Showing posts with label tax credits. Show all posts
Showing posts with label tax credits. Show all posts

Wednesday, 13 September 2017

Money for all? The costs and savings of a Universal Basic Income

The idea of giving everyone in society an income is an old one- Thomas Paine suggested it way back when. However, it is being taken increasingly seriously and the Green Party, Labour and now the SNP are supportive or investigating it.

There are several arguments for some form of Universal Basic Income (UBI). Arguments can be made from philosophical principle, such as the argument that a UBI offers a unique and valuable kind of freedom to all members of society (see the work of Phillipe Van Parijs).  However, another argument is that the UBI would be more economically effective, partly because of the bureaucratic savings involved.

A third argument is that a UBI is necessary because artificial intelligence and robots will cause mass unemployment. I would support a basic income if this occurs but it clearly isn’t going to happen any time soon. I will therefore concentrate on the first two arguments above.

Both those arguments are challenged if a UBI is costlier than its supporters assume. The reason is clear with regards to the second argument mentioned above, but also applies to the real freedom argument. This is because the level of sustainable UBI will in fact be lower than expected and therefore the real freedom offered would in fact be less valuable than expected.

We can split the arguments against a UBI into arguments about fiscal cost and arguments about its likely economic effects. Of course, in practice the two are largely interlinked and I will argue that UBI supporters are probably too optimistic about the latter which makes their cost predictions easier. In approaching this issue I’m happy to ignore the set-up costs of a UBI as these would be a one-off cost, but the likely ongoing costs both fiscal and wider do concern me, as I will outline below.

One problem with assessing detailed basic income proposals is the variety. Each advocate can present different changes to other taxes and benefits to pay for a UBI at their preferred level. Essentially you can tack on whatever tax and benefit changes you want to your basic income scheme to make a total package of changes that will broadly cover the cost of the scheme. However, there will be losers from such changes and often the complexity in the benefit system are there because it is hard to get money to the people who really need it without also giving it to people who don’t. John Kay makes this point well in his blog on the subject, making the point that there will be losers and they are likely to be very sympathetic cases and therefore effective campaigners.

Kay’s blog covers quite effectively the costs and savings of the likely benefit changes, where he charitably assumed that a Green Party proposal was correctly costed so I will focus on the administrative savings argument and the wider economic impacts of a UBI.

So how much would a UBI save or cost?

Free money? On administrative savings

There is one way in which a UBI would generate funds that could benefit everyone without costing anything, which is that the low administrative costs compared to a contingent (non-universal) benefits system. Of course, a lot of the spending is on wages for state workers, who would need to do other work instead (or live on the UBI) but I will take it as read that this is a straightforward saving.

However, the administrative savings wouldn’t be very significant. A pro-UBI Green party paper estimates these savings to be £8bn per year in the UK. Split between 65 million people this amounts to £123 each per year. Hardly a huge amount to write home about.

The Green Party proposal, for example, says that they use £8bn figure rather than the £10bn allegedly quoted in a Citizens Income Trust report to account for this difference. I have failed to find the document quoted and the closest I’ve found to the one described claims a £5bn net saving. Five billion (which I believe is a very optimistic estimate of the overall cost given that those with certain special needs would still need to be assessed) shared out would amount to £77 per person per year.

I believe extra payments for those with special needs would need to remain in place and the administrative costs are undoubtedly concentrated on these. I therefore worry that the more optimistic assumptions about cost savings include taking away such payments which could have a catastrophic effect on people with, for example, expensive disabilities.

A UBI supporter could reply that I’m being unfair by assuming that all members of society would obtain the UBI. This is because other progressive tax changes would mean that only those with low incomes would be net beneficiaries—a much smaller number. So, if we assume the UBI is only shared between 9 million people (roughly the amount of people out of work in the UK at present) then it would rise to £556 per person. If shared between those currently receiving jobseekers allowance this would be an increase of £10 per person per week compared to what they receive at present. This assumes, of course, that the number of those receiving the benefit doesn’t rise substantially (see below on wider economic changes).

Other changes in public finances
The costs of the scheme therefore are mostly found by changing other benefits and/or raising taxes rather than making administrative savings. There will be losers and this is what needs to be assessed.

These wider changes can be done independently of a UBI of course. Another trick in Basic Income papers is the claim that tax revenues would rise due to the basic income. But this means that the state is giving money to people and then taking it back straight away. What matters of course is the net change to people’s income.

