increase in taxes” and “the decrease in the real net hourly wage reduces their work incentive.” On the other hand, individuals like C will opt to work more after unconditional basic income is introduced. Since they have a low consumption rate, they do not work at all within the conditional social security system and “their marginal real net hourly wage is quasi zero.”⁹ With unconditional basic income, their marginal real net hourly wage becomes equal to that of other individuals, and their motivation to work increases. Thus, their labour supply increases as well.
Figure 4: “A, B, and C stands for an individual with a high, medium, and low consumption affinity, respectively, IE means income effect, SE means substitution effect, OE means overall effect, NSS means no social security, CSS means conditional social security, UBI means unconditional basic income, and –, O, +, and – + stands for a negative, nonexistent, positive, and ambiguous effect on labour supply, respectively.”
The effects on labour supply (per individual), as displayed in figure 4, are largely dependent on the consumption tendencies of the individual. That the introduction of unconditional basic income should have a great impact of the labour market is not a large leap to make, but the authors stress, again, the consideration that their work concerns only extrinsic motivation for labour. Basic income has deep social implications as well as the more explicit economic ones. An initial thought on basic income being implemented in Germany, two things need to happen. First, taxes would need to be raised considerably. Second, governments would have to reduce or do away with other forms of financial assistance. These are two very socially charged topics. On one hand, we usually fear that tax increases for social benefits upset those taxpayers who do not see any financial assistance. With BI, no doubt we would have those who wouldn’t want their tax money ending up in someone else’s pocket, but these taxpayers would also be receiving benefits. Another concern is that universal, uniform reform is not always the best way to address socioeconomic inequalities. In fact, it’s often one of the worse. Failing to do away with systems that have been built on foundations of inequality is the major issue when it comes to arguing the value of equity versus equality. One issue here is that many fear that BI implemented within a governmental system that has been built on the premises of citizens essentially having differing values – their value to the state as well as the sets of values they uphold – is still not even addressing, let alone transforming, a system that allowed such extreme financial inequalities in the first place. In truth, no effective model can include all projected externalities and influential variables. Intrinsic motivation to work, as well as cultural values relating to tax and wealth distribution, were not variables that Gilroy, Heimann, and Schopf were able or deemed necessary to include.
Dr. Luke Martinelli for the Institute for Policy Research suggests that the cost of basic income, which will be elaborated on later, includes a three-way trade-off between “controlling cost, meeting need, and…work incentives.” Again, one of the more pressing concerns here being decreased incentive to work. Important to consider here is the substitution effect – less leisure for more income or vice versa – and the income effect, which is “how much leisure and income the individual chooses to enjoy as a result of being able to afford more or less of both.” Martinelli also includes participation tax rates as integral to an analysis of this trade-off. In contrast to many points to be referenced in this paper, Martinelli suggests that labour participation rates may, in fact, decline should the basic income outweigh previously received benefits. The higher tax rates needed for the affordability of basic income would also contribute to a lower labour participation rate overall. As for income effects, the inclination to reduce labour participation would be stronger in low-earning groups that did not previously did not qualify for many – or any – benefits “because the substitution effects described above would not be working against it.”
Summary of the Financial Incentive (Participation Tax Rate) Effects of the Finnish Partial Basic Income Schemes on Three Illustrative Claimant Types
Figure 5: Here we see a complex picture of certain groups being deterred by increased participation tax rates, resulting in decreased incentive to work. Other groups, however, face lower PTRs are would have an increased incentive to work.
Figure 5 illustrates quite well that the labour participation rates would vary greatly in a basic income scheme depending on family structure, previously received benefits, and employment, even though basic income itself is modelled here as being universal and unconditional. This brings up, again, the oft-asked question: is it better to treat everyone the same, or individualise benefits in an attempt to bridge wealth gaps and address inequality through the development of equity?
