Image credit: WNYC

A Universal Basic Income is a wolf in sheep’s clothing. Even Australia’s opposition party has rejected the policy proposal on the grounds it is free money for millionaires. So why does this idea continue to be so popular?

Robots are a foolish reason to consider a universal basic income (UBI). And yet so many still want to indulge in such nonsense. The link between technological disruption, income security, and UBI, is weak at best. And existing targeted welfare systems already achieve income support from any type of workplace disruption, robotic or otherwise.

The fundamental idea behind a UBI is that all members of society should get an equal share of that society’s income prior to even attempting to earn a market income, and regardless of what their market income is. It is a worthy principle.

In contrast, a targeted welfare system phases in income support when individual or family income falls below particular thresholds, and phases it out again when market incomes rise. This is in effect a national income insurance scheme, and again, a worthy idea.

So why all the buzz about the less progressive UBI welfare system that will have to raise additional taxes from the wealthy, only to give it right back? Wasn’t less administrative cost one of the big selling points of a UBI in the first place?

The main difference between a UBI and targeted welfare system comes from the different effects of each system on the incentive to work, and as a consequence, the efficiency of the labour market; the largest and most important market in the economy.

It might be a surprise, but the UBI wins on this front. If there is to be any genuine economic debate about a future with a UBI, it is will come down to this.

To untangle why the UBI wins in the economic efficiency stakes compared to a targeted welfare system, we need to tap into the economic concept of effective marginal tax rates (EMTR). This concept describes the difference between an additional dollar of market income earned and the change in household income after considering both taxes and any changes to welfare received.

A simple example demonstrates. In Australia, family benefits are a type of welfare paid to parents on low incomes. Because it is targeted and not universal, this welfare payment phases out at 50c per dollar of income earned by parents until it is exhausted and no benefit is received.

However, within the income range where this benefit phases out, parents also become subject to income taxes. At incomes above this point, if a parent earns an extra dollar of market income, they pay taxes of around 20c on each extra dollar, in addition to losing 50c of parenting benefit. Their EMTR is 70%. For each extra dollar of market income, their net household income increases by just 30c.

This massive wedge between what employers pay, and what households receive, generates inefficiencies. Workers might decide not to change jobs for the small amount of extra money they get, nor invest in training that provides them only tiny gains in after-tax income. Economists call these effects a welfare trap, since all the incentives to increase work and income are eroded by the high EMTR.

This massive wedge between what employers pay, and what households receive, generates inefficiencies.

But the less targeted the welfare system, the longer the phase-out income range, and the lower the effect of this on EMTRs. The stylised figure below helps demonstrate. The top panel shows with the orange line the effect of a phase out of welfare at 50c per dollar at household incomes less that $50,000 per year. In addition is the income tax system that begins at an income of $20,000 with a marginal tax rate of 20%, and ratchets up to 40% at around $40,000, which is shown in blue.

 

Notice that for this household, once they earn $40,000 per year and extra dollar of income costs them 50c in lost welfare and 40c in tax, leaving them just 10c. If this household took a promotion which took their market income from $40,000 to $50,000 per year, their net income would rise by just $1,000, or 10%.

The second panel shows what happens if the welfare system is less targeted, phasing out at 25c per dollar all the way to a household income of $100,000. Here, the EMTR does not rise as much for those households with incomes near $40,000, but it does rise for higher-income earners. Yet the maximum EMTR is now just 65%, which is a much more efficient outcome.

The third panel shows just the marginal tax rates with no phasing out of welfare. This is the outcome from a UBI, as it is, in essence, non-targeted welfare. The catch, however, is that because a UBI must be paid to many more households with high incomes, the taxes on these same households would need to be increased. Or alternatively, taxes would need to be increased on companies, property or economic rents, that are mostly paid by these high-income households. The bottom panel shows the increased tax rates on high incomes that would need to account for this.

At the end of the day, the case for a UBI boils down to a general case for a greater role of the state in expanding the welfare system as a nation income insurance scheme, which is likely due to the growing volatility of market incomes. This volatility might be coming from automation and robots in some sectors, but in others, it comes from the casualisation of the workforce, with zero-hours contracts, and fewer employer obligations in terms of job security.

The case for a UBI boils down to a general case for a greater role of the state in expanding the welfare system as a nation income insurance scheme

The main economic benefit of a UBI over a targeted welfare system is that it results in lower effective marginal tax rates across the board. However, this outcome can also be achieved by expanding existing targeted welfare systems to make them less targeted at low incomes only so that they also reach middle-income households.

Dr Cameron Murray

Dr Cameron Murray

Cameron Murray holds a PhD from Queensland University and channelled his interest on corruption and rent-seeking into a book, Game of Mates: How Favours Bleed the Nation, which charts grey corruption in Australia. Murray's other interests concern environmental economics and property markets; he writes about these in detail for MacroBusiness, IDEAeconomics, and his personal blog, Fresh Economic Thinking.

Twitter: @DrCameronMurray

How do you spend your days?

