Financing a UBI/GMI

November 23rd, 2017

A couple of months ago, I wrote a post making some observations on the closely related ideas of a Universal Basic Income or Guaranteed Minimum Income. The most important was

Observation 1: Any UBI scheme can be replicated by a GBI with the same effective marginal tax rates, and vice versa

I meant to follow up with a more detailed exploration of financing issues, but all sorts of other things intervened. However, I’ve now prepared a draft, which is over the fold.

Comments and criticism much appreciated

How could a UBI/GBI be financed along with the other activities government must undertake? I’ll assume that that final government expenditure, excluding transfer payments, amounts to 20 per cent of national income, and that revenue from sources other than income tax amounts to 10 per cent of national income. That’s fairly accurate for Australia.

By thinking about the UBI case, it’s easy to work out the required tax rate. Keeping things simple, I’ll assume a single rate of taxation for all income above the threshold of 20 per cent of the average, For a UBI of 40 per cent and a net financing requirement of 10 per cent, the required revenue is 50 per cent of national income. If 20 per cent of income is untaxed, the required tax rate would 62.5 per cent. However, since those in the lowest quintile have incomes below the threshold, the proportion of untaxed income is a little lower and the required tax rate is approximately 61 per cent.

The UBI can be replicated as a GBI with the same effective marginal tax rate (EMTR). In this case, the net revenue requirement is equal to 27.6 per cent of national income, derived as the cost of the GBI (17.6 per cent), plus the net financing requirement for final government expenditure 10 per cent.
The version discussed in the previous post phases out the GBI at a withdrawal rate of 40 per cent over the income range from 20 to 120 per cent. To get an EMTR of 61 per cent, we need a 21 per cent marginal rate of income tax. For income above the 120 per cent threshold, where no GBI is received, the effective marginal tax rate is equal to the income tax rate.

The outcomes are shown in Table 2. Column 2 shows tax paid by those in equal quintile and the total revenue expressed as a proportion of national income. The revenue from income tax is 27.6 per cent of national income, which is approximately equal to the financing requirement. Column 3 shows the average rate of taxation for each quintile. Column 4 shows disposable income, taking account of taxes other than income tax, which are assumed to be a combination of fixed charges (equal for all households) and proportional taxes. Column 5 gives the shares of disposable income, after taxes and transfers

Market income Tax paid average rate Disposab
le Share of disposable income
Q1 10 0 0 44.5 11.1
Q2 40 4.2 10.5 60.8 15.2
Q3 80 12.6 15.8 74.4 18.6
Q4 120 21 17.5 88 22.0
Q5 250 100.3 40.1 132.2 33.1
Mean 100 27.6 27.6 80.0 20

Observation 4: For 80 per cent of households the required average rate of income tax is below 20 per cent. Even for those at the top of the income distribution, the average rate is only a little above 40 per cent.

The fairness of the redistribution associated with this tax-transfer system is a matter of value judgement, but it does not seem excessive to me.

Of more interest is whether an EMTR of 60 per cent is too high, and will have such adverse effects as to render the system unworkable. This seems unlikely. Under the current tax-transfer system, many households face EMTRs of 60 per cent or above because of the withdrawal of benefits and family payments.

Until the mid-1980s, the top marginal rate of income tax was 60 per cent. This rate applied to incomes in excess of $35000 (equal to about $65 000 today, adjusted for inflation). Estimates of disincentive effects are hard to make, but the economy functioned adequately. Admittedly, there was, and still is, significant avoidance and evasion of tax, but the worst abuses had been closed off by the mid-1980s. That is, we have experience of a successfully operating income tax system in which significant groups paid marginal rates of 60 per cent or more.

Taking all these factors into account, it seems clear that a UBI/GMI could be financed with EMTRs within the range of historical experience and not such as to produce catastrophic adverse incentive effects. There would certainly be some reduction in market work and more time allocated to non-market activities of all kinds (non-market productive activity, childcare housework and leisure). That’s consistent with the whole idea of a program to reorient the benefits of technological progress away from consumption and towards freedom from dependence on employers.