III. Rationale for Basic Income Implementation
In a 2017 paper, James Browne and Herwig Immervoll list characteristics of basic income that make it distinguishable from other social benefits. BI, as they define it, is not influenced by previous earnings, current income or assets, marital status or familial structure, and the flat basic income payment is “fully taxable” and is therefore “effectively worth less to those with higher incomes who face higher marginal income tax rates.” While those with higher incomes may be taxed more, proponents of basic income cite unsatisfactory and ineffective social assistance programs as the source of the economic inequalities basic income would attempt to solve. Browne and Immervoll also suggest that basic income would give job seekers the ability to reject unsafe or unsatisfactory work. Nicola Sturgeon, the First Minister of Scotland, cites a steadily increasing amount of working impoverished households as one of her reasons for exploring the idea of basic income. These working households that remain impoverished, as well as a growing number of individuals employed in non-traditional work, are part of a changing labour market. Additionally, those that are unemployed often don’t seek out the maximum unemployment benefits or social assistance that is available to them. This is due to several reasons, but Browne and Herwig cite a stigma around social assistance as a deterrent from seeking it out. The conditional nature of pre-existing ‘safety net’ policies, welfare, and social assistance is a major reason why “low-income groups in some countries are less likely to benefit from cash support than better-off families.” The unconditional, universal nature of basic income would eliminate the stigma of receiving the assistance needed, because there can be no direct association from the payment to things like perceived work ethic, class, etc.
Browne and Immervoll also consider potential inefficiencies in a universal basic income. The funds cannot come from nowhere, and taxes must finance this. This exposes middle and high income individuals to higher tax rates, effectively “giving with one hand and taking with the other.” However, a positive boost in efficiency would happen with administration, as there would be no need for the complexity of means testing and socioeconomic circumstance verification, the reason for this being, again, the universal, unconditional nature of the basic income framework Browne and Immervoll are exploring. And again, basic income is generally not understood as an effort to improve the wealth of the middle and upper classes, but to reduce inequality, wealth gaps, and poverty. So, the taxes on the middle and upper classes is really not an issue that greatly diminishes basic income’s redistributive potential. The redistribution of wealth can be achieved different ways with basic income. Those who are concerned with the equity of the redistribution may lean towards introducing basic income at a lower level, and “retain existing categorical and means-tested benefits” in order to “provide targeted help” to marginalized and at-risk demographics.
Browne and Immervoll use a microsimulation model to look at the effects of basic income amount changes in working age households. In their scenario, the only requirements to receive a basic income are residence within the country and being below the statutory retirement age. They set the basic income to the same amount as received by those who are supported by GMI (guaranteed minimum income). They also address my earlier concerns regarding equitable reform in that their basic income scenario:
However, those currently entitled to support intended to compensate for specific needs or circumstances – such as the costs related to a disability or of renting suitable accommodation – would typically lose out from a flat-rate BI set at GMI levels. This is a principal trade-off between social protection that is responsive to people’s situations, and unified universal support: to avoid hardship being ‘built into’ the reform, and to make the scenario politically more realistic, some form of targeted cash transfer, for instance disability or housing benefits, may need to be kept in place alongside a BI.
In acknowledging these potential downfalls, they present a basic income scenario in which those who receive higher benefits than basic income would provide are able to keep the existing benefits. They also address taxing concerns, as their basic income is taxed just as other sources of income are. This reduces the cost of setting the basic income at a meaningful level while better targeting low income individuals, who have low income tax rates.
Another concern is the trade-off between incentive to work and changing the level of basic income received. The potential for social benefits like basic income to reduce work incentives is a major fear that many have in the basic income discussion. However, Browne and Immervoll argue that their “comprehensive BI completely avoids these adverse incentives.” In figure 6 we see that incentives to work would largely be strengthened by the introduction of basic income, especially to low-income individuals. Here, participation tax rates – the “proportion of earnings that are lost to either higher taxes or withdrawn benefits when a person moves into work” – fall if the individual is the first earner in a couple and they make an income up to the average wage. On the other hand, the second earner in the same couple would have more incentive to work.
Impact of a BI policy on Participation Tax Rates, in percentage points
Figure 6: “Hypothetical reform where a BI would replace most existing working-age benefits, as well as the tax-free allowance. See Section 4 for details. In 2-earner couples, other partner assumed to earn 67% of the average wage in all cases.”
IV: The Cost of Basic Income
“…an affordable UBI would be inadequate, and an adequate UBI would be unaffordable.”
Many are hopeful about basic income based on theoretical discussion, but the realities of where the funding would come from, and the implications of setting basic income at a substantial level pose many problems. One of the aspects of basic income that has made it such a hot topic, and one that has rich, comprehensive analyses, is the fact that people from all over the political spectrum have an opinion on it. Supporters of basic income are conservative, liberal, extreme left, etc., and the same diversity can be found in the groups that oppose it. Most all can agree, however, that to simply ask whether or not the cost of basic income is feasible is too vague of a question. The cost of basic income depends largely on the retention or discarding of existing benefit programs.
