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Basically unaffordable

English
Date: 
27.05.2015
Type source: 
Media: 
The Economist

Replacing welfare payments with a “basic income” for all is alluring, but expensive

WITH cash-strapped governments around the world looking for ways to cut welfare bills and reduce deficits, it might seem an odd time to consider a generous new universal benefit. Yet the basic income—a guaranteed government payment to all citizens, whatever their private wealth—is creeping onto the policy agenda. The Swiss will soon vote on a proposal for a basic income of 2,500 francs ($2,700) per month, following the success of a national petition. Amid turmoil in Greece, Yanis Varoufakis, its finance minister, has hinted that he is a fan. Britain’s Green Party has adopted a version of the policy. Turning it into a substitute for all welfare payments would be prohibitively expensive. But it might work as one element of the safety net.

The idea has a long intellectual heritage. In 1797 Thomas Paine, one of America’s founders, penned a pamphlet arguing that every person is entitled to share in the returns on the common property of humanity: the earth’s land and natural resources (today, you might include radio spectrum or the profits of central banks). Paine suggested paying citizens the equivalent of around $2,000 in today’s money—which was then over half the annual income of a labourer—on their 21st birthday, in lieu of their share of the planet. The benefit would be granted to all, to avoid creating “invidious distinctions” between rich and poor. Since Paine’s proposal, the idea of universal payouts—whether one-off or recurring—has periodically attracted support from both sides of the political aisle.

 

The left has usually viewed such policies as a way of beefing up the social safety net and fighting inequality. That is particularly appealing in a world where technology creates unimaginable riches for some, but threatens the jobs of others. As early as 1964 James Meade, an economist, argued that technological progress could reduce the demand for labour so much that wages would fall to intolerable lows. In a world where a computer can suddenly make a profession redundant, those who have worked hard cannot be certain of a decent standard of living. That may justify more generous state support.

For their part, right-wing advocates of the citizen’s income view it as a streamlined replacement for complicated meanstested welfare payments. A system where everyone receives the same amount requires fewer bureaucrats to administer. Existing schemes withdraw benefits from low earners as they earn more, discouraging work and so trapping some in poverty. For this reason, Milton Friedman, an economist known for his laissez-faire beliefs, wanted to replace all welfare with a simpler system that combined a guaranteed minimum income with a flat tax.

Although the basic income has so far failed to take off, it does have a commonplace cousin: the tax-free allowance. In Britain, for example, workers can earn £10,600 ($16,500) before income tax is levied on subsequent earnings (starting at 20%). The exemption is worth just over £2,000 a year to the 92% of taxpayers who earn more than the threshold. For them, there would be no difference if the government replaced the allowance with a payment of similar magnitude. Making the payment universal would be costlier, but could be paid for by paring other welfare payments.

The digital revolution may transform labour markets and strain welfare states

Yet £2,000 does not provide much of a safety net, and more generous schemes are enormously expensive. In 1970 James Tobin, an economist, produced a simple formula for calculating their cost. Suppose the government needs to levy tax of 25% of national income to fund public services such as education, policing and infrastructure. Paying for a basic income worth 10% of the average income requires average taxes to rise by ten percentage points, to 35%. A basic income worth 20% of the average income requires average taxes to be 20 percentage points higher, at 45%, and so on. Eradicating relative poverty, defined as income beneath 60% of the median, would require tax rates approaching 85%. The Swiss proposal is absurdly expensive: a rough calculation suggests it would cost about SFr197 billion ($210 billion), or 30% of GDP. A generous basic income funded by very high taxes would be self-defeating, as it would reintroduce the sort of distortions that many of its advocates hope to banish from the welfare system. Loafers could live comfortably without lifting a finger.

To prevent that, eligibility could be restricted. Tony Atkinson, another economist, advocates a “participation income”, paid only to those who contribute to society, whether by working, looking for work or volunteering. That reintroduces some administrative burden, but avoids supporting the idle.

A better system might also be financed by a return on assets, rather than by taxes. Alaska pays its residents an annual dividend—$1,900 in 2014—from the returns on its oil fund. An asset-financed basic income would remove welfare distortions without introducing new ones through higher taxes. Unfortunately, few governments have wealth funds. On the contrary, they are mired in debt (though some think they could monetise public assets, including land, more effectively). In any case, many would worry that widespread government ownership of financial assets would lead to bureaucrats meddling in the private sector.

Small is beautiful

Fans of the basic income make plenty of good arguments. A welfare system riddled with complicated means-testing distorts incentives and is a headache to run. Paine’s intellectual case for all citizens to be entitled to a return on the bounties of the earth is compelling. But a basic income is too costly and inefficient to act as a wholesale replacement for welfare. It is feasible only if it is small, and complemented by more targeted anti-poverty measures. Basic income: the clue is in the name.

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Contributor: 
Ralph Kundig
Organisation, Media, etc: 
The Economist