Voters in Hamburg have rejected universal basic income. Many economists would agree with them, Ansgar Wohlschlegel says

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.