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Basic or universal? Pathways for a universal basic income

The idea of a universal basic income (UBI) has been around for a long time. However, it has seized the imagination of large sections of the public only very recently, in the wake of the Global Financial Crisis (GFC) and the subsequent political upheavals.

Basic income concepts have been advanced in a range of forms, and in support of radically different political agendas. As a result, it has acquired a highly disparate group of supporters and a disparate group of opponents. For example, the idea of a negative income tax is most commonly favoured by advocates of free markets, while the left has been more attracted to a universal payment or ‘demogrant’. More incremental reform programs have been associated with the concept of a guaranteed minimum income.

A crucial but not well understood starting point for analysis is that, when fully implemented, all these proposals are equivalent in terms of their effects on the ultimate distribution of income. Any universal grant financed by taxation can be replicated by a negative income tax, or by a means-test guaranteed minimum income.

The sharp differences between advocates of different versions of universal basic income reflect the broader political visions with which they are associated and the rhetorical framing of the proposals. For a variety of reasons, many of the most ardent supporters of a universal basic income are more excited by the first term, ‘universal’, than by the second, ‘basic’. ‘Basic’ reflects the idea that everyone should receive a payment, even if it is initially too small to support an adequate standard of living. However, as will be argued in this chapter, any feasible route to a UBI must begin by focussing on ‘basic’; that is, on ensuring that all those whose market income is inadequate receive enough to provide a basic standard of living.

Varieties of universal basic income

This section begins by defining the three versions of universal basic income: a guaranteed minimum income, a negative income tax and a universal grant. Section 2.1 begins with the observation that, except for the age requirement, Australia’s retirement income system meets the requirements for a UBI. The age pension is set at a level sufficient to lift all people of eligible age out of poverty. Concessions on superannuation mean that virtually everyone receives public support equal to, or greater than, the value of the pension. In these respects, the age pension contrasts markedly with other existing benefits. Section 1.3 provides the starting point for any comparative analysis, namely, a demonstration that any universal grant financed by taxation can be replicated by a negative income tax, or by a means-tested guaranteed minimum income.

Definitions

The core feature of any UBI proposal is an unconditional commitment to ensuring that all members of the community have an income sufficient to sustain a basic standard of living that the community has agreed is acceptable.

A universal basic income is an unconditional amount paid to everyone in the community. The UBI could be paid to individuals or families, and could be varied to take into account special needs such as disability.

A guaranteed minimum income (GMI) is a policy that ensures that everyone in the community receives an income sufficient to sustain a basic standard of living. Although a UBI meets this criterion, a GMI is typically assumed to be paid only to those whose market income is inadequate.

A negative income tax (NIT) is a specific way of implementing the GMI, with a tax schedule that includes a positive payment, equal to the guaranteed minimum for those with zero income. As income rises, the payment is reduced pro rata until income reaches the point where positive amounts of tax must be paid. Commonly, the tax rate is assumed to be flat. The NIT is most closely associated with free-market economists such as Milton Friedman, its primary appeal being that it would replace social welfare payments.

Finally, a universal grant, sometimes called a ‘demogrant’, is an unconditional payment to all members of the community. Advocates of universal grants commonly use the term ‘universal basic income’ to describe this policy and claim that alternative versions such as GMI and NIT cannot properly be described as UBI policies. While rhetorically effective in some contexts, such a claim is not helpful as a starting point for analysis, since it constitutes an argument by definition rather than a demonstration that a particular version of the policy is superior. Moreover, the fact that all of these policies are (or may be made) effectively equivalent in terms of their effects on the distribution of income, as shown in Section 3.1, casts doubt on claims that seem to imply a fundamental difference between them.

A universal grant may be of any size and need not be large enough to sustain a standard of living. The Alaska Permanent Fund Dividend, supported by oil revenues, is an example. The fund, which began operations in 1982, paid out about US$2,500 to every Alaskan resident in 2015.

