Analysis by Keith Rankin.
On Mondays – or Tuesdays after public holidays – National Radio’s Kathryn Ryan runs a session called ‘Political Commentators’. On 28 April, from the right was regular commentator Matthew Hooton. From the left was Neal Jones who is listed as: “Chief of Staff to Labour Leader Jacinda Ardern, and prior to that was Chief of Staff to Andrew Little”.
It was good to hear Hooton now becoming something of an advocate for a Universal Basic Income (UBI), though (given past comments) I am not clear yet that he understands it fully.
It was concerning, however, to hear Jones – a man close to Prime Minister Jacinda Ardern – repeating falsehoods about Universal Basic Income. Jones said that a key problem with UBI is that it would be paid to New Zealand’s richest man, Graeme Hart. That comment reflects an attitude that is dismissive of universalism. Universalism is the basic principle that underpins democracy; and, more generally, underpins ‘horizontal equity’, the idea that we are all equal in our economic and other civil rights.
Perhaps even more importunately, Jones’ comment on Tuesday was false.
It was me who in 1991 first coined the term ‘Universal Basic Income’; my aim was to connect the established concept of ‘Basic Income’ (‘Citizens Income’ in the United Kingdom) with insights gleaned from New Zealand’s tradition of universal income support, as established in the 1938 Social Security reforms and as reaffirmed in the 1972 Royal Commission on Social Security.
The mechanism I envisaged in 1991 is: “a universal tax credit available to every adult – the universal basic income (UBI) – and a moderately high flat tax rate”.
(Refer to my ‘Briefing Paper’ From Universal Basic Income to Public Equity Dividends (2018) which in turn links to a report that links to, among other papers, my original 1991 University of Auckland Policy Discussion Paper. To the best of my knowledge, this was the first ever published use of the name ‘Universal Basic Income’. The name started to be used internationally after I presented a paper at the Basic Income European Network conference in Vienna in 1996.)
Since the 1990s, the concept of Universal Basic Income has become poorly defined, and tends to be seen, simplistically, as an unfunded handout, a kind of regularly paid ‘helicopter money’. In that sense, it is true that some proposals that use the name ‘Universal Basic Income’ would raise Graeme Hart’s income. But not all versions of UBI. In those versions that are truest to the underlying concept – Graeme Hart’s income would be unaffected.
So, once again, for the remainder of this essay, I am going to avoid the term ‘Universal Basic Income’. The term I will use here is ‘Universal Income Flat Tax’ (UIFT, if you will). This is a mechanism made up from a universal income and a single (flat) rate of income tax. Thus, the universal income is funded by the removal of the lower marginal tax rates. In the New Zealand case, that means the universal income replaces the 10.5%, 17.5% and 30% marginal tax concessions. With a single tax rate of 33% and a universal income of $175 per week, Graeme Hart would be completely unaffected, at least in the implementation phase. This represents a reconceptualisation of income tax rather than a redistribution of income.
The Mechanism at Work
Rather than labour the point about how we introduce the UIFT mechanism, it’s good to get the vision of the mechanism in action. It is a mechanism that addresses the issues of stability, precarity, equity, and sustainability. UIFT is not a sufficient panacea to cure all our economic ailments, just as the introduction of MMP did not remove the politics from politics. UIFT is, however, a mechanism that makes the necessary possible. It is an enabling mechanism for the evolution of liberal democracy. The Covid19 global emergency has shown more clearly than ever that our present ways of thinking about public finance are disabling, and as such threaten to bring about an end to liberal democracy in some parts of the world.
(Much of the disabling is due to the fact that many welfare benefits continue to be delivered to us in the form of tax exemptions, allowances, concessions and graduations. These are attractive to recipients because they are unconditional – they do not have to be applied for – and to policymakers because they barely contributes to public debates about social welfare. The big problem with this kind of benefit is that, when a person’s income declines, these tax-related benefits also decline. We tend to think of benefits as a cushion, or a safety net. These tax-related benefits represent the cushion being removed when we fall. The best benefits are cushions that are there for us when we fall, rather than cushions given to us when convalescing from an uncushioned fall.)
So, imagine that we already have in place a 33 percent income tax and a weekly basic universal income of $175. (For present beneficiaries, this $175 per week would represent the first $175 of their present benefit. This situation does not represent any substantial change from the income distribution we have become accustomed to. It is a conceptual change.)