An OECD report models an affordable UBI that would be too low to assist in reducing poverty in OECD countries. UBI supporter Karl Widerquist (in his “Back of the Envelope Calculations”) challenges their methodology by insisting that it is wrong to require budget-neutrality when assessing UBI systems. A pro-Negative Income Tax paper by Wiederspan, Rhodes and Shaefer makes a similar argument. These papers rightly point out that net distributive outcomes are what really matter, and anti-UBI writers should take this approach just as UBI supporters should. However, the “back of the envelope” assumptions from these authors would have significant wider economic ramifications as I will outline in more detail below.

Furthermore, as a UBI is less targeted than the programmes it would replace, those with specific requirements (such as disabilities or lots of children) are very likely to lose out, unless the UBI is set so high that it would have very substantial costs. Basically, you can set the UBI low and it won’t cost too much or have economic disincentives or you can set it high and achieve all social goals but with really very concerning fiscal and economic costs.

Wider economic changes

Things get interesting not in the immediate change to public finances but in the wider economic changes a UBI would produce. Put simply, there would be major upheaval as some businesses and industries find they are no longer viable, others become much more successful and further industries boom.

Using current household income data and benefit payment levels, as Widerquist does, to calculate the costs of a UBI is therefore questionable, particularly where the UBI is assumed to be very high and therefore to have a significant impact on people’s employment choices.

Will people leave work?
The most obvious change is that some people who are working may decide to stop and others who are looking for work may cease to do so. Most assessments of the fiscal cost of UBI assume people will still earn the same amounts of income after the system is introduced, which probably wouldn’t be the case.

Supporters of Basic Income trial schemes seize on studies that show that people do not stop working or engage in socially useful activities such as caring instead. However, I would add some caveats to these findings. Firstly, small-scale trials may not replicate an entire society switching to the system, in particular because of the extra attention researchers give to those involved. This attention may improve their personal outcomes in a way that receiving money and no attention may not. Furthermore, if everyone in society is eligible for the income then this may erode the general work-ethic in a way that would not apply in a UBI trial.

Of course, it is all speculation how people would behave differently with a UBI. However, it is part of the point of the system that some people would leave full-time work to do other things. UBI supporters often suggest that people would be able to do useful things such as learning, caring and building up businesses. All of which would certainly be valuable and I would be happy to support assistance to enable them to do so.

However, some people are what I have elsewhere termed leisure-lovers because they wish to maximise their time spent on low-cost activities and therefore seek to work the lowest amount of time to cover their needs. These people are the ones that will make a UBI more expensive overall as they would spend less time (if any) in paid employment under a UBI.

I can think of many examples of people who would count as leisure lovers:
·        Door-to-door proselytisers for their religion
·        Avid readers
·        Amateur historians
·        Rock musicians
·        Artists
·        Fitness freaks
·        Poets
·        Sport enthusiasts
·        Novelists
·        People who like to travel
·        Computer game-obsessives
·        Some may wish to set up a church of their preferred kind (someone seems to have done this in their garden shed near where I live!)

I’m quite sure a non-trivial number of people would follow interests such as these if a UBI made this possible. The rest of society may consider the benefits of these activities to be minimal. If someone sets up a new church or spends their time writing bad poetry will this really help society?

A further and related point is that some people may well choose to retire earlier if they are not forced to wait until a certain age to receive their ‘pension.’  The state pension age is often the trigger for retirement as it then becomes affordable to stop working, but this may cease to apply.

On a personal note, I think I count as a leisure-lover and would therefore benefit from the UBI scheme I am arguing against. I prefer to spend my time reading, researching, teaching and writing than working a 9-5 job. I hope that my doing these things is socially useful, but I imagine many people would consider that it would be more useful if I was engaged in full-time paid work instead.

The existence of such leisure-lovers is a problem for UBI supporters because they threaten to increase the costs of the scheme without providing the alleged benefits. The direct costs would be that this would mean that more money would be getting paid out to recipients and less money would be collected in taxes. This could quickly blow a hole in the calculations. However, this would also have wider economic effects, as I will also discuss below.

Tax Credits
Most proposals for a UBI involve it replacing tax credits (also known as employment subsidies and called the Earned Income Tax Credit in the USA). Some on the left are very opposed to tax credits because they see it as subsidising employer profit rather than employee wages. However, there is every reason to believe that these are good for employment rates and workers.

