Universal Basic Income for Tax Reform
Myles Bayliss
Abstract:Universal Basic Income (UBI) has existed in various theoretical and practical forms for several hundred years. Whilst UBI is typically associated with welfare and social security policy, UBI concepts can also be used for tax reform. Coupling these concepts with several key reform concepts could result in a fairer and more efficient and effective tax system. This article will examine what areas of tax systems could benefit from UBI -driven reform.
Introduction
Universal Basic Income (UBI) is typically associated with welfare and social security, however an alternative use for UBI is tax reform. Coupling UBI concepts with tax reform could be highly beneficial for the tax system resulting in a more effective, efficient and fairer tax system. The structure of this article is as follows: firstly, a UBI will be explained, as well as the benefits it can provide. This will then be followed by a consideration of how UBI concepts can be used for tax reform.
UBI is a specific type of sustenance payment, a payment that assists the recipient in affording her basic necessities. Other similar sustenance payment policies include: Basic Income (BI) and Guaranteed Annual Income (GAT). For simplicity, this article will only use UBI as catchall term. The key factor of UBI is its universality i.e. every citizen of the nation is a guaranteed recipient regardless of socio-economic or employment status. The payments are also tax-free and are independent to an individual’s taxable income.
The idea is not a new concept, having existed for several hundred years in various forms and recently re-entering political discussion as part of the rights-based welfare movement. UBI itself is a response to the effects of wealth inequality such as lowered educational outcomes (Holmes, 2013) and overall poorer health (Karlsson et al, 2009) which UBI proponents suggest could be addressed through the targeted or wholesale adoption of a UBI program. Empirical evidence tends to support this conclusion.
At this time only ‘trial’ BI/UBI programs have been implemented. The evidence from these trial programs has been overwhelmingly positive however. A series of programs in India showed improved health and labor force participation amongst recipients with the most significant improvements occurring within traditionally disadvantaged classes such as women and the disabled (Standing, 2013). In Kenya, citizens receiving the automatic payments were found to have lower stress, improved psychological health, and lowered spending on ‘temptation goods’ such as alcohol and tobacco (Haushofer and Shapiro, 2013). In Iran, a subsidy program beginning in 2010 has resulted in a sharp decline in the percentage of individuals living below the poverty line (Salehi-Isfahani 2016) as well as wealth inequality (Soleimaninejadian and Yang, 2016). The success of the trial programs is also echoed by the Bolsa Familia program in Brazil which provides low income families with a monthly stipend for ensuring their children are vaccinated and attending school (Wentzel, 2013). Overall it can be firmly concluded that UBI or UBI-type programs have highly positive effects on its recipients.
Proponents also argue that UBI offers solutions for several of the ‘issues’ often attributed to the current welfare system. For example, by eliminating welfare payments, UBI provides a greater incentive to work rather than to not work. This in turn can reduce welfare program expenditure by a government and avoid the poverty trap of traditional welfare systems (Muller, 2013). Having a UBI system in place may also provide an economic stimulus as citizens have more disposable income because expenditures on basic needs are met by the UBI (Wright, 2005).
UBI is not without its criticisms, particularly the method of funding the program and its impact on employment and the economy. For example, during the Iran trials, prices for bread and energy increased by large factors (Salehi-Isfahani and Mostafavi-Dehoozi, 2017). However this inflation may have been exacerbated by international sanctions and general fiscal irresponsibility of federal government at the time of introduction (Salehi-Isfahani, 2016). In terms of UBI effect on employment, in contrast to the positive impacts on labor force participation in the India and Kenya experiments, the 1970s Manitoba Basic Annual Income Experiment (Mincome) resulted in an 11.3 percentage point reduction in labor force participation by recipients (Calnitsky and Latner, 2017).
It is unclear why the Canadian experiment had a negative impact on labor force participation whilst the Indian and Kenya experiments had a positive impact. This may be due to the differences in socio-economic conditions between countries such as Canada and India/Kenya, however as the Mincome experiment has been the only UBI-type experiment in the western world, any conclusion based on the Mincome data is largely speculative. Several countries such as Finland and the Netherlands have recently begun UBI trials which could provide better insights into the impacts of UBI on a first world economy.
In terms of funding a UBI, the major issue is the total cost (Sampford, 2016). For example, if the US were to implement a UBI providing $1,000 per month (approximately the level of the poverty line) to all adults, it would cost the federal government approximately $2.7 trillion annually or 14.5% of the US GDP. This figure does not consider the costs of administering the UBI nor population fluctuations and the impacts of ‘greying’ populations. The obvious source of funding is tax revenue. However as the cost of providing a UBI would be more than the combined cost of Federal Social Security, Medicare and Veteran’s Benefits (United States Office of Management and Budget, 2016) this would not be feasible or sustainable. As such, cuts in government spending, particularly a reduction or elimination of income support programs and other government subsidies may also partially address the funding issue.
