I recently had a letter published in the Guardian, here. I hacked it down considerably though to get under the word limit though. Below is a slightly more extended version. (I will spare you the original, even longer version!)
Dr Tom Holden
School of Economics, University of Surrey, Guildford, GU2 7XH
Monday’s Guardian contained a discussion of a new paper from Compass on Universal Basic Income (UBI). All of that paper’s calculations are predicated on changes to taxes and benefits having zero effect on labour supply decisions. Aside from being wildly implausible, such an analysis removes the key benefit of a UBI, that, if properly constructed, it increases labour supply, particularly amongst low income households.
The existing system creates a “benefits trap” where the removal/tapering of benefits means that the effective marginal tax rate can be astronomical on low incomes. While Universal Credit aims to smooth this, the tapering still leads to high effective marginal tax rates for some low earners. Indeed, IFS research suggests that around 700,000 still face effective marginal rates over 70% even under Universal Credit. By making benefits payments unconditional on income or employment status, a UBI solves this problem, bringing people back into the labour force.
UBI also enables simplifications to the tax system which reduce its administrative cost, enhance work incentives, and increase its fairness. The complications of the existing tax and benefit system both make it hard to administer, and mean that individuals cannot readily calculate how a change in their situation will change their tax liability. The Mirrlees review makes assorted wise suggestions for simplifying the system, but the presence of a UBI would enable us to go further, with a switch to a flat income tax that would also replace National Insurance. The system would still be progressive overall, thanks to the UBI payment being far more significant for people at the bottom of the income scale.
UBI would also enable us to increase VAT in a progressive way. In particular, a rise in the UBI level funded by a rise in VAT would leave those at the bottom of the distribution unambiguously better off. While reporting often focusses on wealth or income inequality, these are undesirable only to the extent to which they lead to consumption inequality, which VAT tackles directly.
In the Compass paper, much is made of the fact that their system leaves most groups with higher income. They do this by preserving virtually all of the complexity of the existing tax and benefit system, while adding additional taxes on the rich. Even aside from complexity considerations, this is fundamentally the wrong approach. Firstly, under a well-constructed UBI, average unemployment durations will be shorter due to increased incentives to work, and the net income of those on the minimum wage will be higher. Both facts mean self-insurance through savings will be more feasible, hence it is appropriate that the unemployed have lower income under a UBI than at present. (To support this, by default UBI payments should be paid into a government provided current account paying the market interest rate.) Secondly, the introduction of a UBI gives an opportunity to wipe clean the old inconsistencies of the tax system, which should not be wasted. Finally, there is no good reason why the cost of introducing a UBI should fall only on those with the very highest incomes. UBI is about protecting the very poorest in our society. It is only fair that these costs should be borne by those with middle incomes as well.
In the past, UBI has been advocated by figures across the political spectrum. It is vital that the progressive centre reclaim this idea before it becomes permanently tied to out-dated views from the far left.
Dr Tom Holden
Lecturer in Economics, University of Surrey