Wednesday 3 September 2014

A Policy A Day: Universal Basic Income

In the lead-up to the election, we are going to examine one policy per (working) day. We've selected policies to be as balanced as possible across a range of policy areas and across the political parties. The idea is to explain the background, analyse the policy to investigate the pros and cons, and give a verdict on the policy at the end. Inevitably, some opinion will make its way in and we make no apology for that - after all, we're voters too. Also, I say 'we' because this series will feature some guest posts from other young people, to share their thoughts and ideas as well. A list of all the articles is available hereEnjoy!

Today's post is by Thomas Vautier.

Universal Basic Income (UBI) sounds like a magic bullet to ending poverty and reducing inequality. So why is this not a policy at the forefront of every party's campaign? We have seen from the Greens that one of their main policy priorities is reducing child poverty by creating a 40% tax on people earning over $140,000 a year, which is estimated to generate close to $1 billion. Article 2 of the Labour parties constitution reads “…the state must ensure a just distribution of wealth”. National is offering $500 for families and is working to increase the median income. From these examples it is evident that we can see that social welfare is and always will be the key component to every government’s policy priorities, as it is going to be the largest expenditure in their portfolio. Yet none of them have ever seriously looked at or advocated for a UBI, which may be the simplest solution to the problem.

(Editor's Note: The Green Party has a policy that states that they "support a full and wide-ranging public debate on the nature of UBI and the details of a UBI system, and government funding for detailed studies of the impacts of UBI. The Green Party will investigate the implementation of a Universal Basic Income for every New Zealander.")

For this blog post I will be looking at both the cost effectiveness of a UBI to New Zealand, and some of the political arguments that are made in support or opposition of it. I will attempt to provide an unbiased argument that provides you with the facts and understanding of what UBI is. As a disclaimer I identify myself politically as a central welfare libertarian. All figures and calculations are based on estimates and are used as examples only.

What is Universal Basic Income (UBI)?
For the purpose of this assessment I will use Philp Van Parijs' definition of UBI as I think it provides a solid and basic start for understanding what it is and how it works:
“An income paid by a government, at a uniform level and at regular intervals, to each adult member of society. The grant is paid, and its level is fixed, irrespective of whether the person is rich or poor, lives alone or with others, is willing to work or not. In most versions–certainly in mine–it is granted not only to citizens, but to all permanent residents.”

UBI has been advocated since the 18th century, but for the purpose of this blog post we will not go into a history lesson about UBI. In its simplest form, a UBI is a payment to every eligible citizen for a period of their life (generally to retirement age).

So that I can properly explain UBI in the context of New Zealand, I will set a few (hypothetical) parameters for how I believe a UBI would be implemented in New Zealand.
1) People between the ages of 15 – 65 would be eligible for this payment.
2) The current tax system would be replaced with a 33% flat tax.
3) All current welfare programs would be stopped and replaced with the UBI.
4) The UBI payment would be $10,000 a year.

Current System
Currently New Zealand spends $26.3 Billion on social security through the various payments and schemes available to eligible New Zealanders. There a wide variety of schemes available to New Zealanders, from single parent allowances, student allowances, work and income support, and many more. All of these schemes require their own individual agency to manage them, and most are independent of each other. This means that the New Zealand government has to employ people across all of these sectors, not just to manage them, but also to make sure that people are not ripping off the system. With this comes the competition for government funding; as governments change so do budgets and money allocated for each of these sectors. So one year single mothers might be better off, where the next they lose some money.

This has been an inherent problem with social security in every developed nation. As a government tries to provide for everyone, the system becomes so big that just managing it becomes a burden. These problems are no more inherent than in the lead up to an election, as each party vies for a percentage of the vote they offer up more and more money to social welfare, saying they will create new and improved schemes and agencies that will reduce poverty, the wealth gap and inequality.

Building on this inequality is our current tax system. As most would know, it is a progressive tax system that works the following way:
1) Income tax on $14,000/year at the current tax rate of 10.5% is $1,470.
2) Income Tax on the next $34,000/year at 17.5% is $5,950
3) Income Tax on the next $22,000/year at 30% is $6,600 - a total of $ 14,020 on the first $70,000.
4) Thereafter the tax rate becomes 33%.

