By Ansgar Wohlschlegel*
Universal basic income (UBI) has supporters across the political spectrum. The idea is that if every citizen received a payment from the state to cover their living costs, it this will allow them the freedom to live as they choose.
UBI could, for example, let people decide whether to work and let them live in dignity after AI has made their labour redundant. Everyone gets the transfer, so the bureaucratic costs of monitoring who is eligible are removed. At the same time, it seems like a just arrangement as taxpayers also receive their fair share. What’s not to like?
But voters who turned down a UBI pilot in a recent referendum in the German city of Hamburg apparently found something to dislike. A frequent argument against UBI is that recipients will decide to work less. This in turn will make labour (and consequently labour-intensive products) more expensive.
Indeed, a recent study on a UBI experiment has found that recipients of an unconditional monthly transfer of US$1,000 (£760) were significantly less likely to work. And if they did work, they put in fewer hours than a control group who received only US$50 per month.
Supporters of UBI may still argue that the increase in recipients’ wellbeing reported by research is worth these mild economic costs. However, the most striking costs of implementing UBI in practice are often overlooked. If a country implemented a UBI on a large scale, the money to be distributed would have to be raised via new taxes.
The Hamburg pilot would have required public funds to the tune of €50 million (£44 million). Paying out the monthly US$1,000 from the US study to all 55 million adults in the UK would require the government to raise an extra £500 billion per year to fund this scheme.
But why should we care about the public funds needed to finance a UBI scheme? After all, the whole point of UBI is that these funds are going to be equally distributed among everyone. So isn’t this just some rearranging of money from some rich people to the less well-off?
The simple answer is no. In practice, taxes are always based on some economic activity. If I earn more labour income, I will pay more income tax. If I spend more money at the grocer’s, I will pay more VAT. Income tax reduces my compensation for the leisure time I sacrificed and makes leisure artificially more attractive as compared to working.
All this will affect my decision on how much to work, and means that decision will differ from what I would do if there were no taxes. Economists call this a distortion.
Counting the costs
Due to the distortion that most taxes create, raising public funds imposes costs on society over and above the amount of the money to be raised. One could think of this as if the tax was water that the taxman taps through a leaking hose – some of it will be lost before it is collected.
For instance, economists estimate for the UK that this distortion imposes costs between a tenth and a quarter of an additional pound raised in a proportional increase in labour income tax.
To imagine what this means, suppose the UK wanted to replace the current universal credit system of welfare benefits with a UBI that pays every adult citizen the standard universal credit allowance of £400 per month.
Imagine you are a middle-income taxpayer whose monthly income tax bill would rise by £400 to finance this scheme. Although it might seem fair that you also receive the same transfer as everyone else, you are no better off than you were under the old system due to the tax increase.
Even worse, this extra tax makes working less attractive for you, as explained above. This distortion makes your labour supply choices less efficient. It implies that this imposes further costs of £40-£100 on society.
The total funds needed to pay £400 per month to every adult in the UK is £22 billion, compared to the £7.3 billion that the government currently spends on universal credit. This means (based on the example above) that the extra funds needed for a UBI of that size would impose a loss between £1.5 billion and £3.7 billion per month purely due to the distortion that raising these funds creates.
Pilots on UBI typically distribute money that was gained through a windfall such as a donation. Consequently, studies based on these events focus on the effect on the people receiving the UBI transfer. However, governments cannot rely on windfalls – and the costs of raising the funds needed to implement a large-scale UBI system cannot be ignored.
Economists aren’t all naysayers against redistribution. Redistribution is an important feature of a fair society. However, there’s a strong arugment that UBI is a bad way of achieving this.
Instead, governments should aim to avoid taxes that distort behaviour. A carefully designed means-tested benefits system can have the same redistributive effect as UBI – at less cost to the state.
*Ansgar Wohlschlegel, Associate Professor in Economics, Swansea University.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
15 Comments
"A carefully designed means-tested benefits system can have the same redistributive effect as UBI – at less cost to the state" - more cost to the state as there is a large cost in determining who should receive it.
In the 2023/24 financial year, the Ministry of Social Development's (MSD) departmental operating costs were budgeted at approximately $1.7 billion. $340 per NZer per year.