Writing mostly. Also teaching the bright minds of tomorrow realistic economics at the University of Queensland. Chasing the kids. Sometimes time for football and rock-climbing.

Why is this important to you?

The political environment in the developed world is rapidly becoming more polarised than it has been for over half a century. I see this as a dangerous situation that makes it harder for people to get good information that is not tainted with views from the extremes.

What drove you to focus on economics. Was there a particular moment you can remember that led you to this field?

Observing the wilful blindness within large companies and organisations who seemed to have a knack for ignoring the obvious sent me crazy! As I began to see this more in our public policy debates I realised how much value can be gained by taking a step back and having an objective and systematic look at the world. Economics allows you to do this. If you can survive the first few years of indoctrination and keep your open mind, there is a lot of useful research going on in the field.

What drives you professionally?

Making a difference. I actually was close to leaving economics to become a medical doctor in 2012 so I could at least know I was helping someone. But I decided instead to stay in economics and focus on corruption and related topics that I knew might not make a direct difference to many people but could make a systematic difference if I could share the knowledge widely.

In your opinion what are the three biggest problems facing the developed and developing world?

For the whole world, the number one problem is the ongoing battle over the economic surplus.

Institutions that have funnelled wealth, income, and power, up the distribution are reaching their social limits. Between nations, decades of trade imbalances will likely reverse as previously rising nations stabilise, and new nations embark on rapid industrialisation. The losers from major changes to the distribution of global wealth will not be happy.

If you hadn’t become an economist what would you have done?

Become a medical doctor.

What led us to this moment in history?

Chance and luck, just like always. Though I do believe there are long term patterns that repeat in the great arc of civilisation.

What are the lessons we failed to learn during and since the 2008 crisis?

That finance is not an output of the economy, but an input to it. We had a chance to go back to basics and remember that the real economy is about producing things that people value.

Can you list some ‘baby steps’ out of the current economic mess?

Boost public spending on tax authorities so they can bring international firms into line. Vote out major parties to allow the diverse voices of the minor parties to rise up and reset the scope of public debates.

If you were a President / Prime Minister what would your first three pieces of policy be?

First, ensure that when political decisions result in windfall gains to private entities that these gains are taxed or sold by the government to recoup their value. Second, create a public bank with a mandate for investment in value-added export industries and renewable energy generation and distribution.

Third, ratchet up taxes on land, wealth, and inheritance.

Tell us something you have been wrong about?

I never thought the Sydney property market would be at a $1 million median price by 2016. I thought Trump would do better than expected in the election, but not win it.

Name the book that changed you.

Ultra Society by Peter Turchin. It made me stop thinking of economic growth as a competitive process, but a cooperative one. As an economist trained to see competition and understand its merits, I have now broadened my view to see how in fact competition and cooperation work together.

What would you do differently if you were to start all over again?

Nothing. Life is a lesson. It’s not something to be optimised. I want to make all the mistakes again… maybe a few more as well.

Give our readers, members and subscribers a piece of advice that has served you well.

From my Dad, about taking on new and challenging projects - “If it was easy, everyone would do it.”

Anything you would like to plug? Now is your chance.

My personal blog is fresheconomicthinking.com. Also, read macrobusiness.com.au, and follow me on Twitter @DrCameronMurray.
Dr Cameron Murray

Latest posts by Dr Cameron Murray (see all)

6 thoughts on “Why does a basic income need to be universal?

  1. A few points. First off, Taxation is not a source of federal income. Tax money has several uses but raising revenue isn’t one, but it is a cost to the country’s spending power. As such the basic wage concerns here [EMTR] are not at all necessary so they are purely political. I believe John Quiggin is at UQ so he can put you straight on this. Our federal government is the monopoly issuer of our dollar, so unlike everyone else it can create it, buy buying its debts, such as pensions, a UBI etc. I am in favour of a UBI but am open to be convinced that a JG works better. A problem with welfare is the stigma attached to it by right wing voices. So a UBI would substitute for welfare [with add ons for special cases such as invalids] and if Malcolm Turnbull got it It could hardly be stigmatised . Paying for it is a non event if all the Gov has to do is write checks [so to speak]. Getting poor people this income will let them participate in the economy and the increased spending will add to GDP, thus [possibly] not be at all inflationary, although we could do with some right now.

    1. I agree with you on taxes, money etc. But regardless, to argue the merits of a UBI you must argue them against a targeted welfare system that doesn’t simply give the richest the same basic income as the poorest. All the argued benefits, such as giving poor people income to help them participate in the economy and increase spending, also come from a larger targeted welfare system.

      1. I notice you describe targeting as like insurance. Go back to the UK’s National Insurance scheme introduced after WW2 for some real thinking about the questions involved. In fact, then look at the transition that this scheme was put through to reach the targeted system that we have now (when I say we, I feel that New Zealand – when earlier I drew a UK National Insurance benefit for a while – is pushing this retrograde boat out even further with Social Investment.)