The extent to which the employee and employer benefit from the credit will vary from case to case. In some cases, the employee will get all the benefit, while in others the employer will capture the lion share. However, note that the latter cases could include some whole industries that would not be competitive in wealthier countries without tax credits.

Some on the right would say it would be better for such industries to die off while others on the left would claim that such industries should be protected or subsidised to keep them going even though it is cheaper to produce such items abroad. However, in the first case the upheaval would be much more damaging and possibly costly than the continuation of earnings subsidies. In the latter case, if the state is saving an industry by paying it money or forcing consumers to pay more for its goods then how is this any better than providing tax credits?

This section has moved away from the UBI, but the point is that the UBI will tend to help industries that find it easier to recruit, whereas tax credits help industries that struggle to compete internationally and help keep consumer prices down. I imagine there would be more computer-game start-ups but fewer manufacturing plants. Maybe this is a good thing – computer-games are a profitable and growing industry. However, it seems like a more diversified economy is a much safer bet than a more ethereal one.

Price rises
One advantage of a UBI is that it will improve the worker bargaining position, which is a good thing. I would support doing that through the provision of a job guarantee scheme (see below) which would also have a similar effect.

However, a consequence of improving worker bargaining is that it will likely lead to price rises for consumers. In addition, as highlighted regarding tax credits, it may also undermine some exporting industries as well.

A UBI would also (in some cases intentionally) lead some people to choose to leave the labour market. If more people do so this would reduce the pool of workers available and again put pressure on wage rises.

The correspondingly higher wages can also result in a reduction in employment in some sectors and/or price rises. Unemployment might not be considered a problem given that people will have a guaranteed income, but this will then increase the direct and indirect costs of the scheme. Of course, it could be that all those laid off will become entrepreneurs, but what if they don’t? What if they give up on paid work entirely and there is a smaller pool of workers available as a result?

Now, there would be a compensatory price reduction in some areas. It might become cheaper to acquire items that people enjoy producing; artisanal products might become cheaper and people would quite possibly enjoy their work more. These are good things for those people, but the rest of society will end up paying more for most of their goods and services with a UBI.

If the price of labour, goods and services do rise, as I have suggested they would, then this will also mean that more government expenditure will be spent on goods and services, putting pressure on

Summary of my claims

I have claimed above that a more dynamic assessment of the complex consequences of a UBI would likely show that there would be a lot of additional costs. These would counterbalance the gains—if prices rise then the basic income loses effectiveness and so would either need to be raised or would be less effective at reducing poverty than advertised.

Of course, perhaps a basic income would lead to significant productivity advances and corresponding rises in income. However, if the point is that people are free to earn less than they would otherwise then it seems that overall lower productivity would result.

What matters in the final analysis is the distribution of the benefits and costs of the system. This is hard to work out even ignoring the dynamic economic consequences I have raised above.

It is wrong to assume that a UBI would be a fantastic panacea. The devil would be in the detail and its (difficult to predict) overall economic effect. It would benefit some people, of course, such as those who want to pursue uneconomic or risky dreams and ventures. Mainly, it would benefit those with strong a preference for uneconomic activities—a group we can refer to as leisure lovers (of which I am almost certainly one so I’m arguing against a system from which I would benefit). It would almost certainly help the low-paid, though I would contend that other proposals such as mine would be more effective in this regard.

Alternatives to a basic income

The alternative to a basic income is obviously not to have a basic income (as is the case everywhere at present). But that isn’t to say there aren’t other policy proposals out there which could make a difference to people’s lives.

I would obviously point towards my own novel tax and benefit system, the CLIPH-rate tax. However, other alternatives include the following:
·        A Participation income – proposed by Anthony Atkinson, this is similar to the basic income but dependent upon engaging in approved activities. (My CLIPH-rate tax proposal similarly allows hour credits for participation in a range of activities such as caring and study and not just paid employment.)
·        Tax credits to encourage people into work and to encourage employers to create more jobs (discussed above).
·        A job guarantee scheme which ensures that anyone willing to work can do so and get paid. This is included in my CLIPH-rate tax proposal as people capable of working need to have access to hour credits to receive income without corresponding tax-rises.

All these proposals also have costs and therefore require higher taxes or other public finance savings to pay for them. However, because they seek to encourage people to engage in socially useful activity they would not have as big an impact on the wider economy as a UBI would.