How could we use this tax-benefit mechanism to address the four issues: stability; precarity; equity; sustainability?
Stabilisation is the familiar issue of how societies use fiscal and monetary policies to manage normal economic downturns and upturns in the economy. Governments expect to pay more welfare benefits in an economic contraction (eg a recession), fewer benefits in an expansion. And governments expect to collect fewer taxes in a contraction, more taxes in an expansion. Thus, we expect the government to run budget deficits during contractions and budget surpluses during expansions.
When we have welfare benefits that are easy to access, this process is known as automatic stabilisation. While such automatic benefits are good for the recipients, they are especially good for the stability of the economy as a whole. (Countries that already had a system of benefits in place before the Great Depression of the 1930s – notably Sweden and the United Kingdom – emerged from that emergency comparatively quickly, in 1932. Other countries – for example France and the United States – were still in economic depression at the onset of World War 2.)
The more bureaucratic the process of accessing benefits – and the more conditional those benefits are – the less efficient is the stabilisation process. (Reliance on benefits delivered as tax concessions is especially destabilising, because these benefits are lost when they are most needed. A particularly egregious example of a destabilising benefit in New Zealand at present is the In-Work Tax Credit, which, as its name suggests, is lost when recipients lose their employment. Another such benefit is the KiwiSaver annual tax credit of $521, which is progressively lost as a person’s gross weekly income falls below $1,043.)
Under the UIFT mechanism, the full universal income is retained when a person loses their job, or suffers a reduction in wages. And it’s instant, a genuine cushion; not a subsequent palliative. Further, this cushion benefit cushions people with partners still in work; many people (especially married women) do not qualify at all for present targeted bureaucratic Work and Income benefits.
When there is an economic expansion, under this UIFT regime, government income tax revenue increases by 33 cents in the dollar for every extra dollar of gross income; thus, during a normal economic upturn, the government moves into surplus more quickly and more automatically.
Precarity is the situation where many people are employed on short-term contracts; some may be expected to be ‘on call’ without being compensated for that restricted time. It also refers to many the self-employed people – free-lancers and small business operatives – whose labour incomes fluctuate with little predictability.
For these people, a basic universal income works as a personal economic stabiliser – a cushion allowing some income tide-over during down times – with a higher marginal tax rate which offsets this cushion in the good times. With the UIFT mechanism in place, these people can remain self-reliant, and will have minimal need to engage the welfare bureaucracy which needs to prioritise those people with structural income incapacity.
Further, the unconditional benefit component of the UIFT creates some incentive for self-employed workers to retain work-life balance, by not overworking at certain times, and by not penalising them when they need some downtime, such as family time.
Equity is a central component of democracy. And equity represents the equal ownership of productive resources. Private equity represents the equal ownership rights of the principals of private businesses. Public equity represents the equal ownership rights of all economic citizens over those many productive resources which are not privately owned. Equity-holders expect to receive an economic return on their equity. There is no law of economics that restricts this capitalist expectation to private shareholders.
The consequence of this liberal democratic reasoning is that the universal income component of UIFT can be properly understood as an economic dividend; interest on the public equity represented by the public commons. And it also means that a universal income that is basic (ie low) need not remain low under all possible future circumstances.
Just as political citizenship reflects the universal suffrage, one person one vote, so, in a mature democracy, economic citizenship requires a universal publicly-sourced private income. One person, one equity dividend. A reflection on equity principles suggests that the universal income part of the UIFT mechanism should be understood as a public equity dividend.
A universal publicly-sourced private income is capital income, not labour income. It is a social dividend, not a wage. It is a yield on public capital. It is social capitalism at work, not socialism.
The word ‘equitable’ must be associated with an equalising mechanism. Here we may consider both financial inequality and time inequality.
A liberal democratic dividend means that one substantial part of the economic pie is distributed equally, and that the remainder of the economic pie is distributed unequally in line with market forces. It means that people experiencing substantial declines in their market incomes retain a personal stake in their liberal democracy, through their rights to an income from the public share. And it means that people experiencing increases in their market incomes do not simultaneously draw increases from the public share. Financial inequality is mitigated.
Time inequality is addressed, because the inclusion of an unconditional universal income gives encouragement to the overworked to work less, and for the underworked to work more. Without such an equalising mechanism, workers, who also lose public benefits when they lose private incomes, are disincentivised from reducing their work overloads. Likewise, people with little or no work know that, with UIFT, they will retain their publicly-sourced private income when they take on increased market workloads. The overworked work less and the underworked work more. For the unemployed and the underemployed, a basic universal income is work enabling; it facilitates rather than restricts labour supply.
