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Universal basic income: the dangerous idea of 2016

The Conversation

Gigi Foster, UNSW Australia

The resurrection of universal basic income (UBI) proposals in the developed world this year gained support from some prominent Australians. But while good in theory, it’s no panacea for the challenges of our modern economy.

UBI proposals centre on the idea that the government would pay a flat fee to every adult citizen, regardless of his or her engagement in skill-building activities or the paid labour market, as a partial or complete substitute for existing social security and welfare programs.

Of the schemes run in developing places like Kenya, Uganda, and India, some have been evaluated statistically, delivering some evidence of positive impacts on educational investments, entrepreneurship, and earnings.

In the developed world, Canada is trialling a UBI scheme. Finland also just rolled out a UBI trial, involving about 10,000 recipients for two years and costing about A$40 million. While Switzerland’s voters just rejected a UBI proposal via referendum, a similar proposal is presently looking like a goer for Utrecht in the Netherlands.

Here in Australia, it has been suggested the government might hand out somewhere between A$10,000 and A$25,000 a year to every man and woman.

Can we afford it?

There are two big questions to ask before taking a UBI proposal seriously, and the first is the most obvious one: where would the money come from to pay for it?

The present Australian welfare system (excluding the Medicare bill of A$25 billion) costs around A$170 billion per annum. Our GDP is around A$1.7 trillion per year, so this welfare bill is about 10% of annual GDP.

Giving A$20,000 to every Australian adult (19 million people) would cost approximately A$380 billion. That’s a little over twice the present total cost we pay for the above-mentioned programs.

Economics journalist Peter Martin has suggested that abolishing the tax-free threshold would pay for a UBI scheme. Working out whether the abolition of the tax-free threshold would fully fund a UBI is non-trivial, given the complexity of changing marginal tax rates as income rises and the need to estimate how many taxpayers fall into which tax brackets, but one thing is sure: the income tax bill of most if not all earners would have to rise in order to fund a UBI.

One scenario

Let’s look at what would happen to someone earning A$80,000 per year if we were to implement a UBI, abolish the tax-free threshold, and leave the marginal income tax rate kink points unchanged.

This person presently pays about A$18,000 in income tax – made up of a marginal tax rate of 19% on dollars from the tax-free threshold of A$18,200 to A$37,000, and a marginal tax rate of 33% on dollars from A$37,000 to A$80,000.

Under a UBI scheme involving the abolition of the tax-free threshold, that same individual would receive the UBI (say, $20,000) but would then face a 19% tax rate on ALL of the first A$37,000 of income, and then a marginal tax rate of 33% on dollars from A$37,000 to A$80,000, yielding a total tax bill of A$21,220.

This person would be better off under the UBI in terms of take-home pay: instead of A$62,000, he would get A$79,000 in his bank account. But is the additional revenue increment from abolishing the tax-free threshold enough to pay for the UBI, if we spread it across all earners? I’ve yet to see a hard-headed answer to this question.

We may need to increase taxes elsewhere to pay for a UBI – possibly corporate taxes, land taxes, etc. – and most of these other taxes disproportionately impact richer people. Would legislation to fund a UBI scheme via increasing taxes on the rich get passed?

Some might suggest taking the money we presently spend on social security and welfare payments and converting it to a UBI. This would be enough to fund payments of about A$10,000 to each adult. But it would be a reverse-Robin-Hood policy: instead of spreading a fixed sum across our neediest citizens, we’d be spreading that sum across everyone, making the neediest worse off in order to send cash to our more well-heeled citizens.

Question 2: What is the perceived “broken” part of our present welfare system, and would UBI fix it?

Any targeted (e.g. means-tested) social support payment must be clawed back as income and/or wealth rises. While arguably an efficient way to get money to where it’s most needed, means-tested social security payments inevitably depress the incentive to earn more, at least in the section of the earning distribution where social security payments are paid out. This is talked about a lot, but I haven’t seen a reliable cost estimate for Australia of the disincentivising effects of the claw-back of social security and welfare payments.

The administration costs of the present system of targeted payments, also an argument given for moving to a UBI, are estimated at about A$3-4 billion. Whether this includes all much-pilloried costs of “churn” is an open question. And a UBI scheme would also have administration costs, which have not yet been estimated.

Another frequent theme describes the modern economy as turbulent, with more part-time, casual roles and more employment uncertainty than in the past. The implication is that the way our present system compensates people in insecure work is inadequate. Yet a social support model like a UBI that makes it even easier for people to be precariously attached to the workplace carries the implication that the workplace is not good for them.

In fact, work is socially and psychologically supportive for many people. Studies have found negative psychological impacts from job loss and retirement that seem driven by the social aspects of working. Do we want to isolate our most vulnerable citizens even more?

Arguably the biggest problem in our current tax-and-transfer system is that the rich, and their organisations (like big companies), do not get taxed enough and/or benefit from special provisions (for example in regard to superannuation).

Instead of changing our present targeted welfare system into a diffuse scattergun money-for-all scheme, we could instead courageously tackle the worst part of the problem first.