Retirement income

As an example of a commitment to provide a basic income, consider retirement income. In Australia, as in most developed countries, everyone who has reached a certain age receives an income sufficient to keep them out of poverty, at least according to generally accepted measures such as the Henderson poverty line. The basic commitment is implemented through the age pension, which is set, for an individual, at 27.7 per cent of Male Total Average Weekly Earnings (MTAWE)¹. Further adjustments are made for differences in circumstances. Most importantly, recipients who rent privately receive assistance that depends on their household structure and rental payments.

The age pension is subject to a means test on income and assets. However, the thresholds are high enough, and the clawback rates low enough, that anyone for whom they are relevant can attain a standard of living comparable to that of typical working-age households. Moreover, taking superannuation concessions into account, the total value of the benefit provided to ‘self-funded’ retirees exceeds, in most cases, the value of the age pension. The means test simply limits double dipping.

The social commitment to provision of a basic income does not extend to people of working age, or to children. Social security benefits for these groups are conditional on stringent tests for disability, active job search and other factors, as well as income and asset tests that can only be resolved positively by people below or near the poverty line. Moreover, most benefits are fixed at levels too low to keep recipients out of poverty. In particular, the unemployment benefit, now called NewStart allowance (the similarity to Orwell’s Newspeak is presumably unintentional) has been frozen in real terms since 1994 and is well below the poverty line.

Equivalence

A crucial fact about the policies described above is that, in terms of their effects on the final distribution of income, they are all equivalent. That is, any universal grant financed by taxation can be replicated by a negative income tax, or by a means-tested guaranteed minimum income.

This point may be illustrated by a simplified example in which we disregard households and assume that everyone in the community is treated as a separate individual for the purpose of tax and welfare payments. Consider a community in which average annual market income per person is A$100,000 and the acceptable basic income is set at A$25,000.

A universal payment of A$25,000 could, therefore, be financed by a proportional income tax set at a rate of 25 per cent. Someone with no market income would receive the payment and pay no tax, so that net income would be equal to A$25,000. Someone earning an average income of A$100,000 would receive A$25,000 in universal payment and pay A$25,000 in tax, ending up with an unchanged net income of A$100,000. Someone earning A$200,000 would pay A$50,000 in tax and have a net income of A$175,000.

It is easy to see that the same outcome could be achieved with a negative income tax, also at a rate of 25 per cent, with the payment at zero income set at A$25,000. This tax would raise zero net revenue but would yield the same post-tax incomes as the universal payment described above.

Finally, consider a means-tested guaranteed minimum income set at A$25,000, with a clawback rate of 25 per cent. Everyone with incomes under A$100,000 would receive a payment. The payment could be financed by a single-bracket income tax with a threshold of A$100,000 and a marginal tax rate of 25 per cent.

These three policies would have identical effects on the distribution of income after taxes and transfers. Each would also imply that everyone in the community faced an effective marginal tax rate (some of the marginal tax rate and the clawback rate for means-tested benefits) of 25 per cent. On the other hand, they would have radically different effects on the ratio of government revenue to national income. The universal payment would imply setting government revenue and expenditure equal to 25 per cent of income, while, as noted, the negative income tax would raise no net revenue and require no expenditure.

The revenue and expenditure associated with a means-tested, guaranteed minimum income would depend on how unequally incomes were distributed around the mean value of A$100,000.

Based on plausible simplifying assumptions, the required expenditure and revenue would be between 7.5 and 12.5 per cent of national income. Polar cases include:

1. A uniform distribution over the range [0, 100,000]. This distribution implies a revenue and expenditure requirement equal to 12.5 per cent of national income.
2. A three-point distribution, with 30 per cent receiving zero, 40 per cent receiving A$100,000 and 30 per cent receiving A$200,000. This distribution implies a revenue and expenditure requirement equal to 7.5 per cent of national income.