  1. Duncan Earley
    November 23rd, 2017 at 16:37 | #1

    Could we achieve a GMI just be removing the “look for work” component of Newstart? No change to the budget or tax rates.

    The two big issues I have with UBI/GMI are not to do with the funding, but the conditions you put on it.

    – What to do about kids? Do they get it? If so that encourages people to have more kids and how do you know that money doesn’t just get spend on drugs/alcohol/gambling?

    – What do you do about Housing? Do you provide extra money to people who aren’t in state housing? How much? Do you abolish all state housing schemes and increase the UBI?

    As soon as you start looking at these kind of issues and adding conditions to the UBI you just get back to the welfare system we already have.

  2. Newtownian
    November 23rd, 2017 at 17:33 | #2

    “Until the mid-1980s, the top marginal rate of income tax was 60 per cent. This rate applied to incomes in excess of $35000 (equal to about $65 000 today, adjusted for inflation).”

    This sounds ok but…………..

    If I recall it in the early-mid 1980s a full professor’s salary was about 35K so the top rate slug was at the margins of a pretty good living. Also I definitely remember a small bedroom house in Annandale – Inner West Sydney was about $68 K about 1985.

    Now though the 65K salary is a pretty basic research associate who still hasnt a hope in hell of affording the latter house which I would guess would now cost in the region of $1.5 million.

    I guess my points/questions here are:
    * If you can get this through John where will you hide from colleagues who will want your guts for garters when they take a massive hit.( Given the Prof salary is about 140 K now it means you are looking at a group who was originally only at the margin of the top tax rate being pushed to the point such that 60% of their salary is taxed at the top rate. You have to admit this is a big change)

    Further by that time of implementarion you will be retired and be able to say “I’m all right Jack…..I’ve retired with my bucket of superannuation which you cant touch” – Or are you planning to somehow hit the superannuants with a big new super tax too? ps should we keep working or get the living wage as a pension and even better get two full pensions without the discounting that a couple has to wear?

    (Either way I can see the mob screaming after your blood.)

    * How will anyone be able to afford a house in Sydney/would the economy be able to take the resulting crash needed to rebalance things?

    * I suggest provisionally there are two factors not covered by the above quote which appears to me more or less CPI based:

    – There is currently severe hidden inflation which the CPI fails to capture most notably housing costs at the margin (the majority of people with houses got in earlier or have paid them off and so are fine with increased house prices because their mortgages are much less. Its only those wretched avocado eating hipsters I pass each morning in their coffee shops who would get hit – but the trend is that this inequity and inflation will increasingly bite over the coming years due to the current debt trap we are in and the rebalancing act will crystalize this inflation and crash the economy – with the crash being blamed on an attempt to get a UBI).

    – There has been a big average PPP increase in wages since the mid 80s. I just had a look at the 1980 to 2011 AVERAGE change. Now I know median is more useful but the average change at least was about 100%. This explains where the money is coming from – like the academic situation where wages appear to have kept pace with GDP unlike many other areas.

    My apologies for being a little hyperbolic but I’m just offering some Devils advocate musing. But these thoughts do suggest I think your risk assessment does need a little work to highlight the downsides/destablising effects as well as the upsides. I expect you have thought of and quantified these? The trouble is some silly people might not appreciate these and suggest this is a no cost to anyone exercise.

    Maybe you could point a link to the downsides which you think are legitimate as against the howls from the righteous right which will start to accompany discussion of how to right the increasing imbalance and the viability of living wage by right versus a superdole which the opposition forces will certainly cast this in and so muddy the waters yet again.

    Dont get me wrong. A rebalancing is needed urgently. But I cant see how it will be pretty and a solution to all people other than the super rich.

  3. Svante
    November 23rd, 2017 at 18:10 | #3

    “How could a UBI/GBI be financed along with the other activities government must undertake?”

