Universal Basic Income
This post is by PaulL, a regular commentor and occasional contributor. It is the ninth post in a series on the financial incentives to work and the impacts of our tax and transfer system on household formation, and the second post on the “what could we do” subsection. The index to all posts in the series can be found here.
One of the options to address abatement rates and EMTRs is to make programmes universal. When something is universal everyone will get it, irrespective of income. Therefore no abatement rate applies, and no disincentives to working.
A Universal Basic Income is the biggest example of this. At its most glorious a universal basic income would give every citizen (permanent resident?) a standard amount of income, with no abatement. Even the richest household gets it.
In theory this would mean that we save a lot of administration costs – there is no need for complex eligibility rules, abatement rules, means and income testing rules. There are no distortions to incentives to work. The UBI would be set at a level where anyone on a benefit today would be no worse off.
However, there are problems. In broad terms a UBI that leaves nobody worse off will leave a lot of people a lot better off. It will be fantastically expensive. A UBI that isn’t fantastically expensive will not deliver on some of the promise – it won’t be universal any more.
Let’s work with some numbers. The jobseeker benefit provides $360 for a single person who is over 20 and living away from home. In many cases people get more money than this through targeted supplements such as an accommodation supplement, but many of those supplements are related to children, so let’s stick with $360 per person.
We could deliver $360 to 5.1 million NZers. That would cost $95 billion per annum. I note that the NZ Superannuation rate for a single person living alone is $463 a week, so it would be a reduction in NZ Super for a single person, and about equivalent to the per person rate for a couple.
Total Crown revenue in NZ is $141 billion, so that one programme would consume two thirds of our Crown income. Without tax system changes we’d have little left for hospitals, schools, roads, justice, Defence etc.
Total Crown expenditure on welfare programmes in the 2020 year, including NZ Superannuation, was $33B per annum. Interestingly NZ Superannuation is half of that, at $16B per annum – the biggest part of our welfare budget goes on the elderly.
This proposal would replace all direct expenditure on welfare, and potentially also reduce the size of MSD due to administrative savings. MSD in total costs $2.4B a year to operate, so maybe another $1B. If we’re being super optimistic there are some savings in IRD too, maybe another $0.5B. All up, there’s $37B of spend we replace with $95B. $62B of extra funding required, or needing an increase in revenue to the Crown of 50%.
We could increase tax rates to compensate, given that every NZer now has a lot more money than before. We could set a tax free threshold at the level of the UBI (so the UBI is always untaxed, and children wouldn’t need to fill in tax forms). That would be a tax free threshold of $19,000 per annum per individual. We could then apply a flat tax rate above that – say, 39% for every dollar above $19,000. Everyone in NZ’s EMTR would then be 39%, from the poorest to the richest. This is very, very attractive in a policy sense – incentives to work would be much better than today.
Income tax in the year ending June 2021 was $45B in total. The total income from wage and salaries in NZ in 2021 was $147B. A 39% tax rate on all that (because the UBI would use up all the tax free threshold) would return $57B. So that would increase our tax take by $12B, arguably without making anyone worse off (it’s effectively clawing back some of the UBI). But we’re still $50B of funding short.
We could look at other taxes to fund it, but NZ really isn’t big enough to put in $50B of new taxes without some major effect. NZ’s total residential property value is $1.72 trillion, a property tax that delivered $50B per annum would require a tax of 3% of property value (including house value) per annum on every house in NZ. I’d presume a tax of that size would result in a reduction in property values (not necessarily a bad thing, unless you’re one of the 60% of households who own houses).
We could look at capital gains taxes or wealth taxes, but those have their own problems.
It’s not technically impossible, but I think it’s well outside the range of politically possible ideas.
If we step back from the maximal UBI, then we need to start targeting. We could start looking at household structure, and rather than providing a flat amount per citizen we could deliver $360 per adult and $100 per child – a total of $78B. Or we could deliver $360 per household, plus $150 per additional adult and $100 per additional child. These measures increase the administrative cost and create some form of incentives to manipulate the system. They also don’t look particularly affordable.
We can come the other way, and start with what we can afford. If we reverse engineer current welfare expenditure, including NZ superannuation, and we assume that we can move to the 39% flat tax rate, we have $37B current welfare spend plus $12B in new taxes we can spend. $49B divided across 5.1 million NZers gives a UBI of $9,600 per annum, or $184 per week. If we could implement a UBI at this level we’d gain all the promised benefits, but unfortunately for a single person on the benefit that’s a halving of their income (ignoring accommodation supplement). For a single person on NZ Superannuation it’s a reduction from $463 to $184 per week. That’s also unlikely to be practical.
We could top up this minimal UBI for people with specific needs, but really we’re just reintroducing the benefit system, supplements, and abatement rates.
There are models in between, I see no evidence that they fix the problem – they are a different tradeoff between being “good” and being “affordable”. There is no option that I see that is both good and affordable.
In short, whilst a UBI has the potential to entirely fix the problems with EMTRs, a truly universal basic income is not politically possible, and less than a truly universal basic income doesn’t solve the problems.