Big thinking on the UBI is not for the fainthearted (or weak headed)

Susan GuthrieTax and WelfareLeave a Comment

The recent Basic Income debate has brought to light both criticisms of the existing welfare system, and of alternatives to it, such as the Big Kahuna’s tax and welfare proposal. Criticism is the easy part, designing something which would work better is the hard bit. What has been spectacularly lacking in much of the debate, and the recent article by Michael Fletcher is a case in point, are carefully thought-through, practical solutions to the problems inherent in either the existing welfare system or alternatives to it based on an unconditional basic income policy.

Fletcher’s criticism of the Big Kahuna focuses on the inadequacy of a basic income of $11,000 for sole parents and retirees. It’s an obvious problem and one we highlighted and discussed at length in the Big Kahuna. Adequacy is an important issue and is a debate the public should have.

But before we get on to that, let’s put these simple now-then comparisons, the core of Fletcher’s article, in context. Simply comparing what someone today receives from the welfare system versus what they would receive were a radically different policy implemented overnight, highlights a potential issue but not one that is likely to emerge in the real world. No western government would implement a policy as radical as the Big Kahuna over-night.

So, instead, the real issues to focus on are i) how people might behave under a radically different regime and ii) how we might transition over time to the new regime in such a way that the most vulnerable are not harmed. Imagining how people might behave under a radically different tax and welfare regime, fully operative in 20 or 30 years time, is not for the faint-hearted but a policy like the Kahuna cannot be assessed without it.

Long Term – Changes in Behaviour

We don’t expect people in 20 to 30 years time to be any closer to a wonderfully rational, bullet-proof human exemplar than today’s lot. Of course there will still be lives going astray in the future. But we should be open to imagining how those lives might be supported differently but equally well or better in the future – through family and community, through the economy, and through the tax and welfare system.

It’s easy to imagine routes through which the UBI might reduce the incidence or severity of poverty for example, making the issue less important than it is today. Supported by a UBI it is possible workers will bargain more effectively collectively than they have in the past. All else equal, that would give a greater share of national income to workers rather than employers, something likely to help reduce the incidence and severity of poverty.

A reformed tax system would support investment in business, not housing, something which is positive for job growth – again, of help in reducing poverty. And, of course, unlike the current system there is no abatement of the basic income when recipients begin to earn income in addition to it. It is a rare thing – a welfare system free of ‘poverty traps’.

The many social and economic benefits of being free to locate where-ever you like, live with whom-ever you like were discussed in depth in the Kahuna and we won’t repeat them here. Fletcher was disparaging of our suggestion that sole parents for example might be more likely to live with others under the Kahuna regime – he clearly hasn’t had many discussions with sole parents (the ones we spoke to described the positive experiences of sharing accommodation).

Paying a basic income over an adult’s life, rather than just in retirement, may also change when and how people save. Not only is the incentive to save greater under a basic income policy which has only a modest payment in old age but, for many working people, the basic income will be a bonus which can be set aside as savings. A life-time spent saving the UBI would produce a nest-egg well-able to fund a very comfortable retirement.

It’s possible that there will be changes in the price and variety of services and financial products which will help reduce the risk of poverty. There may be greater uptake of life insurance, for example, which addresses the risk of being both a widow/widower and poor. Fletcher seems to be dismissive of the value of life insurance but we’ve no idea why.

The dynamics of how behavior changes in response to different policy is an essential element of policy evaluation. Michael Fletcher allows nothing for that, his seems to be a world where all the issues are best addressed by giving more cash to those struggling under the current regime. That is ideological, not rational.

We could go on and on here, but hopefully you get the idea. As part of assessing the policy, and prior to implementing it, think about (and if possible research in depth) how people might behave differently and how this might augment or detract from the policy’s effectiveness. And of course, if you’re going to make value judgments about those responses (dismissing life insurance, for example, or shared living) then be explicit about your reasons.

Short Term – The Transition

On the issue of transition, it is totally sensible to run both a UBI-based system and a means-tested system of top-ups for a decent length of time. This was exactly how the current UBI for those aged 65 and over (ie National Super) was introduced over 30-odd years beginning in the late 1930s (a means tested Age Pension co-existed with National Super). So we have no problem with Fletcher’s suggestion that means-tested top-ups be available alongside a UBI. However we would see this as limited to a couple of decades – the transition time from one regime to the other and more than enough time to work out what those behavioural responses might be and to design effective measures where gaps in likely support are identified.

Our own thinking on this points to the apparatus constructed around Working for Families being the best way to deliver any means-tested top-ups to the UBI. And, yes, that would mean packing up the WiNZ office.

The top-ups would not be limited to ‘working’ nor ‘families’ though. All adults would receive the UBI and have the option of applying for a top-up. Rather than have a child UBI, a top-up related to the number of children being cared for would be available. No hours-in-work conditions would apply. Those aged 65 and over could apply for top-ups (just as people who receive NZ Super can now apply to WiNZ) and the maximum top-up for those folk would deliver an income equivalent to NZ Super today. The first call on a non-custodial parent’s UBI would be his or her children but those parents too could apply for a top-up in the event they have no taxable income.

Importantly, the basis for the means-testing would be taxable income assessed under a new tax regime which incorporates net worth in the taxable income analysis. So unlike the current regime, wealth as well as cash income would form the basis of eligibility – which is surely fairer than the current regime.

 

 

 

 

 

 

 

Big thinking on the UBI is not for the fainthearted (or weak headed) was last modified: April 5th, 2016 by Susan Guthrie
About the Author
Susan Guthrie

Susan Guthrie

Susan is an economist who, prior to joining the Morgan Foundation in 2010, held various private and public sector roles. She has worked for the Reserve Bank of New Zealand and the NZ Treasury, as an international economist in the financial sector in New Zealand and Hong Kong, and as an advocate for consumer rights. In 2011 she co-authored with Gareth Morgan ‘The Big Kahuna’, a book advocating tax and welfare reform for New Zealand and in 2014 she co-authored with Gareth ‘Are we there yet? the future of the Treaty of Waitangi’.