Fact Checking

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?

Stability.

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.

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.

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.

Sustainability.

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.

————————————–

References:

Universal Basic Income (or Basic Universal Income) and Covid19. Scoop or Evening Report, 7 April 2020.

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.)

I keep hearing rather unfortunate ‘expert’ comments in response to questions asked about Universal Basic Income (UBI) as a way of responding to the Covid‑19 economic contraction. These comments all relate to a ‘straw man’ concept of UBI that is obviously unaffordable and impractical. It is not possible to offer any kind of Universal Basic Income (as an unconditional payment to all adult tax‑residents) at the level of New Zealand Superannuation.

What is both possible and necessary is to offer a basic universal income – initially set at $175 per week – in conjunction with a flat rate of income tax of 33 percent.

By doing what is possible and necessary, we provide bridging income guarantees to all New Zealanders who risk income losses, in in a way that requires no new bureaucratic input.

By doing this, all people with salaries or other earnings of more than $1,346 per week would receive exactly the same after tax as they do now. They already receive this benefit.

Further, all beneficiaries and superannuitants would continue to receive exactly the same as they already expect to receive after April 1. This $175 per week benefit is, in effect, the first part of their existing benefit.

Working people on incomes lower than $1,346 per week would receive more than they do now. All working people expecting to suffer a loss of income will be assured that they would continue to receive this $175 benefit as the market component their income falls.

If the $175 per week proves to be too low, then it can subsequently be adjusted upwards.

It’s simple. Really simple. And necessary. It is a way to maintain a high productivity economy that experiences a loss of gross domestic product. It is an easy way of ensuring that everybody gets a slice of a shrinking economic pie.

To avoid confusion, let’s call the $175 per week a Basic Universal Income (BUI).

See also: Keith Rankin Analysis – Economic Emergency 2020

Here I just consider two typical New Zealanders of different generations, and two policy options. And no jargon.

Policy Options:

1. 1. Complex option; the status quo.
   2. Simple option: all New Zealanders over 18 receive a universal dividend of $175 per week; additionally, New Zealanders over 65 get a universal superannuation of $171 per week; all income is taxed at 33 cents in the dollar. (The two universal payments combine to $18,000 per year.)

Example People:

1. 1. ‘Married’ persons aged over 65.
   2. ‘Married’ persons with children, aged 18 to 64, with partners grossing around $35,000 a year. At lower household incomes, they qualify for Working for Families ‘tax credits’ and Accommodation Supplements.

Example People Findings

The chart looks at differences in the available weekly incomes of these example people, as their gross annual incomes vary from $0 to $100,000 per year; that is, the differences that would apply if Policy Option 1 was replaced by Policy Option 2.

(Note on Policy Option 1. Working for Families ‘tax credits’ are generally paid to children’s caregiver parents. Typically, the caregivers would be the lowerearning parents. However, in the scenario here, Example People 2 may be earning more or less than their partners, depending where they are on the chart’s income scale. To deal with this I have attributed these payments equally to each parent.)

(Note on Policy Option 2. This option regards a ‘superannuitant’ as any New Zealander aged over 65, and ‘beneficiary’ as being any New Zealander aged 18-64 who presently receives total public benefits in excess of $175 per week. With Policy Option 2, the first $175 per week of beneficiaries’ benefits becomes an unconditional universal dividend. The remainder continues to be a conditional payment.)

The chart shows that, for Policy Option 2, Example People 1 (‘senior citizens’) would gain about $30 per week if they have zero private earnings. That weekly gain falls to $0 per week if they gross $10,000 in a tax year. Senior citizens earning around $35,000 would be around $60 worse off under Policy Option 2 than under Policy Option 1. Higherearning seniors would be $70 per week worse off. The main losers from Option 2 would be higherearning superannuitants.

The blue part of the chart shows that no workingage people would be worse off than at present, and that some would gain. Their actual gains arising from Policy Option 2, which would vary from person to person, peak in our case at around $28,000. The main gainers from Option 2 would be minimumwage workers, and many part-time workers whose earnings are critical to their household budgets.

It is important to note that people of working age earning over $70,000 per year would experience no change. And persons earning between $50,000 and $70,000 – nearly half of all fulltime workers, would gain up to $10 per week.

Other Benefits of Policy Option 2

An important group of gainers would be young people – for example 2024 yearolds – a number of whom are dependent on their parents; others are beneficiaries trapped in benefit poverty. One of the great misfortunes of our times is the difficulty too many young people face in making the transition to economic independence, and to the personal autonomy that ensues from economic independence.

If we consider beneficiaries in general, this policy will not give them any more money directly. But, by allowing them to keep their universal dividend when they take on more paid work, the policy removes their poverty traps.