This issue relates to both the issue of robots and the issue of climate change. It relates more generally to the possibilities of being able to enjoy high living standards in a more relaxed form, and having a supply-elastic economy. At present we try to have a full-capacity (ie, ‘maxed out’) growing economy where we have little choice but to overproduce and overconsume. At present, our overconsumption is someone else’s livelihood.
The robot concern is that our economies will become too productive. The only thing scary about that scenario is that, at present, we have no social mechanism to distribute the proceeds of that productivity. In the absence of such a mechanism, the endgame is extreme inequality, which means (among other things) extreme poverty. An advanced society with extreme poverty has high unemployment of bothpeople and robots.
How does a mature UIFT mechanism address this issue? It addresses the issue by both raising the amount of universal income and by raising the income tax rate. If done in a neutral manner, then the overall extent of economic inequality (measured by the Gini Coefficient) would be unchanged.
In order to avoid increased inequality, both the universal benefit amount and the tax rate would need to increase. This would be a simple reflection of increasing capital income relative to labour income; more gross income accruing to ownership relative to income accruing to effort.
(At this point we might note, Graeme Hart, as a likely robot investor, would be even richer than he is now, before tax. While the UIFT mechanism would give him an increased public equity dividend, he would also pay more income tax. The net effect of these three influences on Hart’s income should be that his ‘disposable income’ would increase at about the national average.)
As this process of rising incomes and rising income taxes unfolds, it means that the public share of the economic pie increases relative to the market share. This increases the willingness of the overworked to work less. And it increases the understanding that paid work is a cost rather than a benefit. Rising public equity dividends relative to total income gives the necessary signal to the entire workforce to work less for money, and to embark on more projects that may not deliver financial returns. More voluntary unemployment, less involuntary unemployment. More ‘slack’, in the sense that slack represents market supply elasticity. An economy with more slack has the capacity to increase production when it needs to. In normal times, liberal capitalist economies should not be ‘maxed-out’; only in certain types of emergency.
We can now imagine a democratic capitalist world order, in which people choose to both earn less and spend less, while being assured that basic economic needs are covered, as well as many higher-order needs. Ironically, in our Covid19 lockdowns many of us gained a sense of that, though missing the coffee and ambience of the local café. But not missing the wider rat-race.
It is this slower living – which we have seen briefly – that has the potential to bring about environmental sustainability. We have heard more birdsong. We have smelled the flowers. We have heard that the people in China have lately seen the stars in the firmament.
We can have a high productivity economy without maxing-out our countries’ GDPs. We just need a mechanism to make the necessary possible.
What is the First Step?
In New Zealand, the first step is to reconceptualise our tax-benefit system, and in the process to apply a little relief to those who work hard without receiving high wages. This step would have easily been funded through tax revenue in 2019, pre-Covid19. Today this first step should be funded – and immediately, eg through the 14 May 2020 Budget – by Reserve Bank credit, just as the emergency wage subsidies have been funded.
See my Five Examples for any further clarification about how the transition to UIFT would affect different people.
In many other countries, the process will be more difficult. They have more complexities to unravel (compared to New Zealand) in their present income-tax scales. Australia could make the transition quite easily, with a 37% tax rate and a basic universal income of $240 per week.
We need political commentators with open minds.
From Universal Basic Income to Public Equity Dividends (2018); Policy Observatory Briefing Papers, AUT, Auckland
Public Equity and Tax-Benefit Reform (2017); Policy Observatory, AUT, Auckland
The Universal Welfare State incorporating proposals for a Universal Basic Income, Keith Rankin, University of Auckland Policy Discussion Paper No.12, 1991
Constructing a Social Wage and a Social Dividend from New Zealand’s tax-benefit system, paper presented to the Basic Income European Network (BIEN) international conference; Vienna, Austria, 12-14 September 1996.
(Note that in this paper, I used the terms ‘full universal basic income’ and ‘adequate universal basic income’. My use here of words such as ‘full’ and ‘adequate’ are suggestive of the aspiration that a basic income could be more than a basic dividend; rather a substitute for a wage, and therefore a possible disincentive to engage with the labour market. However my emphasis in this paper – and subsequent papers – was the ‘social dividend’, a basic universal income that might eventually evolve into a non-basic payment.)