10th August 2018

Minimizing social inequality with UBI

Minimize social inequality by introducing Universal Basic Income (UBI)

The expected sudden rapid rise of unemployment resulting from accelerated technological progress, the so called “technological unemployment”, may cause significant social unrest worldwide. One of the solutions, which could help reduce the negative impact of the long-term unemployment, and which has now been seriously discussed and tried out in several countries, is the Universal Basic Income (UBI). It is defined as “a periodic cash payment unconditionally delivered to all on an individual basis, without means-testing or work requirement”. To minimize social inequality, UBI should be:

  1. Universal: paid to everyone eligible, including children, adults and pensioners (but only for nationals or residents who acquired the necessary rights for UBI)
  2. Basic: in the foreseeable future, such benefit should not be sufficient for a person to live even at a “poverty line”. Sometimes such a basic income is called partial Basic Income
  3. Periodic: paid at regular intervals (e.g. monthly or weekly), rather than a one-off lump-sum
  4. Paid in cash: allowing the recipients to decide how they wish to spend the money
  5. Individual: paid on an individual basis and not, for instance, to households
  6. Unconditional: paid without a requirement to:

a) Pass a means test
b) Prove that the recipient actually works
c) Demonstrate even the willingness-to-work.

It is important for the UBI to be just basic i.e. partial, and not a full allowance that would enable a person to live at what is defined in the UK as a “poverty line”. Such restriction is necessary for several reasons:

  1. Making it affordable for the states to finance it right now within the current budgets. It would effectively replace the majority of existing benefits, and by pooling them together make them simpler and less expensive to administer
  2. Starting the roll-out of UBI as early as possible although at a very low level will enable the governments to gather the necessary experience and see potential problems
  3. Preparing the nations for technological unemployment that will have unintended social consequences of its own. The availability of UBI will be invaluable when millions of permanently unemployed will suddenly have to find a new purpose in their livesCreating a basis for a conditional Basic Income that might replace benefits, to which some people may already be entitled (e.g. housing benefit) but also offer it to anybody else who wants it, as long as such a person meets the required conditions. Such a condition could be a permanent employment, participation in various government schemes, e.g. further education, or public work scheme. It would thus, together with UBI become a full Basic Income. At some stage (depending on affordability) it would provide the recipients with financial means enabling them to live at, or slightly above, the “poverty line”.

Therefore, Full Universal Income = Unconditional Universal Basic Income + Conditional Universal Income. As with any idea, it has its proponents and opponents.

There are a number of areas where UBI can help:

  1. Reduce, and in the long-term, eliminate extreme financial poverty. In the poll by Dalia Research (Research, 2017), 52% of the interviewed people quote the increased financial security. One might conclude that the main reason behind that wish is to gain freedom from a kind of serfdom – we must work to survive. The option of not having to work or only work a little bit as a sort of top up to facilitate our needs is truly powerful. A Full UBI will at some stage directly support the ‘Basic needs’ at the bottom of Maslow’s Pyramid, mentioned earlier in Part 1, chapter 1, enabling an individual to realize his full potential.
  2. UBI will virtually eliminate benefit fraud. The simplicity, universalism and transparency of the UBI will minimize and in practical terms eliminate fraud for this type of benefit
  3. UBI will lead to significant savings. UBI can deliver substantial savings in the cost of distributing benefits that will be replaced by this universal financial support. Malcolm Torry, Director of the Citizen’s Income Trust, in his 2013 “Money for Everyone: Why We Need a Citizen’s Income” argues that a basic income is the most effective means of welfare, avoiding the high marginal deduction rates of current benefits, which create the familiar unemployment and poverty traps
  4. UBI will provide support for the people in need who do not receive benefits There is a section of the society in most countries where people in need of financial help do not get it because of the complexity of various schemes and lack of basic knowledge how to apply for it, or simply because they do not want to be seen as “beggars”. With UBI they will get that financial support automatically
  5. Choice of career paths will be much wider for most people with UBI in place. Once a person gets UBI, it may become a trigger for them to review the way people earn their living. Many people will be able to change jobs reflecting more accurately their personal preferences.
  6. UBI will help employees enhance their bargaining power. For many people, the sheer knowledge that they would be able at least partially to support themselves, will lead to improving their career, financial position or conditions of work at their workplace, knowing that they could afford not to work for a while and leave the job, if their requests are not met
  7. Working more very seldom produces better results. A recent research found that the relationship between hours worked and productivity of an employee’s output falls sharply after a 50-hour work-week, and falls off a cliff after 55 hours. Someone who puts in 70 hours produces nothing more with those extra 15 hours, according to a study published by John Pencavel of Stanford University. Longer hours have also been connected to absenteeism and employee turnover. Employees work many more hours now than they have in the past, but it’s coming at the expense of health, happiness and productivity. As a side effect, reducing the number of hours will create new job opportunities or can almost naturally lead to a wider level of job sharing
  8. UBI will reward people who are currently doing voluntary jobs. There is an army of volunteers, mostly working for charities that do not get any remuneration for the work they do. With UBI, they will have some extra financial support, enabling them either to extend their working hours, or more people will become volunteers. That will also be a partial reward for quite a few pensioners caring for free for their grandchildren
  9. UBI could increase labour mobility for people who would like to move to where there jobs are but currently do not have enough financial means to take the risk of relocation
  10. Many people resist doing something under pressure, like going to a work place they hate because they do not have any choice – they need money to survive. However, once they have that choice by, for example, having UBI that gives them some income, suddenly they see work as an option rather than an absolute necessity and have a motivation “to do something” in their potentially free time.