Overall, the UBI isn’t the perfect panacea some of its fervent advocates assume it to be. Some people would lose out from it and society would face an expensive bill if many people take the option to follow their personal interests or retire earlier as a result of the system. 

Wednesday, 8 July 2015

Thoughts on the budget

The budget announced today came with some surprises, and I thought I would give my stream of consciousness response to the headline changes.

·         The big surprise is the major increase in the minimum wage announced under the heading of a national living wage. As the new ‘living wage’ is national it does not take account of the disparities in regional living costs that the living wage is designed to highlight.

The rebranding of the minimum wage is strange, perhaps designed to muddy the term to rob it of its power. Being cynical, this might be out of a desire to undermine the growing campaign that is highlighting the increasing disconnect between earnings and the cost of living in the UK.

The increase in the minimum wage (as this is what it is) is quite a move by Osborne. It takes a typically left-wing policy proposal and enables the chancellor to portray himself as a friend of the worker.

·         Only workers over 25 get the new living/minimum wage though, as far as I can make out. There are already age-bands designed to give inexperienced school-leavers a chance in the job-market so this isn’t a major departure.

·         What of the low-pay commission, the independent body charged with determining what minimum wage level will be sustainable? They will presumably still be in charge of the ‘real’ minimum wage while Osborne has created another band, over which he has control.

·         I have recently blogged about my preference for tax credits over high minimum wages and the policy here is going in the opposite direction. Cutting the eligibility threshold for tax credits is painful as it further undermines this support to workers and/or the employers who can make use of their labour.

·         Questions remains about what will happen as a result to prices and the job market. Perhaps this will be good at reducing the number of NEETs but at what cost? It might mean that a lot of over-25s end up unemployable as under-25s can be employed for less money than them.

Companies who have to pay their workers more are going to pass this on to their customers in the long run. These increased prices will cost those on frozen benefits and those who do not benefit from the policy as well as everyone else.

It is likely that most people will be losers from this policy and some of those losers will be among the economically worst off. The chancellor claims he represents ‘working people’ but certainly not the working class who might find themselves out of work but with fewer options and less support.

·         Positive proposals: To give credit where it is due, the Buy-to-let tax break cut and tightening up eligibility for "non doms" sounds like good things, though I haven’t had a chance to look in any real detail.

·         A terrible idea: The proposal to increase the inheritance tax threshold was heavily trailed and I was predictably apoplectic about this. Unearned income like gifts and bequests should be taxed more heavily than anything else, according to almost all economic and ethical theories of tax.

·         Punitive:  The punishment imposed on younger people for not having a wealthy and generous family continues. Under 25’s needing benefits and low-earning parents seem to be particular targets of this government, just as they are of tabloids. Today’s changes to maintenance grants, housing benefit, Child Tax Credits and the newly lowered Benefit cap seem to be targeted at these “feckless scroungers.”

As a recent guardian editorial pointed out, there isn’t any actual principle behind the benefit cap—it is benefit-scrounger-bashing-tabloid-fodder. A similar point can be made about the other punitive changes—punish the young and the poor (they don’t vote Tory anyway).

·         What magic happens when someone reaches 25? This budget seems to build on the premise that people become very different at this age. Perhaps this is the government reflecting on the extended adolescence that people are considered to have in this SO-CALLED (by me, right now) binge-drinking and computer-game age.

I’m sceptical that there is anything so considered—the young are not a popular constituency with most voters and so are ripe for cuts. These changes also entrench inequality – with one set of young people trapped in low-paid work which provides little time and money left over for further development, while others can get ahead. It all appeals to the Tory base.

·         Overall trend:  One thing that this budget continues is the removal of state support in many areas and passing this on to individuals (or the BBC). Education is an obvious case, where gradually grants have been replaced with fees and loans. Public transport (such as rail travel) is another area where more revenue comes from passengers and less from government as time goes on.

In-work benefits seem to be going the same way, and I have slightly more of a problem with that than education and public transport subsidy, but I think it is worth noting. My question is whether we really need to give up on a progressive tax system that could fund a fairer society which would encourage people into work, improve their chances of finding some and ensure that they get a reward for it.

This isn’t a universal trend – pensioners and the NHS continue to be funded at previous levels. But it is a noticeable direction of travel. It would be good to have a progressive tax system that enabled us to move in the opposite direction in some cases (tax-credits being my own preferred method).


·         Overall this budget (unsurprisingly) doesn’t get the seal of approval from me. 