Gross Fiscal Cost of Selected Illustrative UBI Proposals
Figure 7: Taken from the Institute for Policy Research September 2017 Policy Brief, these are some suggested figures for basic income, distributed on a weekly basis.
Estimated Revenue Generated by Selected Illustrative Tax Changes
Figure 8: Here we see considerable additional sources of revenue should policymakers increase taxes by varying increments in sectors where increases would make a meaningful difference.
The costs suggested in figure 7 are based off of the structure of a hypothetical basic income in the United Kingdom. Obviously, there are differences between the distribution of incomes here and schemes mentioned earlier that exclude retirees from collecting a basic income. We also see the acknowledgement of disability benefits in Martinelli’s scheme, where existing disability benefits are done away with in favour of additional basic income payments. Doing away with certain existing benefit programs definitely helps make basic income more affordable, but we can see that with the balancing that comes from additional funding for disabled citizens would require considerable raises in taxes. Most notable in this UK scenario is the potential for increasing the land value tax. Obviously, there is a fixed amount of land in the world, and for this Martinelli believes that increasing land value taxes it is not only “economically efficient” but “justifiable from the perspective that land ownership…represents the appropriation of commonly-owned resources for private gain.” Additionally, what Martinelli stresses in order to assure the affordability of basic income, is that it must be revenue-neutral. He gives two different basic income schemes that would cost £288 billion and £326 billion, with the stipulation that existing benefits are erased and new, additional benefits for disabled individuals are included. The more expensive scheme, at £326 billion, would require “income tax rate across all tax bands” to increase by 8%.
V. Conclusion
Implementing a universal basic income would no doubt be a radical change to existing benefit systems, no matter the country they are implemented in. What we know now about existing systems, especially in the western world, is that in addition to providing a window of opportunity for the ostracization of those who opt to receive their due benefits, whether on the basis of disability, unemployment, etc., existing welfare and social assistance policies are not doing much do undo inequality. They are quite literally band-aid solutions to structural problems that go beyond just the economics of employment, immigration, disability, and more. Another issue, which I believe must be reiterated any time we assess the accuracy and value of models, economic or not, is the gap between reality and modelling. All the cases above are models, or even projections, of what universal basic income would look like, but it is near impossible to predict the feasibility of universal basic income without large-scale, real time, real life, experiments. Structurally, it would look very different, especially after all needed changes to tax policies, but I suspect that the day-to-day differences for middle and high income individuals would be negligible, and the benefits to impoverished and low income individuals would outweigh minor losses to other demographics. I fully acknowledge that there is a chance for those receiving existing benefits to fall through the cracks in the transition from current systems to a universal basic income, but without actual trial runs, we will never know whether or not the potential pitfalls – individual decreases in incentives to work – are worth it.
Bibliography
Browne, James, and Herwig Immervoll. "Mechanics of Replacing Benefit Systems with a Basic Income: Comparative Results from a Microsimulation Approach." The Journal of Economic Inequality 15, no. 4 (2017): 325-44. doi:10.1007/s10888-017-9366-6.
"Family Assistance Program." Encyclopædia Britannica. Accessed December 07, 2018. https://www.britannica.com/topic/Family-Assistance-Program.
Gilroy, Bernard Michael, Anastasia Heimann, and Mark Schopf. "Basic Income and Labour Supply: The German Case." Basic Income Studies 8, no. 1 (2013). doi:10.1515/bis-2012-0009.
Martinelli, Dr. Luke. "Assessing the Case for a Universal Basic Income in the UK." September 2017. Accessed December 7, 2018. https://www.bath.ac.uk/publications/assessing-the-case-for-a-universal-basic-income-in-the-uk/attachments/basic_income_policy_brief.pdf.
Shafarman, Steven. "A Brief History of Basic Income Ideas." European Basic Income Network. Accessed December 07, 2018. https://ubi-europe.net/ubi/brief-history-basic-income-ideas/.
Shanahan, Genevieve. "India Debates the Case for a Universal Basic Income." The Economist. February 02, 2017. Accessed December 07, 2018. https://www.economist.com/leaders/2017/02/02/india-debates-the-case-for-a-universal-basic-income.