As these examples illustrate, the difference between means-testing and taxation is essentially arbitrary. This means that, in the present context, measures of the ratio of tax revenue and public expenditure to national income do not tell us much. Depending on the administrative systems involved, the various proposals described above might have different implications for compliance and other factors. However, in a fully integrated tax–welfare system, these distinctions would disappear.

Admittedly, this equivalence is only valid when the schemes are implemented in full. If we are considering at transition from the current situation to a universal basic income, there are genuine distinctions between the alternative approaches.

Universal first or basic first?

As a vision of the future, there’s plenty of appeal in the idea of a society in which everyone has sufficient resources to meet their basic needs, regardless of their assets, abilities or the way they choose to live their lives. Yet, once we return to the realm of electoral politics, the unavoidable question arises: how do we get there from here? Given the obvious impossibility of implementing a UBI in one or a few terms of governments, what should be the first steps?

Universal first

Intuitively, a priority on universalism leads to the idea that we should begin with a small demogrant, which would gradually increase in value to the point where it becomes sufficient to meet basic needs. Alaska’s Permanent Fund Dividend, paid out of the invested proceeds of oil royalties, is often cited as an exemplar of this approach. The fund paid each Alaskan around US$2,100 in 2015 (Widerquist 2015), one of the highest amounts ever, reflecting high oil prices in the previous year.

Unfortunately, US$2,500 a year is only about US$40 a week, a handy addition to the budget but not nearly enough for a person to live on. In the absence of independent income (say, from private investments), the number of Alaskans who have been freed from the need to work, or meet the demanding conditions for unemployment benefits, is approximately zero.

Nor is there any real prospect that this will change. Even if the dividend were to double or triple, it would not provide a poverty line income as defined by the US government, let alone a decent living standard. And, in the absence of an unlikely oil bonanza, there’s no reason to expect any increase at all.

In practical terms, a strategy of starting with a small universal benefit, and gradually increasing it, can yield no real impact for several decades. Over the course of such a period, it is likely that some real or imagined budgetary emergency would see the program curtailed and ultimately scrapped. This has already happened in the case of Alaska’s Permanent Fund.

In 2017, the Alaskan legislature voted to allocate some of the funds to offsetting the state’s budget deficit rather than using it to finance the Dividend. The result was a reduction in the annual dividend of US$1,250 (Brooks 2017).

To avoid these risks, a universal-first approach requires the immediate introduction of a universal payment substantial enough to support at least a minimal standard of living. This, in turn, would require a substantial increase in tax rates, introduced at a stroke. While the impact on net income would be offset by the existence of the universal grant, the difficulties in specifying a new tax scale, and adjusting tax concessions, in such a way as to spread the burden equitably would be formidable. Political aspects of the problem are discussed below.

Basic first

The alternative is to start with ‘basic’ rather than ‘universal’. That is, begin by providing sufficient income to support a decent standard of living to those most in need, then expand it to the entire population. This approach is most naturally associated with a guaranteed minimum income.

Existing benefit systems potentially fall short of the GMI in three ways. First, each benefit in the system is conditional on eligibility requirements such as disability or job search activity. Second, they are subject to clawbacks that imply high effective marginal rates of taxation. Finally, with exceptions such as the old age pension, these benefits are typically insufficient to lift recipients out of poverty.

Since the 1990s, access to basic incomes has become steadily more difficult in all these respects. The case of unemployment benefits, noted above, is typical. Similar cuts and restrictions have been imposed on disability benefits, and supporting parents benefits, in Australia and elsewhere in the world. These cuts have been driven by a combination of neoliberal drives to reduce public spending² and conservative hostility to welfare recipients, reflected in the use of stigmatising terms such as ‘dole bludgers’.³

A ‘basic first’ approach would require reversing these trends and would, therefore, entail immediate and sharp political division between advocates of a basic income and supporters of the push to restrict welfare benefits to the ‘deserving poor’. Political implications are discussed in more detail in Section 4.

