In the run-in to the UK general election in May, discourse has emerged over the Green party’s policies as they have gained increasing support in the polls. Arguably the most discussed policy of theirs has been their support for a citizen’s income (also known as a basic income). Donald Hirsch, writing from the well-respected Joseph Rowntree Foundation, contributed to this debate with a recent policy paper titled “Could a ‘Citizen’s Income’ Work?”.
Hirsch’s paper provides an excellent analysis of the current debate over the logistics of the citizen’s income debate as well as the philosophical reasons to support or reject it. However, his key points concern only the funding a citizen’s income. He argues that “a citizen’s income set at existing safety net levels would require the state to take about half of all earned income above existing tax and NI thresholds” (12). This tax hike would increase further if the citizen’s income absorbed Housing Benefit, which he argues remains a major question mark for any citizen’s income plan, since Housing Benefit’s inclusion in a citizen’s income would require its amount to be doubled. But are tax rates over 50 percent really that horrifying? Until Thatcher was elected the highest income tax rate bounced around 75-98 percent during the previous thirty years.
Regardless, it is unfair to assume that a citizen’s income will be solely paid for using income tax. The Green party explicitly supports a wealth tax, which would certainly go some way toward financing a citizen’s income. The Green party has promised to release a costing plan for their citizen’s income scheme this month, yet Hirsch jumped in to say it was financially ludicrous before seeing their plan.
On another note, Hirsch believes that leaving Housing Benefit separate from a citizen’s income would fail to achieve the simplicity the citizen’s income is supposed to achieve by keeping means-tested benefits in the UK welfare state. However, earlier in this paper Hirsch admits that disability benefits are left out of financing plans by the Citizen’s Income Trust because such means-tested benefits will still be needed to help those who’s cost of living are understandably higher than average. Housing is not much different. Housing Benefit is largely important in the London housing market, and it can be seen as an understandable means-tested benefit to keep. Further, I disagree with his claim that keeping means-tested benefits harms the point of implementing a citizen’s income.
Keeping means-tested benefits like Disability Living Allowance and Housing Benefit does not mean that we should abandon the pursuit of a citizen’s income completely. Implementing a partial citizen’s income—even if it means keeping a means-tested branch of the welfare state—is still worthwhile, as it will incentivize work and establish the importance of unconditional income. Simplicity is not an all or nothing goal.
My last quarrel with Hirsch regards his selective use of empirical examples of partial citizen’s income schemes throughout the world. He highlights the Namibian pilot project, Alaska’s Permanent Fund Dividend, and Iran’s cash benefit in place of subsidies. While Hirsch is correct in saying that none of these are particularly apt comparisons to the UK (the Namibian pilot gave less than $1 per day funded by donors and Alaska and Iran’s programs are funded by resource windfalls) he chose to ignore the more recent Indian pilot projects as well as the negative income tax experiments in the United States and Canada in the 1970s. The latter is a more apt comparison to the UK, since the UK, US, and Canada are all Western developed democracies, and the former proved successful enough that Guy Standing believes that the Indian government will continue to look into cash transfer programs like the citizen’s income.
A citizen’s income in the UK is not as unbelievable as one might think. Conditional cash transfer programs across the Global South have been implemented with success, showing that cash transfer programs (though largely conditional at the moment) have political viability. These programs even finance themselves to an extent since they are commonly adopted as development strategies. Across the world cash transfer programs are gaining momentum, and Switzerland is going to vote on a citizen’s income scheme in 2016.
Hirsch’s article raises many key questions and obstacles for the citizen’s income movement in the UK, but it also neglected to acknowledge the Green party’s forthcoming costing plan, the desirability to implement a citizen’s income alongside Housing Benefit, and legitimate empirical examples of partial citizen’s income schemes. Even if Hirsch disagrees with the citizen’s income as a policy, it has gained enough traction as an idea that he had to write such an article to explain its shortcomings during election season. While I agree that it remains politically difficult to achieve, I do not think he admits just how much progress has been made in the past few years of the movement.