Monday, 6 July 2015

The real problem with UK tax credits

In my previous post I was very critical of the argument that Tax Credits are simply a form of ‘corporate welfare.’

However, I want to flag up one very good point raised by Deborah Orr where this claim is quite probably true. Tax credits utilise a working-hours threshold (of 16, 24 or 30 hours depending on family composition) which will have unwanted effects.

This could be seen as a form of corporate welfare where companies will be able to more easily (and potentially more cheaply) hire two part-time staff to do the job that could be done by one.

This might not be an entirely detrimental outcome—tax credits may have been one of the factors why the downturn in the UK economy as a result of the global financial crisis caused mass underemployment rather than mass unemployment. Employers might otherwise prefer one full-time employee to two part-time employees and there will no doubt be someone out there (possibly one of the part-timers) who would prefer to do the job full-time.

But the hour working threshold will still have unwanted effects. There are no doubt numerous cases where both worker and employer would prefer to have more work hours in a week in the absence of the threshold.

A further problem with the hours threshold for tax credits is that it means that these are not doing as much to assist low-paid workers who work very long hours, for example two minimum wage jobs.

But what is the alternative to the working hours threshold? The logical extension is to take account of the actual amount of hours people have worked and give people more support if they a) work longer and b) work at a low wage.


My hourly averaging proposal does this. It therefore represents a much more effective form of earnings subsidy. It is targeted at those who have a low lifetime average income and gives an incentive for people to keep working full time in order to generate more income. 

Sunday, 5 July 2015

The Living Wage vs. Earning Subsidies

Is the Living Wage campaign just counterproductive?

There has been much discussion recently about the Living wage, or the lack thereof in many cases. The living wage represents the idea that the current UK minimum wage does not always provide enough to give people an adequate living. Living wage campaigners have two routes open to them – to argue that the minimum wage should be raised to living wage levels or to shame companies into paying their staff a living wage.

I am doubtful that either will succeed, but also that success with either would make a huge difference to the people at the bottom of the wage scale. The campaign to shame (and presumably boycott) companies would have to be pretty universal in order to overcome the competitive disadvantage such firms would face if they start paying their workers more than their competitors. This is a point Engels pointed out 150 years ago. Customers would have to voluntarily shop in the more expensive shops which pay the living wage instead of their cheaper rivals.

This explains the problem with imposing a higher minimum wage as well—that this will be passed on to consumers, many of whom are the low-paid people we wanted to help in the first place.

One recent line of attack is to highlight how much some major companies have been benefitting from the tax credit system. This is calculated by working out how much tax credit money is paid to assist the staff of the company in question.

The comparison is between the current situation (where companies with low-paid employees receive tax credits) and an alternative in which they would be forced to pay more and therefore the state would not have to pay as much.

This is a simple equation but it isn't a meaningful one. The question we face is about policy: Should we use tax credits to raise the living standards of low-paid workers or use minimum wage regulations?

If you change from one policy to the other it wouldn't simply mean that a cheque for the difference would be due. The important question for such an exercise is what represents the relevant counterfactual. If there were no tax credits this would not mean that firms would pay their staff more to get them to this income level. Their workers would just have less money in their pockets.

What about the alternative counterfactual that firms would be forced to pay the living wage? If companies were forced to pay their workers more then they would make all kinds of different decisions. Some would go out of business as they could not compete with foreign competition while some others would cut their workforce and replace them with machines.

But what about those businesses, like Tesco, which would survive and would not be able to employ robots or other technology to do the work? Firms would not respond by just paying their workers more and their shareholders and managers less. Firms might invest in labour saving equipment to reduce the number of staff they need, putting people out of work.

This would cut the tax credit bill, but it would not indicate any ‘subsidy’ to the corporations. The costs would pass mostly onto their customers, but also onto the unemployment bill where workers have lost their jobs.

Whichever way you look at it, tax credits don’t represent a simple subsidy to corporations (except in the cases I mention in my next blog). Some corporations will benefit from them of course, but at most a small fraction of the total cost of the tax credit scheme.

Some of the cost will go in administrative costs, lost incentives and economic inefficiencies. If any unintended group is likely to benefit it will be consumers (which means everyone) who get cheaper stuff, but mostly the scheme will help low-paid workers.


One reason some people are distrustful of the left is that they deem them incoherent or incompetent when it comes to economics and policy and I fear that campaigns like this do not do the egalitarian cause much good.