How to get there

Assuming a ‘basic first’ approach is preferred. How might it be implemented? As initial steps, three measures might be considered:

1. increasing unemployment benefits, at least to the poverty line
2. replacing the job search test for unemployment benefits with a ‘participation test’
3. fully integrating the tax and welfare systems.

Increasing unemployment benefits

The basic age pension in Australia is around 28 per cent of MTAWE for single pensioners and 42 per cent for couples. This income has proved sufficient to eliminate, almost completely, poverty among the old, who were once the most exposed to privation. The same level applies to service pensions and disability support pensions.

By contrast, unemployment benefits (now given the Newspeaky name Newstart) were briefly set equal to old pensions at 25 per cent of MTAWE under the Whitlam government. However, a long series of cuts and freezes have reduced access to benefits and cut their relative value to around 18 per cent of MTAWE today.

Participation income

While social acceptance for a completely unconditional basic income is a long way off, a ‘participation income’ as proposed by Atkinson would have many of the same effects. The criteria for earning a basic income would no longer be based on market production but on a social assessment of value. Participation in this context would include full-time study, raising children and voluntary work. Over time, it might be extended to encompass commitments to artistic, cultural and sporting endeavours, even if these were not at a level sufficient to generate a market income or qualify for existing forms of public support.

A fully integrated tax–welfare system

As discussed above, a fully implemented universal basic income would imply an integrated tax–welfare system, in which the distinction between means testing and taxation would disappear. A step towards this goal would be the inclusion of benefit payments in taxable income, with a corresponding, or larger, reduction in clawback rates.

Completely integrating clawbacks into the tax system would clarify the effective marginal tax rates currently faced by benefit recipients (commonly above 60 per cent). This would provide a counterargument to the spurious claims that the marginal rate faced by high-income earners (less than 50 per cent) constitutes an unreasonable disincentive to work.

Utopianism, managerialism and reform

We have moved from a situation in which the left offered a utopian vision that inspired people to one in which centre-left parties have offered a manageralist response to the GFC and the rise of inequality. That has proved insufficient to mobilise and engage people or to stave off the ‘dominant identity politics’⁴ that has largely supplanted neoliberalism on the right. We need to recapture the vision and language of utopia that used to be part and parcel of left politics.

The light on the hill

As the discussion above suggests, UBI is not a short-term policy option but a vision to be realised over the coming decades. Therefore, the crucial issues concern not the details of the design but the process and politics of getting there.

This distinction between a short-term policy platform and a long-term objective used to be normal for social democratic and socialist parties, and it was long reflected in the unwillingness of members of the Australian Labor Party (ALP) to discard the socialist objective,⁵ even after decades in which Labor governments were more likely to privatise than nationalise.

For the future, we need more than a formal set of words in a policy platform. We need, in Chifley’s words, a ‘light on the hill’ towards which we can climb year by year. In this context, it is useful to compare, once again, the ‘basic-first’ and ‘universal-first’ approaches.

A basic-first approach to universal basic income requires the reversal of longstanding trends that have tightened access to unemployment benefits and other forms of welfare. It therefore involves a direct assault on the policy directions that have prevailed for at least the past 25 years. It links an ultimate, currently unattainable objective to immediate political struggles.

A universal-first approach is more explicitly utopian in its vision than the basic-first approach. However, there is no obvious starting point for a short-term fighting platform.

Beyond the labour market

For most people, the central fact of economic life is the need to work for a living by producing, or helping to produce, goods and services that can be sold in a market. That is true not only of work for wages but of the domestic work, mostly done by women, that must be done to make market work possible. It is also true of most of those who are formally classified as self-employed, and many small employers.

To put it simply, having a job is a vital economic necessity. To maintain a moderately comfortable life, we need not just a job but a full-time job, with good wages and reasonable security. Moreover, except for a relatively brief period in the mid-20th century (the Keynesian ‘long boom’), the existence of enough jobs to provide employment for the workforce has depended on the willingness and ability of owners of capital to provide those jobs.