What this system does is disproportionately benefits those on a higher rate of pay. For example if the entire $70,000 was taxed at 33%, the tax would be $23,100 but with our system it is $14,020. But people below $70,000 do not receive the same benefits.

So how will implementing an UBI change this?
Currently in New Zealand there are approximately 2.7 million people between the ages of 15 and 65. If we work on the number of $10,000 a year, it would cost approximately $26.64 billion, which is roughly $300 million more than the current social security system. So first off the bat we come to the problem that it costs more than the status quo. This is a valid argument; why change a system that costs less with a system that costs more? But as we will explain, this cost comes with a big positive.

With the implementation of this UBI we would also introduce a new flat tax. At first, it seems that charging a 33% flat tax would be counter productive to solving financial inequality. This is where the UBI shows its ability to be an equalizer. The UBI itself is tax free, so individuals will never lose any of this money no matter how much money they make. So let’s look at how things will change for the different pay levels.

Under the current system if someone falls into the first tax bracket (earning up to $14,000 a year), they are taxed $1,470, meaning their net income is $12,530. But if they are given a UBI of $10,000 and taxed at 33%, the tax paid on their $14,000 income is $4,900 leaving them with $9,100, plus the tax free UBI which brings them up to $19,100 leaving them $6,570 better off. This works as well for people earning up to $40,000 under the UBI system where they would be $620 better off.

The change comes at when people earn above $70,000; they are currently only taxed at 33% on every dollar over 33%. Under the new system there would be a loss for people over $70,000, but proportional to their income it is not a huge loss. This comes with its own argument that is prevalent from the right: “people who earn more have worked hard for that money and should not be unfairly taxed”. But what this fails to recognise is that firstly the current system disproportionately disadvantages people earning under $70,000, and secondly that without the government providing these people the environment to succeed they would not have had the possibility to earn large amounts of money. In my opinion they have a responsibility to give back to the country that has provided them this profitable environment. I think that this is a good balance in making sure that the top few percent give back, but not discourage people from succeeding.

The last big reason as to why I see UBI as a positive policy is that it encourages private enterprise and the startup of small business. It has been shown that when people have a guaranteed income they are more likely to take the risk in starting a small business. While people may argue that people will stop working and we will end up with a society of welfare bludgers, this will only be a small percentage as it is now. I see it as the price we pay for living in a free society and making sure that everyone has the opportunity to succeed if they so wish.

The points I have made here do not take into account the many policies that would have to change in order for this to work. It is simply so that people can see that there are other options out there. I mentioned at the start of the piece that the Greens want to increase the top tax bracket to 40%, and this may be a good number, and may fix the some of the problems we face. But what I think the biggest point is that there needs to be a balance between providing for the poorest in society and fostering economic growth.

If something is to change then we have to understand that it will not be fast, it will take time, but starting soon is the key.

I encourage anyone interested in the idea of UBI to look into this and the other possibilities out there (for example, negative tax). If we are to find a solution to the growing problem of financial inequality then we need to start educating people now, so that we can equalize the system in the future.

Thomas Vautier is currently studying a double major in International Relations and Political Science at the Victoria University of Wellington.  

1 comment:

  1. Some more reasons for it:
    *The entire industry surrounding the management of who is allowed enough to live on would be much reduced. No one would be chasing you to take a stupid job with the threat of a benefit cut. I don't think it's at all tenable to suggest that the UBI could replace every benefit, though. Some people need more money - think solo mum with 4 kids.
    *It's money that would be mostly neutral to people beyond a certain income, if accompanied by tax changes. But to the enormous number of people who are actually poor, it would be a whole lot more money. Their quality of life would be hugely improved.
    *Poor people generally spend their money, because they have to. This would be extremely stimulatory to the economy.
    *Tertiary education would be far more accessible, and without as much of the lasting drain that indebting students makes. And it would not be just about getting a job, either. People might even return to treating education as a good in itself (which it actually is), rather than a means to an end.
    *It might make the necessity of a minimum wage less. Which could mean more employment without more hardship. It could also mean that the shitty jobs have to actually pay MORE because people won't do them otherwise. Which is actually fair.
    *Being a beneficiary would not be something carrying stigma any more than claiming one's superannuation is.
    *There might be less homeless bums trying to wring money out of me for washing my car window.