    A link to Matt Bruenig’s blog (USA) turned up in my inbox the other day. He has ideas on financing UBIs, and more “on the set of interlocking issues that affect poor and working people.”, eg

    “The UBI already exists for the 1%
    ..Even if you exclude the capital component of mixed income (since it is connected to work even if the income is not from labor) and housing rents (since these are imputed to homeowners rather than paid to them as cash), that still means that, from equity income and interest alone, the top 1% receives 7.5% of the national income without having to work for it. Put another way: the average person in the top 1% receives a UBI equal to 7.5 times the average income in the country..

    “Weird UBI Argument About Rents
    The argument is this: In fact, workers may not even see much of the benefit of their UBI check: if their new gains are simply passed on to landlords and merchants through higher rent and prices, the benefits will be entirely illusory, even as people appear to be receiving an enormous handout. … Its advocates may not realize how shocking it is because, in their mind, what they are arguing is that a UBI leads to higher rents that consume the value of the UBI. But what they are actually arguing is that a UBI increases disposable incomes and that increasing disposable incomes leads to higher rents that consume the value of the income increase. Stated this way, the shocking nature of the theory becomes clear: if true, the theory predicts that anything that increases people’s incomes is pointless…

    And this bundle of beaut ideas seems a little ripper!

    Nickel-and-dime socialism

  4. November 24th, 2017 at 03:22 | #4

    Excuse my ignorance, but what current levies disappear? Are the contributions to various social insurance schemes- in France say these are very large, as they finance health care – replaced by the new scheme, or continue as the posited 10% revenue not from income tax?

  5. John Quiggin
    November 24th, 2017 at 06:08 | #5

    @James Wimberley

    Social security and pensions are all financed out of general revenue. The only hypothecated levy is the 2 per cent Medicare/NDIS levy, which is integrated into the income tax system anyway.

  6. Luke Elford
    November 24th, 2017 at 08:07 | #6

    “Until the mid-1980s, the top marginal rate of income tax was 60 per cent. This rate applied to incomes in excess of $35000 (equal to about $65 000 today, adjusted for inflation).”

    I’m curious about this calculation.

    As far as I can tell, the 60% rate applied up until the financial year 1985-6.

    All group, Australia CPI index number, June quarter 1986: 42.1

    September quarter 2017: 111.4

    Implies $35,000 in Jun-86 = $92,600 today.

  7. Smith
    November 24th, 2017 at 08:44 | #7

    Why does all of this have to be financed by income tax? Why not a higher GST rate? The Scandinavians, who have very generous welfare if not actually UBI, have GST (equivalents) of around 20%. You can finance a lot of basic income redistribution by taxing consumption. You could also be creative and raise revenue with a carbon tax.

    60% is a pretty high EMTR. On Luke Elford’s figures it applied in the 80s only to incomes that today would be in the top 5% or thereabouts. Whatever the disincentive effects were then, they aren’t comparable to what they might be applied to everybody today.

  8. John Quiggin
    November 24th, 2017 at 10:45 | #8

    @Luke Elford

    That sounds more plausible. I’ll go back and check my figures.

  9. John Quiggin
    November 24th, 2017 at 10:47 | #9

    @Duncan Earley

    Gradually relaxing work tests is the path I’ve proposed towards a GMI. First step might be allowing voluntary work in place of market employment.

  10. Black cat
    November 24th, 2017 at 10:54 | #10

    This is an excellent example. The obvious conclusion is to transfer some of the burden of taxation from labour to property. This would also improve incentives. We should incentivise labour—not speculation in property.

  11. Black cat
    November 24th, 2017 at 10:55 | #11

    @Smith . Why not a tax on property?

  12. Troy Prideaux
    November 24th, 2017 at 10:57 | #12

    @Black cat

  13. Smith
    November 24th, 2017 at 11:48 | #13

    @Black cat

    If by a tax on property you mean a wealth tax – sure, why not?