The critical feature of the labour market is that while the owners of capital can choose whether or not to buy labour, those whose only asset is labour have no choice but to sell it. This imbalance of power is inherent in capitalism.

The ultimate goal of socialism and social democracy should be a society and economy where work is a choice rather than an economic necessity. A universal basic income would play a central role in such a society. It would imply, for everyone, the possibility of maintaining an adequate standard of living without market work.

For this to be a real choice, the other side of the coin is a job guarantee, to ensure that everyone who wants to work can work and earn a reasonable wage for doing so. The relationship between a UBI and a job guarantee is discussed by Fitzroy and Jin (2018), Quiggin (2018), and Henderson and Quiggin (2019).

Political obstacles

The political obstacles are substantial. The whole thrust of policy for decades has been to increase the intensity of work-testing for benefits of all kinds. And, unlike much of the neoliberal agenda, measures like ‘work for the dole’ have plenty of public support, despite the largely spurious nature of the work that can be required in such a scheme.

But the difficulty of the proposal is precisely the point. A UBI represents both a long-term challenge to the entire organisation of work and labour and, in the short term, a rallying point for a rejection of one of the central themes of neoliberalism, the critical importance of (paid) work. As the collapse of the neoliberal order accelerates under pressure from the political right, this mixture of utopian vision and immediate resistance is precisely what the left needs to offer.

It is not particularly challenging to take the first steps towards a UBI using a universal payment approach. This may be done through a relatively modest demogrant such as the Alaska Permanent Fund Dividend. However, as noted above, the next steps in the transition are more problematic. Transition to a UBI would require that the value of the universal grant should be increased over time. In reality, to cite the Alaskan example, the grant is an obvious source of potential savings when the budget comes under stress, and in Alaska, cuts have been proposed repeatedly.

Sustainability

Any discussion of the political sustainability of a full-scale UBI or guaranteed minimum income is obviously speculative. Not only has nothing of the kind ever been attempted, but the implied social transformation is so radical as to render analysis pure conjecture.

Nevertheless, longstanding arguments about the superior political viability of universalism compared to means-testing and targeting would seem to gain strength from the kinds of shifts required for such a policy.

As noted above, the difference between guaranteed minimum income and UBI is one of form rather than substance. Hence, once a basic income was universally available, or nearly so, it would be possible to restructure the system to convert it to a UBI.

How to get there

When fully implemented, UBI and guaranteed minimum income schemes are almost identical to each other (and to negative income taxes). To be more precise, in terms of the ultimate distribution of income and effective marginal tax rates, including the effects of means-testing basic payments, any UBI is equivalent to a guaranteed minimum income with the same guaranteed payment and similarly progressive taxes, and vice versa. For wage earners operating under the Pay-As-You-Earn system, there would be no difference in net pay, just a different way of calculating it on the payslip. Hence, if we actually achieved a genuine guaranteed minimum income, transforming it to a UBI would be largely a matter of definitions.

The critical question, then, is how to get there. Compared to the universal first approach, the basic first approach is of merit in that we are already part of the way there, and that the next steps involve clear and feasible political demands.

Bibliography

Bregman, Rutger. 2016. Utopia for Realists: The Case for a universal basic income, Open Borders, and a 15-hour Workweek. Published online by De Correspondent.

Brooks, James. 2017. ‘Alaska House Votes to Lower Permanent Fund Dividend’. Juneau Empire. 12 April 2017. www.juneauempire.com/news/alaska-house-votes-to-lower-permanent-fund-dividend/.

Fitzroy, Felix, and Jin, Jim. 2018. ‘Basic Income and a Public Job Offer’. Journal of Poverty and Social Justice 26, no. 2. doi.org/10.1332/175982718X15200701225179.

