Transitional Basic Income scheme with an optional 'workfare' element
David Chapman
The idea of the government using taxation to provide everyone with a Basic Income (BI) is usually thought of as a very radical measure, a drastic, and very expensive, change from the present system, which therefore is unlikely to be adopted for many years yet. But I make here a new proposal for a less radical BI, not all that different from the present system, but in fact a great improvement on it, which could be put into operation in a year once there is support for it. Once adopted, it could, if people demanded this, be improved by stages into a conventional BI. This new transitional BI scheme is as follows:
'A less radical Basic Income scheme, not all that different from the present system, but in fact a great improvement on it, could be put into operation in a year'
For the sake of brevity, let us use the term 'maximum benefit' to refer to the total of whatever benefits a household would receive under the present system, if they had nil income and nil savings. Each household is paid BI greater (but in most cases only slightly greater) than its maximum benefit. In the case of a couple, any BI in respect of children is given to the caring partner, and the rest of the household's BI is equally divided between the two of them. A person's BI is paid as a cashable welfare cheque, or directly into the person's bank account.
To pay for this, three tax increases are made. Firstly, National Insurance (ie social security tax) of 9 per cent is extended to income above L350 per week. Secondly, National Insurance is in effect extended to investment income, by charging on it an extra 19 per cent tax, but only on income above the average income. Thirdly, a 'special tax' of an extra 7 per cent is levied on all income, ie the tax gives no allowances.
A household is then taxed according to one of the two following schedules, the 'primary' or the 'secondary', whichever one results in the lower amount of tax.
Primary tax: 75 per cent of income (ie earnings plus investment income, both before tax). Or Secondary tax: consisting of income tax as at present (plus any increase re investment), plus NI (extended to higher incomes), plus a special tax of 7 per cent of all income (ie no allowances), minus a 'special credit' (= about L9 per week at present), or two credits in the case of a couple, plus a lump sum equal to the total BI received by the household.
(The special credit is equal to 7 per cent of average income - the same percentage as the special tax. Average income is defined as the national total of personal incomes, divided by the number of adults, including in this number the non-taxpayers.)
Clearly, the result of this will be that low-income households will pay primary tax. Their disposable income (ie income plus BI minus tax) will be their BI (equal to at least their 'maximum benefit'), plus 25 per cent of their pre-tax income.
Higher incomes than this will pay secondary tax. The disposable income which any household will get will thus be:
Either its present disposable income plus L9 (or L18 in the case of a couple), minus 7 per cent of its pre-tax income.
Or (if it would be more) its BI (equal to at least its 'maximum benefit'), plus 25 per cent of its pre-tax income.
Thus any household with below-average income (or below twice average income in the case of a couple) will be better off under this scheme than they are now. There might also be some above-average-income households which will be better off, ie those for which their BI plus 25 per cent of their pre-tax income would be more than their present disposable income.
Would Basic Income destroy the incentive to work?
An objection often put against Basic Income schemes in general is that many people would just live off their BI and do no paid work, so that the tax base from which the BI is paid would be seriously reduced. I see no way of predicting for certain whether or not this would happen. But if we introduced the above scheme and found out that this did in fact happen, it would be possible to correct the situation, and bring more people into work, by modifying the scheme as follows.
Any person of working age who was not sick, handicapped, a carer with some minimum of responsibilities, or a full-time student would be paid part of his/her BI (let us say L25 per week) not in cash but in the form of a reduction in the tax he/she had to pay. The rest of his/her BI would be paid as before.
If a person could not find paid work of the ordinary kind, the state would offer to pay for sufficient hours of low-paid work to earn at least L25 per week plus a sum enough to pay the expenses of working (travel to work etc). The work would usually be done for organisations at present using voluntary labour, such as Oxfam, Age Concern, pressure groups, political parties, etc. The state would reimburse the organisations for paying the wages of these workers.
'The state would offer to pay for sufficient hours of low-paid work to earn at least L25 per week'
Note that anyone who earned more than L33-33 per week- the amount which, under the first scheme, would have been paid, at 75 per cent, L25 of tax - would be exactly as well off under this BI scheme as under the first one. But someone who earned nothing would be L25 worse off.
Conclusions
- This BI scheme would redistribute income from (most of) those above average income, to those below the average income.
- A large majority of persons (70 per cent or more) have income below the average, so even this preliminary and transitional BI scheme might expect to get majority political support.
'This preliminary and transitional Basic Income scheme might expect to get majority political support'
- It will reduce or remove the unemployment and poverty traps (especially if a lower primary tax rate than 75 per cent proves to be affordable with the yield from the above tax increases).
- This BI could easily be put into operation. All it needs is (a) an extension of the present arrangements for paying old age pensions to the rest of the population, and (b) a simple change in the formula for calculating income tax. (No new assessment is required, additional to the determination of a person's income which is already being done.)
Dr David Chapman, Democracy Design Forum, Coles Centre, Buxhall, Stowmarket, Suffolk, IP14 3EB (tel 0449 736 223).
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