I agree with Josh that there’s a lot of scope for considering more aspects of citizen’s income than those I covered in my paper – including the contribution that could be made by various funding sources including wealth taxes, and what previous evidence like the US negative income tax experiments might tell us about potential behavioural responses. I guess my paper was partly a challenge to the BI movement to be explicit about the very serious revenue-raising implications and to demonstrate how the money can be raised and society persuaded to support the considerable redistribution required. The way I approach this in my paper is influenced by the way this is presently being presented in the UK debate, including suggestions by some influential commentators that seem to me wholly unwarranted, such as that the scheme can be done in a cost-neutral way, that it could be funded purely by abolishing income tax allowances and that Alaska has done something similar to what is being suggested by the Greens and others in the UK. I hope I have shown that a citizen’s income requires some significant trade-offs that its supporters need to argue boldly for, not pretend they do not exist.
In making this argument, it’s important to approach the facts with care. Yes, Josh, if and when a costed wealth tax has been proposed by the Greens and others, let’s see how much of a contribution it would make and what it will mean for those paying it. A few of your assertions were not quite accurate. Disability Living Allowance and other payments to support the additional cost of disability are NOT means-tested in the UK. Housing Benefit is not only relevant for Londoners but, because other benefits do not cover rental costs, is essential for anyone not working or on a very low income, and the vastly different cost of housing in, say, Guildford and Gateshead would make it hard to introduce a standard allowance. Income tax rates did reach 98 per cent on top incomes (including the investment income surcharge). in the late 1970s, but a 50 per cent rate on ALL income would be unprecedented: the basic rate of income tax plus National Insurance Contributions, which is currently 32 per cent, was only 39 per cent in 1979 – so a basic rate above 50 per cent would mean going back to that that time and almost twice as far again. Finally, whatever the 1970s North American experiments tell us about behvioural responses to a negative income tax, these very small-scale payment schemes affecting only people on low incomes did not test the political acceptability of paying for such measures, which is in my view the biggest obstacle.
Whatever my doubts about a citizen’s income, you are right that I should not imply that it is “financially ludicrous”, as you put it, when it’s obviously feasible if there is a politically acceptable way to pay for it. If a high degree of scepticism came through in my paper, this is because I fear its growing popularity has taken place largely in ignorance (by the wider public) of the huge costs involved. :Let’s by all means have an open debate about how these costs can be covered, and about what it will take to persuade society that this is worth paying for.
1. I’m increasingly convinced that a negative income tax/basic income guarantee makes sense. IMHO, it’s not unrelated to Lincoln’s Homestead Act of 1862 which was basically an almost free land give away. Unfortunately, the land belonged to Native American tribes, but aside from that it was a gift and spurred US economic development.
2. Warren Mosler, @wbmosler would most certainly disagree that federal taxes have to be raised to fund a federal negative income tax. Does anyone remember all the cars that the US had to sell to pay for World War II? Nope, no one does. Per the link to New Economic Perspectives above, and Modern Monetary Theory, #MMT, it’s not the federal budget that has to “balance,” it’s the three economic sectors, private (domestic), foreign, and public. Economist Steve Keen makes the identical case in Forbes, “Beware Politicians Bringing Household Analogies” http://www.forbes.com/sites/stevekeen/2015/01/14/beware-of-politicians-bearing-household-analogies-3/
Per Mosler: “(Federal) Taxes For Revenue Are Obsolete”
“…I was recently forwarded an article entitled Taxes For Revenue Are Obsolete, written in 1946 by Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York and published in a periodical named American Affairs. While Ruml was writing about the merits of corporate taxes, it is his discussion about how the function of taxes changed after the nation exited the gold standard that make this a must read. As Ruml’s stated, with an “…inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue… It follows that our Federal Government has final freedom from the money market in meeting its financial requirements… All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.” He goes on to explain how, with Federal spending not revenue constrained, the first function of taxation is to regulate the value of the dollar, which we know as regulating inflation. The notion of the Federal government ‘running out of money’ and ‘dependence on foreign borrowing’ as well as ‘sustainability’ is categorically inapplicable. ….”
http://www.huffingtonpost.com/warren-mosler/taxes-for-revenue-are-obs_b_542134.html
As Ruml, and later Mosler noted, state and local governments are different. Their budgets have to balance.