Policy Option 2 ticks all the boxes: it is affordable, it is simple, it is democratic, and it effectively redistributes income from comfortablyoff ‘boomers’ to ‘Gen-X’ ‘battlers’ and to millennials struggling in an environment of punitive benefits and precarious work. Option 2 also facilitates fulltime workers (eg 40hourperweek workers) to work fewer hours (eg 30 hours per week) and to live less stressed lives. It is a ‘winwinwinwinwin’ policy option. That’s five wins. Further, there would be a reduction in requirement for bureaucratic services as fewer people would seek help through conditional benefits. Tax collection would be substantially simplified.

There are simple and affordable solutions to our seemingly intransigent income distribution problems. It just requires a willingness to see. Thinking that feels bold to one generation, once absorbed, becomes commonsense to the next generation. Traditional ‘National Party’ tax cut policies are blighted by the fact that higher earners gain more than lower earners. In Policy Option 2, the gains go to where they are needed, the rich gain nothing, and the old rich become worse off.

Less targeting of benefits can mean better targeting. Less can be more.

Select Publications:

2019: http://socialalternatives.com/issues/basic-income-and-new-universalism

2018: https://www.nzae.org.nz/events/nzae-conference-2018/2018-conference-papers

2017: https://thepolicyobservatory.aut.ac.nz/publications/public-equity-and-tax-benefit-reform

2016: https://scholarworks.wmich.edu/jssw/vol43/iss3/5/

2011: https://www.nzae.org.nz/events/nzae-conference-2011/programme

1998: https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/journals-and-magazines/social-policy-journal/spj10/rejoinder-to-david-preston.html

1997: https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/journals-and-magazines/social-policy-journal/spj09/constructing-a-universal-basic-income-and-social-wage.html

1991: http://keithrankin.co.nz/kr_uws1991.pdf

Ownership of the gross domestic product (GDP) is called ‘income’. Deciding who, at first cut, owns those goods and services is a matter of the accounting principles adopted. Here, applying Occam’s Razor, I favour the simplest accounting interpretation.

(We may note that there are two subsequent redistributions: the first redistribution relates to benefits and transfers; the second ‘deficit/surplus’ allocation relates to the process of some parties’ spending more than their post‑transfer incomes [deficit spending] offset by others who spend less than their incomes.)

The official national accounts acknowledge three main income funds, though in a convoluted way: private capital income (“operating surplus”), labour income (“compensation of employees”), and public income (“taxes”). The ‘convolution’ is the official practice of only acknowledging “indirect taxes” as public income. Direct taxes lie hidden within the two big private funds, with direct taxation being treated as a redistribution; a redivision that is too complex for the national accounts because – thanks to graduations and exemptions – each individual taxpayer is levied at a personalised tax rate.

This month’s chart simply applies the 33 percent tax rate that has been the cornerstone rate of income tax in New Zealand since 1988. In doing so, there is no claim that 33% is the optimal tax rate; the 33% rate is what it is, for better or worse. (Australia’s cornerstone rate is 37 percent.)

The blue portions of the chart represent unambiguous private income; income (already taxed) sourced through the marketplace. The capital and labour shares are roughly equal, and have been for some time. Together they make up 58 percent of GDP. (Note that the private sector includes net foreign claims on New Zealand’s GDP.)

The orange-shaded portions are public income. ‘Net indirect taxes’ are unambiguously public. ‘Gross income tax’, is calculated as 33 percent of ‘gross labour income and ‘gross capital income’. It arises from the application of simple, commonsense, national accounting. The public income share amounts to 42 percent of 2018/19 GDP.

Where does the public income share go? A sliver is saved, as the government’s fiscal surplus; this means that the private sector enjoyed some deficit spending in 2018/19.

A much bigger share of public income is spent directly by government, on collective goods and services such as education and healthcare.

The biggest share of public income is allocated to private parties as benefits and transfers. The biggest single component is the unconditional benefits granted as income tax concessions. Present distributional rules on benefits and transfers favour people at both ends of the income spectrum, but not hugely.

Rearranging this in favour of a more equal public distribution need not be an expensive exercise. Further, such a rearrangement has the potential – a result of the simplification process – to reduce permanently the demand for public administration services. The principal beneficiaries of such a rearrangement would be lower‑middle income households, and the young people struggling to make the transition from private dependence to autonomous adulthood.  The National Party could be promising that, if able to form a government in 2020, they will simplify public benefits in lieu of a more conventional tax reduction policy.

There is a sound argument that, so long as productivity is a significant contributor to increased GDP, the public income proportion of GDP should be increasing over time. This argument suggests that the 33 percent tax rate is a little bit on the low side. My sense is that the underlying public contribution to GDP is more like 45 percent than 42 percent. While a tax rate of 36.5 percent would yield such a 55:45 private:public distribution split, policy priority should probably favour simplification over tax increases.