What else is relevant?

Some worry that a UBI scheme would further depress the incentive to work. As I’ve stated elsewhere, I doubt that the drive to win in terms of labour market success is going to go away anytime soon.

Others have also found small impacts on work incentives from cash transfer programs, though this evidence is mainly drawn from developing countries.

In principle, two types of work incentives may be affected. People receiving unconditional handouts every year may feel less pressure to get and keep a job. Secondly, if the UBI were funded by the abolition of the tax-free threshold and/or increases to income tax rates, then people would be more strongly penalised for working additional hours and might hence work less.

Would people receiving unconditional handouts feel freer to explore their creative sides? To explore entrepreneurial ideas? To engage in more meaningful work than they presently do? These are all mentioned as possible benefits of a developed-country UBI, but we really don’t know whether they would materialise, nor do we really know how to measure them.

We do know that people adapt to new reference points (including income reference points), and there is good reason to expect that at least some of a long-term UBI would be soaked up in higher prices – particularly for goods that the poor buy most.

Watch and learn

A proposal to throw money at people, while wrapping that proposal in the flags of “equality” and “basic rights”, can be argued to be the lazy man’s face-saving response to the complex, entrenched problems of poverty. The poor arguably lack access and/or skills as much as or more than they lack money.

What’s more, the present Australian social security and welfare system can be viewed as a UBI scheme with exceptions for people who don’t need it. Some changes to the system that do not involve wholesale overhauls could address many of the problems discussed above.

My advice for Australia? Watch the policy experiments in Europe keenly. But don’t assume for one minute that universal basic income is a magic bullet. Compared to our current system, it is expensive, inefficient, and potentially regressive.

The ConversationGigi Foster, Associate Professor, School of Economics, UNSW Australia

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.


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Canada and Australia share a political culture of conflict

The Conversation

Gregory Melleuish, University of Wollongong

In a recent book, political scientist Tom Flanagan argues that the years of minority government in Canada between 2004 and 2011 had a corrosive effect on Canadian politics and political culture. He comments:

After so many years of continuous campaigning, federal politicians are like child soldiers in a war-torn African country; all they know how to do is to fire their AK-47s.

This statement, and many other things that Flanagan describes as features of Canadian politics – including increased centralisation of decision-making in the party and the need to be in constant campaign mode – could also be considered to be characteristics of contemporary Australian politics.

There can be little doubt that the years since 2007 have transformed the nature of Australian politics, turning it into a political warzone in which there can be no rest for the combatants. This came after some 24 years of relative political calm during which there were but three prime ministers – Bob Hawke, Paul Keating and John Howard.

These years of political stability owed a lot to politics not being all out-and-out warfare, even allowing for Keating’s occasional belligerence. Governments on both sides of politics ruled for what they understood to be the public good, not just to secure victory over the other side.

When the Australian electorate voted in the Labor government led by Kevin Rudd in 2007 they had an expectation that this pattern of politics would continue. They saw Rudd as continuing the tradition of good government that Australia had enjoyed since 1983.

Instead, the Australian people were soon to enter the zone of conflict and instability, which is still the case. One could blame this on the challenges that governments have had to face since the global financial crisis. But then the Hawke government faced enormous challenges in the late 1980s without descending into anything like its successor 20 years later.

There were many factors at work, including Rudd’s leadership style, the way in which he was dispatched and replaced by Julia Gillard, and the consequences of having a hung parliament from 2010. The result was a much more ferocious style of politics. It was ferocious in the conflict both between the parties and within the parties as the struggle for power became increasingly intense.

Australian politics has recently been marked by ferocious conflict both between and within parties. Source: AAP/Julian Smith

What happened was that a political “state of nature” replaced what had been the civilised practice of political life in Australia. One of the great virtues of the Westminster system, which Australia, like Canada, has inherited from Britain, are its traditions of political behaviour, of behaving reasonably and decently.

Those traditions have been significantly eroded in recent years. One reason for this has been the need to be in constant campaign mode. Flanagan writes that the Conservative Party in Canada is a “campaign party”, always looking to the next election. The same is true of both main political parties in Australia.

All of this is exacerbated by the 24-hour news cycle and the use of social media. There can be no rest for any government; skirmishes are always being fought as parties prepare to “go over the top” for the next big offensive.

What this means is that the job of governing the country is almost of lesser importance than winning the political battle. Rather, government is just another tool or weapon to be used in that battle.

The real problem, as Flanagan says, is the harmful effect that such behaviour has had on the political culture. What Australians want is what they had under Hawke and Howard: good, strong, stable government. What they are getting is constant political warfare.

The problem is that young newcomers to politics are being inducted into this dysfunctional political culture. They are learning how to become political warriors dedicated to winning the political game. And winning is the top – perhaps only – priority.

The danger is that this culture of constant conflict will becoming self-perpetuating. Politicians will forget why the Australian people have elected them. There needs to be some way of breaking this cycle of conflict and returning Australians to the days of good government that they enjoyed under Hawke, Keating and Howard.

The ConversationThis article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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