If an economy has demand-pull inflation (too many dollars chasing too few goods and services), than raising federal taxes is an option. That’s one of the primary purposes for federal taxes, to manage aggregate demand.
IMHO, Mosler argues compellingly in “Demand Leakage, the 800lb Economist in the Room”
“…Demand leakages are unspent income. For a given currency, if any agent doesn’t spend his income, some other agent has to spend more than his income, or that much output doesn’t get sold. So if the non government sectors collectively don’t spend all of their income, it’s up to government to make sure its income is less than its spending, or that much output doesn’t get sold. This translates into what’s commonly called the ‘output gap,’ which is largely a sanitized way of saying unemployment.
And with the private sector necessarily pro cyclical, the (whopping) private sector spending gap in this economy can only be filled with by government via either a (whopping) tax cut and/or spending increase (depending on one’s politics).
So wherefore the ‘demand leakages?’ The lion’s share are due to tax advantages for not spending your income, including pension contributions, IRA’s and all kinds of corporate reserves. Then there’s foreign hoards accumulated to support foreign exporters. And it all should be a very good thing — all of that net unspent income means that for a given size government, and a given non government rate of credit expansion, our taxes can be that much lower. Personally, I’d rather have a tax cut than a policy to get other people to spend their unspent income or borrow more. But that’s just me …”
http://www.huffingtonpost.com/warren-mosler/demand-leakages-the-800lb_b_1646916.html
for much, much lower federal taxes. Since we don’t have demand-pull inflation, the last thing we want to do is depress aggregate demand. That’s what’s driving unemployment and downward pressure on wages.
OT, apologies if you’ve already seen this 2013 article about conservatives and libertarians who support a negative income tax http://economix.blogs.nytimes.com/2013/12/10/rethinking-the-idea-of-a-basic-income-for-all/?_r=0
Below is a 2.5 page pdf from Bard College Economics professor Pavlina Tcherneva, Ph.D. pdf.
@ptcherneva
http://pavlina-tcherneva.net/
She doesn’t explicitly mention a basic income guarantee, but imho she’s open to the possibility.
“…And the third question should be “Should the government spend willy-nilly on whatever it pleases since it doesn’t face involuntary default?” and the answer to that question is most definitely NO. Not all deficits are created equal: some create more inequality and more rentier income, as it seems to be the case in the current crisis. Others can cause inflation. Yet others can directly create jobs, public investments, and productive capacity without generating inflationary pressures. In sovereign currency nations, a truly responsible government spending is one that is measured both by the debt-(or deficit)-to GDP ratios, but by the real impact of that spending on the economy–job creation, poverty alleviation, stable prices, income distribution, social goods provisioning are all good measures for assessing how responsible government policy has been.””
http://pavlina-tcherneva.net/2-key-charts.pdf
Once economists understand the fiscal realities, great things in addition to a basic income guarantee, such as Warren Mosler’s health care plan may become possible.:
“Everyone gets a ‘medical debit card’ with perhaps $5000 in it to be used for qualifying medical expenses (including dental) for the year.
Expenses beyond that are covered by catastrophic insurance.
At the end of the year, the debit card holder gets a check for the unused balance on the card, up to $4,000, with the $1,000 to be spent on preventative measures not refundable.
The next year, the cards are renewed for an additional $5,000.
…
http://moslereconomics.com/2009/03/02/mosler-health-care-proposal/