Then there is also the cost of having a progressive tax system: tax codes, secondary tax, etc. If everyone got a UBI, you could argue a progressive tax system wasn't needed, we could have one flat tax rate (which would need to be pretty high to pay for the UBI). Maybe you only get to keep 50c in the dollar, but remember your basic living costs are already taken care of.
Would people work less with a UBI - only if the UBI is set fairly high I imagine. If it was set at a level where the average Joe ends up about the same (gets the UBI but pays more in tax), they'll probably work the same amount as they need that much money to maintain their current lifestyle. Potentially dole bludgers would work more, you get to keep the after tax money for every hour you work and you don't lose your UBI like you do the dole. Most middle class and above will still work the same hours to get ahead more. Many of them could already choose a basic lifestyle and less hours but don't. Young kids may suffer - if you can leave school and get the UBI (which would seem like a lot of money at that age), why work. Maybe the UBI payments are lower for under 30's.
"If every citizen received a payment from the state to cover their living costs, it will allow them the freedom to live as they choose"
And the majority, (not all) will choose to enjoy life over working. This will result in far less productivity and also far less government earnings to pay for everything including the UBI. Imagine trying to get anything done when 80% of the population doesn't work because they don't have to. Why oh why do we try to reward and encourage laziness ?
Indeed, a recent study on a UBI experiment has found that recipients of an unconditional monthly transfer of US$1,000 (£760) were significantly less likely to work.
Pretty much anyone that works full time now could cut down their hours and still receive a basic income, yet most choose to maximise their earnings.
"Why oh why do we try to reward and encourage laziness ?"
The laziness is already encouraged by the welfare system. A UBI removes the abatement rate for those that are already lazy, it should in theory encourage them to work.
Yet, below you write that a main downside of UBI is that it's: "Hard to get young people to start work when they get a free ride."
That contradicts your post above, and agrees with my view.
In my experience most UBI proponents want it to be funded by non-distortionary revenue such as a land tax or natural resource dividend. When you have that the UBI actually becomes much less distortionary than our current system because you don't lose the UBI when you work. Under our current system many people are paying marginal tax rates of 50% or higher because of the way benefits are withdrawn as you earn more UBI would fix that.
This seems like a weird and misleading argument against UBI and whilst the author is not wrong that many economists are sceptics, I don't think it's for the reasons laid out here. For most economists it simply comes down to "can we afford it?".
No I reckon the economists are more of the yvil variety, can't get past the rewarding laziness philosophy. Very puritanical.
Which is nuts, because it's the current system that rewards laziness by only paying people if they don't work.
"it's the current system that rewards laziness by only paying people if they don't work"
I'm pretty sure that people who work also get paid, and they get paid more than people who don't work. What the heck are you talking about ?
As I said above, you don't need a progressive tax system with a UBI, as the UBI is essentially a massive tax free threshold. You can pay for it by charging the full 39% or more on every dollar earned.
A UBI has a lot of benefits. The big downsides I see are:
- Potential for people to work less (debateable IMO)
- Is it distributed per person, per couple, per family, etc? Anything more complicated than per person will create big overhead costs in enforcement, but per person isn't exactly fair.
- Hard to get young people to start work when they get a free ride.
There's been a variety of trials and studies done over the years. The general consensus is they have no or low impact on employment participation.
But also, there are immediate benefits to implementing one, but that they taper off over time.
Essentially though, the societal model of small households of people fending for themselves amoung a larger population is very inefficient and hard to sustain equitably. If youre in a village, and you're the fishmonger, the ironmonger is unlikely to have much of an advantage over you. If you're a minion in a city doing your average wage job, the providers of everything else you need to survive, have you over a barrel.
I would rather have zero income tax than a UBI. You work you get to keep all the remuneration you earned. You don't work, you get nothing.
Why not address the real problem....make a reasonable period of work (both in terms of weekly/annual hours and total years working) provide a comfortable standard of living rather than the disparate levels of compensation currently in play that occur irrespective of contribution.
That's been tried many times.
It's usually substandard to what we have, and the state stops people leaving by force.
It has?...where and when?
Oh, thats right, in most western democracies from the end of WW2 till the 80s
So you want to invent a time machine.
That way of life was mostly via happenstance, not design.
Or it demonstrates that your claim is false ...no time machine needed, just a basic understanding of reality (and vested interests)
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