Friedman, Milton. 1987. ‘The Case for the Negative Income Tax’. In The Essence of Friedman, edited by Kurt Leube, 57–68. Stanford and Washington DC: Hoover Institution Press.

Henderson, Troy, and John Quiggin. 2019. ‘Trade Unions and Basic Income’. In Palgrave International Handbook of Basic Income, edited by Malcolm Torry. Cham: Palgrave Macmillan. doi.org/10.1007/978-3-030-23614-4.

Leigh, Andrew. 2017. ‘Why a universal basic income is a terrible idea’. Crikey.com. www.crikey.com.au/2017/04/21/universal-basic-income-terrible-idea/.

Lerner, Abba. 1943. ‘Functional Finance and the Federal Debt’. Social Research 10, no. 1 (February): 38–51.

Quiggin, John. 2011. ‘Money for nothing?’. johnquiggin.com. 18 October 2011. johnquiggin.com/2011/10/18/money-for-nothing/.

Quiggin, John. 2018. ‘Labour market policy and the future of work’. In Social Security Reform: Revisiting Henderson and Basic Income in Australia, edited by Peter Saunders. Melbourne: Melbourne University Press.

Rhys-Williams, Julie. 1943. Something to Look Forward to: A Suggestion for a New Social Contract. London: MacDonald & Co. (Publishers) Ltd. doi.org/10.1057/9780230522824_16.

Torry, Malcolm. 2013. Money for Everyone: Why We Need a Citizen’s Income. Bristol: Bristol University Press. doi.org/10.51952/9781447311263.

Van Parijs, Philippe, and Yannick Vanderborght. 2017. Basic Income: A Radical Proposal for a Free Society and a Sane Economy. Cambridge, MA: Harvard University Press. doi.org/10.4159/9780674978072.

Widerquist, Karl. 2013. ‘What (If Anything) Can We Learn from the Negative Income Tax Experiments?’ In Basic Income: An Anthology of Contemporary Research, edited by Karl Widerquist, José Noguera, Yannick Vanderborght, and Jurgen de Wispelaere. Chichester: Wiley Blackwell.

Widerquist, Karl. 2015. ‘ALASKA, USA: 2015 Dividend Estimated to Be Near Highest Ever’. The Basic Income Earth Network, 31 August 2015. basicincome.org/news/2015/08/alaska-usa-dividend-amount-estimated-to-be-near-highest-ever/.

Widerquist, Karl, José Noguera, Yannick Vanderborght, and Jurgen de Wispelaere. 2013. Basic Income: An Anthology of Contemporary Research. Chichester: Wiley Blackwell.

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1. 1 Following a long series of gradual increases, the pension age is now 67. A proposal for a further increase to age 70 was abandoned by the Abbott government but may be revived in the future.

2. 2 The seemingly uncontroversial statement that a substantial and permanent increase in public expenditure must be financed by a similar increase in taxation frequently leads to objections put forward on the basis of Modern Monetary Theory, an updating of the ‘functional finance’ ideas of Lerner (1943). Quiggin (2011) is a response.

3. 3 Such rhetoric typically involves a mixture of downwards class envy and age-based prejudices. Programs such as ‘work for the dole’ are invariably introduced for young workers first, before being extended to unemployed workers in general.

4. 4 Commonly referred to as ‘populism’, dominant identity politics has emerged as a central theme of right-wing politics in many countries. The starting point is an assumed ‘representative identity’ for ‘everyday citizens’ of the country concerned. The representative ‘everyday Australian (or American)’ is taken to be white, English-speaking, Christian, heterosexual, employed or retired, and, at least by default, male.

5. 5 The ALP National Constitution states that ‘[t]he Australian Labor Party is a democratic socialist party and has the objective of the democratic socialisation of industry, production, distribution and exchange, to the extent necessary to eliminate exploitation and other anti-social features in these fields.’ This wording has remained unchanged since the 1920s. However, it has been made less prominent over time.