universal basic income: an introduction

The idea of a universal basic income (UBI) has been floating around for some decades, but the noises have grown louder in recent years, it seems to me, as industry and agriculture have become increasingly mechanised, at least in the developed world. This means, I’d suppose, that those with the capital to harness the technology for profitable ventures would be more able to concentrate the wealth in their hands (and in the hands of venture capitalists who back them) while the less advantaged who’ve previously relied on working for a living are left at a loss, in more ways than one.

Right now I know very little about UBI. How would it be funded, is it applied nation by nation, are there different projected plans available, has it ever been tried anywhere, what are the upsides and downsides, who’s advocating it? And so on. There are probably more questions than answers at the moment, but considering the huge gaps occurring between the rich and the poor in developed countries, and the rise of homelessness often going hand in hand with rises in GDP, this kind of apparently simplified safety net is surely at least worth a look.

First, without doing any research, I assume that ‘universal’ really means ‘national’ or ‘state’ – we’re not going to get this organised on a global scale. The second assumption is that such payments would have to come out of the taxation system, as I can’t think of any alternative. This would seem to add up to quite a bill, depending on the amount allocated on a per capita basis. There would also be offsets, such as the elimination of much welfare bureaucracy, which would perhaps throw more people out of work. There are also arguments as to whether this would amount to ‘sit down money’, or would incentivise people to be more active in business and creative fields. 

So do we have any evidence about costs and benefits? Has this approach been trialled anywhere? Well interestingly, a small-scale 3-year trial is being carried out in Fife, Scotland, very close to where I was born in Dundee. Reporting from June 2020 has it that the trial, involving only 17,000 Scots, involves a one year preparation period and an estimated minimum cost of £186m, so it will be a while before we see any results, if indeed the plan goes ahead. There are plenty of naysayers of course.

A more comprehensive test is already under way in Spain, where some 850,000 households have been supported with a ‘guaranteed minimum income’ by the leftist government since June 2020, at an estimated cost of 3 billion euros annually. This isn’t strictly a trial – the government plans to maintain the system indefinitely (meaning probably until a right-wing government takes over), but of course they’ll be monitoring it in terms of reducing poverty and boosting employment, health and other indices.

The current pandemic, unsurprisingly, has brought the UBI and it variants to the forefront once more, but it has been mooted, and tried to varying degrees, in the past. Brian Donaghy, in his booklet on basic income, gives a brief overview of these small-scale trials, in Canada, Switzerland, Finland, Namibia, Kenya and the USA. Unfortunately some of them were torpedoed by political opponents before much meaningful data could be gleaned, but one of the most interesting findings they had in common was an increased sense of good health and well-being felt by recipients. 

The fact is that, over recent decades, the term ‘welfare’ has developed distinctly negative connotations. Making the income truly ‘universal’ within a whole nation or state, rather than targeting those below a certain income level, as is the case in the Spanish trial, is really the only way to remove the idea of ‘welfare’ from these payments. 

Now, in order to understand the financial and taxation implications of a UBI, I need to undertake a steep learning journey. I may also go into some personal revelations to make it clear why these kinds of payments are of particular interest to me. 

So, having read Brian Donaghy’s booklet, A basic income for Australia, I have more questions than answers. Donaghy also makes it clear that convincing politicians of the justice of such a system will be an uphill battle, especially in dual party-style democratic countries, when both sides of the political fence are more dedicated to opposing each other than to working together, which would be essential for such a system to work. 

Despite the naysayers, the UBI and its variants refuses to die, in fact it’s finding more interest now than ever before. In spite of this, it hasn’t really been given a full trial anywhere, and the public as well as politicians are very divided on the subject.

But I need to dive in on how it might work in Australia, relying on Donaghy’s booklet.

According to the Australian Bureau of Statistic figures for 2018, average annual full-time adult earnings were fractionally under $90,000 gross – an eye-watering figure to me. Donaghy sets the UBI, for calculation’s sake, at about $24,500 annually – which is approximately that of the current aged pension, and associated supplements. So this income rises to $114,500, with the extra – the UBI (which every adult gets) – being tax free. 

But here’s where Donaghy – who’s an experienced finance journalist – leaves me behind: 

The UBI replaces the existing tax-free allowances but there are no longer individual tax allowances or rebates. 

As a perennially poor person I’ve generally paid too little in tax to worry about such things. So what is a tax-free allowance? My guess is that it includes Jobseeker, AUSTUDY, the aged pension, and such payments as carer’s and disability allowances. His remark about individual allowances covers particular payments that are distinct from these general payments. 

Donaghy then goes into tax rates, which I’ve never had to think about. What I can glean is that we have sliding tax rates, like every other country. According to the Australian Tax Office (ATO) our tax rates for the 2020-21 financial year are: no tax on annual income $18,200 or under; 19% for every dollar over $18,200 up to $45,000 (that’s 19% of $26,800 = $5092). That strikes me as a pretty reasonable tax rate for relatively low income earners. The rate from $45,000 to a whopping $120,000 is 32.5%, which also strikes me as low, though I’m pretty sure that those in this tax bracket, especially at the higher end, are howling about it. The rate goes up to 37% for earnings from $120,000 to $180,000, and then jumps to 45% for each dollar over $180,000.

Donaghy suggests that the Basic Income payment will be at the tax-free threshold, which at the current tax-free rate would be $700 fortnightly – a bit low as the tax free threshold has been lowered recently. I would expect such a payment to be around $900/fortnightly, which would mean, for simplicity’s sake, raising the threshold again. Not difficult, as governments tinker with the threshold regularly.

So, how to massage the tax system to support some kind of Basic Income? I’ll write about that next time.

References

Brian Donaghy, A basic income for Australia, 2020

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