        Behind the idea of National Insurance (NI) was a non means tested payment that you got as of right because when you were working you made contributions to the scheme. And behind this idea was the political belief in rigorously maintaining full employment. There was a discretionary payment for those that didn’t contribute (enough say, or opted out) but the passionate political belief after the Depression was in full employment and in maintaining the lives of people well above the poverty level from cradle to grave.

        There were problems with NI – but it was in concept & principle distant from targeting means testing. You won’t remember/know about universal child support benefit perhaps either. But note the very high take up of NI & universal child benefit. This speaks hugely to the human welfare principles involved and the deeply humiliating experience of means testing during the Depression. Think about feudalism & the mutual obligation for wealth & power to keep the poor alive in return for work, vs politically free wage labour in a democratic system of welfare ‘as of right’ and you can then understand the political & human ground that you are standing on.

        1. Universal? Free? Right? Democratic?

          Language betrays you.

          Including Maori?
          :/

          As “Indian” in Canada and Indigenous on our land, I can attest to the unequal non-universality of social infrastructures.

          As we speak Canada is in the new colonial process altering CPP #cppib to continue to be free from government involvement of public wealth invested globally away from “oppressing” CDN legislation and laws to maximize returns.

          “CPP Investment Board is not controlled by the government or subject to government appointments, its employees and directors are not part of the Public Service of Canada.” as a crown corp.

          Interestingly, elected government championing clean energy while using CPP funds for fracking south of CDN while the same government party created the “Carbon Tax” to decimate prairie provinces rallying against such environmentally devastating practices.

          The funds go to the same conglomerates, the bore group, and has a subsidiary Omni-Trax who’s has denied fixing or selling rail in northern Manitoba for years creating food insecurity for “Indians.” Omni states the line is unfixable recently this year only after “Indians” capitalized on social media to show visually the current state of rail and that it could be fixed!

          Trillions for things like fracking but none for food security for locals – that’s “universal” social security systems for ya.

          Oh ya, don’t forget the flatlined interest rate.
          Housing/auto/etc bubbles with inflated loans sectors.
          The slipping Canada dollar.
          Increased CPI, specifically transportation and housing.
          The negative balance of trade.
          Stagnate export rate.
          And the loss of market confidence.

          Toss in Bank of Canada/CRHC create rates that devastates economies outside the make-believe reality which CDNs are quickly cueing into what we’ve (Indians) been stating for generations.

  2. There are two common political objections to a UBI: “money for nothing” and “money for millionaires”.

    And there are two ways in which a basic income can be LESS than universal:

    (1) means-testing;

    (2) eligibility testing that doesn’t penalize “means”.

    High EMTRs are caused by the former, not the latter. In particular, an ACTIVITY TEST will not increase EMTRs beyond nominal tax rates, provided that taxable “activity” satisfies the test. Thus an activity test can overcome the “money for nothing” objection (whatever its merits or lack thereof) without causing an EMTR problem.

    The “money for millionaires” objection is less serious, because you don’t need both taxation and means-testing to penalize millionaires at whatever rate is deemed to be appropriate: any desired financial penalty can be implemented entirely by taxation!

    In case that argument is rejected, there is a fallback position: If there is an income tax, all means-testing should be asset-based. This would prevent taxation and means testing from “stacking up” on the same base.

  3. Dr Murray, you twittered “Observing the wilful blindness within large companies and organisations who seemed to have a knack for ignoring the obvious sent me crazy!” That’s how I feel about the management and economists of elite universities, blinded to the reality that money represents credit (and what you buy with it debt) because of the convention (refuted by credit cards and bank loans) that they must have it before they can spend it.

    Conceive of a system in which all finance is by credit card. Banks merely authorise generous credit limits for self-care in families and business (including government) projects, and write off debts to the extent of earning for services rendered (including family care and self-improvement) and goods consumed (so what has been consumed is known and can be reproduced). Local government and banks are then in a position to know defaulters and apply remedies (target real support or reduce credit limits). Businesses (including local government) short of staff need to attract them with work worth doing and decent working conditions. How much people spend is up to them, to keep down their debts they have to earn their keep voluntarily while they are able. UBI, pensions and taxes are thus not needed; carers can buy what they need for their job and that schedules its reproduction.

    It works logically. Politically, people like to acquire more than they need to leave some for their kids, but in real rather than monetary terms, what they have, others have not; that applies also to the holding of property for business purposes. This is where the problems would arise changing to a credit card system. When we die our needs die with us, and our children are already provided for financially, but may need to inherit property for emotional reasons. I can envisage transference of responsibility for a family house to relatives or management of a business to new incumbents, but not of business property that has been earned by all those working in it. What disappears is the possibility of bankers, managers and international speculators buying rights to shares, mortgages and property with no responsibility for the people whose needs have defined them.

    Money always represents credit, but only sometimes earnings. Why that is not obvious to economists is I suppose why the earth orbiting the sun was not obvious before Copernicus: it is not what they see because the alternative explanation is not one they have been taught to expect.

Leave a Reply

Your email address will not be published. Required fields are marked *