There are also some arguments against UBI but most of them can be alleviated:

  1. Although UBI may be easy to administer, saving a lot of money, its implementation is not that straightforward. To be meaningful, UBI would have to be an equivalent of at least 20% of the average wage in the developed countries and that may cost a lot of money. That’s true, people tend not to like higher taxes, this does present a practical problem for the implementation as does the difficulty of removing an established bureaucracy employed in the welfare system that would have been made redundant. However, it is less than the cost of the whole welfare state in the developed countries. Yes, it may indeed lead to somewhat increased taxes required to pay for UBI but again that would be an equivalent to an additional 1% to 3% of an average current taxation level. Estimates vary, but for Ireland total taxation, including UBI would be at about 40% flat tax level and in the USA also at about 40%. (Sean healy, 2012)
  2. The argument that some people may stop going to work is true. However, current experience, i.e. in Canada, shows the numbers are in low single figures, since the level of UBI is far from being sufficient to sustain even the very basic needs. It is also true, that some people may watch TV all day, as some do now, if they are on the dole
  3. Some people worry that an additional amount of money on the market will lead to an increased inflation. Yes, the price of cheap goods and services may rise somewhat but that depends on the level at which UBI is set and can be managed
  4. Sometimes, UBI is feared to lead to the increase in population, especially if children will also get it. In some countries, like in Germany, they want more children, so that would not be a problem. In others, it can be regulated by a much lower UBI level for children or allocating UBI only to adults. This will largely depend on the country’s population growth needs and culture
  5. For some people, especially on the so-called far right, it may seem to be a form of ultra-socialism. Well, then the current welfare state is already such an ultra-socialism
  6. The argument that giving people free cash will lead to increased drugs or alcohol related problems is definitely true, as it is today. In general, some people cannot manage any amount of money properly. That’s why, for example, in the UK there are still many companies that pay their employees weekly wages so that people do not spend all their income on the pay day. For some of us it is just our human nature to generate endorphins right here and now.

UBI is not a panacea for social problems, but it is a promising solution that could be implemented at its minimal level right now. That minimum would largely depend on the state of the country’s economy, legislation and some cultural tradition. However, it seems to be affordable for most developed countries at around 20% of the average wage level. In the UK it would be about £4,500 annually for a working adult tax free, that is twice that much as every taxpayer gets today as a tax allowance (about £2,300). People who are on social benefits already get much more than that.

UBI should be first entered as a “New benefit” replacing most, but not all existing benefits and tax reliefs. The balance between the expenditure that was covering the abolished benefits, such as tax relief, should be initially paid from general taxation. As an example, in the UK, depending upon one of the existing scenarios, that net annual cost would be equal to between 1% and 3% of the total tax levied. From then on, any annual increase should be slightly above inflation. Additional sources may come from the so called Tobin’s tax on “micro-second” investment (share dealing) transactions, which in pure economic sense could be considered gambling, or taxes on certain derivatives.