  14. Collin Street
    November 24th, 2017 at 21:09 | #14

    “Why does all of this have to be financed by income tax? Why not a higher GST rate?”

    Because consumption taxes are stupid.

    This is actually arguing well beyond my qualifications, but I’ll try and give the outline as I understand it. The traditional economic view focusses on “deadweight loss” of tax rates, which is… not something I can explain, but it’s the impact of taxes on prices and supply/demand curves which means that under a tax less is produced/consumed than without. It’s not _linear_; it varies roughly as the square of the tax take on each particular class of transactions. Which means, raising the same money from a few concentrated taxes has more negative impacts on the economy than a low tax rate on lots of things. This is “base broadening”, and this argument is correct/solid/indisputable insofar as it goes [note the neglect of distributional issues, which… you shouldn’t neglect].

    The next step is where things go wrong. The traditional framework has it that “consumption taxes” tax “everything”, but income taxes just tax “income, so income taxes are more narrowly-focused and are Bad. This is bogus, because:
    + consumption-tax systems never tax everything; there’s always some item or another that isn’t taxed, and
    + Income taxes tax all expenditure, they just put the paperwork on the counterparties to the transactions: all income comes from expenditure. This means they’re actually broader than consumption taxes, can be run at a lower rate and give less negative distortion.

  15. Moz of Yarramulla
    November 25th, 2017 at 09:33 | #15

    @Collin Street

    That presumes that all income is taxed, when we have copious evidence to the contrary. It’s no longer just a few rich people diverting money into tax havens, and some directors using family trusts to get round the worst of it. It’s wholesale foreign ownership via tax havens so that a big chunk of spending doesn’t appear as income at all (as far as our tax system is concerned).

    When that “missing millions” was 1% of the economy we could afford to write it off, but when it’s 10% and growing rapidly we need to ask: at the extreme, just how far could this “hack” of our tax system be taken? We already have taxi drivers (for example) being paid by untaxable corporations and the ATO being reduced to asking them politely if perhaps they might consider voluntarily declaring some of their income please. Could that arrangement be extended to nurses, bus drivers, baristas (has it already…)?

  16. Collin Street
    November 25th, 2017 at 09:58 | #16

    And they do the same thing with consumption, Moz. Have a look at the airplane-leasing arrangements run out of the Isle of Man.

    If we’re talking about radical reshaping of the tax system then we’re… talking about radical reshaping of the tax system. If we’re in a position to do that then definitionally the old barriers to change have gone. The sociopaths among the ultra-rich do not want to be taxed. There’s no special tax-structure magic sauce that will leave them happy with an increased tax burden; any attempt to increase their effective tax rates, be it through increased GST or income tax, will be met with the same opposition.

    Either we try and tax them and they throw a tantrum and we overcome that, or we don’t tax them and society collapses. Any tax plan that involves fixing the low burden on the wealthy must, definitionally, have overcome their opposition before it can be implemented; this means “opposition of the wealthy” is simply not an issue in the design of tax plans, only in their implementation.

    [social problems are like earthquakes: things shift frictionlessly until something catches, and then the pressure builds up until the strength of the sticking point is overcome. But to stand against social change you need social strength: fixing social problems largely involves kneecapping socially-powerful people.]

  17. Moz of Yarramulla
    November 25th, 2017 at 10:08 | #17

    Collin Street :Either we try and tax them and they throw a tantrum and we overcome that, or we don’t tax them and society collapses.

    Yep, exactly.

    I was more trying to point out that those tax problems are being democratised/inflicted on the poor as well – Uber pay their ‘small business owners’ in a way that leaves each individual driver to decide what fraction of their paltry income to declare to the ATO, and very deliberately don’t provide assistance to them (because pointing out all the business expense deductions would make it obvious just how little income is left afterwards).

    We desperately need to fix that, and the very rich (both people and corporate-people) will be very, very upset.

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