UBI should be extended to all nationals born in the country as well as to those citizens from other countries that have lived and worked in the country for the length of time specified by law. This should be based on the assumption that everyone who contributes to the country’s wealth has the right to participate in the distributed income. It should be unconditional, as in the name, but its level may vary on one parameter only – age. Thus, children, working-age adults and pensioners would receive UBI at a different level.

There are many ways how the UBI can be implemented and the implementation scenarios will vary significantly between countries, reflecting different economic capabilities and cultural differences. It can be implemented via individual tax credits, personal Negative Income Tax (NIT) or household based regressive negative income tax.

Individual tax credit, called Working Tax Credit, has been in operation in the UK for quite a while. However, it is conditional and non-universal. In 2017 the conditions stipulated that a person could get the Working Tax Credit of up to £1,960 a year if either of the following applied:

• A person’s age is from 16 to 24 and has a child or a qualifying disability
• A person’s age is 25 or over, with or without children

A further condition is that such a person:

• Works a certain number of hours a week
• Gets paid for the work he does
• Has an income below a certain level

A Negative Income Tax (NIT) is another option of how a UBI could be implemented. NIT is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. It would be a mirror image of a typical tax system. It could be applied either on an individual (personal) or a household basis. Benefits received would vary inversely with the income earned via employment or coming from others sources, in line with a negative tax rate and threshold. For example, if the NIT is set at £10,000, the basic tax rate is 20% and the income threshold above which the tax is paid is £25,000, then a person earning £25,000 would get an additional 20% cash on the difference between what he earned (£25,000) and the NIT (£10,000), which is 20% on £15,000 = £3,000. Negative income tax has already been tried in a number of countries.

In most of the OECD countries’ expenditure on social assistance is quite significant. In Luxemburg, per-capita benefit spending has already reached 50% of the poverty line. For most governments, the first step would be to convert all benefits and tax allowances into the UBI with some supplementary amount added. Most countries already spend over 20% of their GDP on paying benefits.

The best proof that UBI may work is perhaps the most recent decision made by the Finnish government. Finnish unemployment stands at about 9%. Therefore, the Finnish Parliament has decided to introduce UBI in two phases. The first phase started in September 2016 as a pilot for a randomly selected group of 2,000–3,000 citizens already on unemployment benefits. They receive a monthly basic income of 560 euros. That amount is the same as the current guaranteed minimum level of Finnish social security support. The pilot study, running till the end of 2018, intends to assess whether basic income can help reduce poverty and social exclusion (Bostrom, 2013), while at the same time increasing the employment rate.

The UK proposals for UBI, if implemented in full, would cost about £10 billion net. In the transition period, some top ups, for certain groups of people would be unavoidable, like the housing benefit. But with that caveat, the UBI could be introduced in the UK even tomorrow, because the additional cost is lower than previous annual budgetary giveaways. More than half of the cost would be balanced by removing the personal allowance and basic state pension.

The UBI should subsume as many current single benefits as possible because it would make the whole operation more cost-effective and easier to administer. That is also the rationale behind the Universal Credit now being implemented in the UK. Therefore, the UBI entitlement should also include children (with lower level of benefit). Pensioners in the UK should be entitled to UBI, with a higher level of benefit than the working adults, since they would have very little opportunity for extra work and such UBI would replace the national statutory basic pension. Gradually, UBI for pensioners should be high enough so that it should cover most of the basic cost of care home for the elderly.

UBI should be individualised rather than applied to a household, since individualisation would drastically reduce the cost of distributing the benefit (very few checks, if any), greatly reducing false benefits claims and state intrusion in private lives (who lives with whom). UBI individualisation will however be more expensive than paying it to households. Therefore, initially it would have to be set at a level far inadequate to sustain an individual living alone.

To respond to some critics of UBI who say it will also be an extra income for the wealthy, if all citizens are given the same amount of money per month, I would suggest considering it as a taxable income. Those who earn nothing or very little will pay no tax but those who earn a lot, will pay some additional tax.

In the UK, as in most other countries, there are plenty of hindrances rather than incentives for unemployed to do any part time work. People have to contact the job centre if they can pick up the job and still retain the benefit. The system is just too complicated. The soon to arrive so called Technological Unemployment will force the governments to implement UBI since this is the fastest, simplest and most effective option to maintain social order, as well as fulfil the dream most of us have, i.e. to devote time to that what we like doing most. Incidentally, that could also include work, if it is still available when the Technological Unemployment arrives.

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