Free lunch for all would bust the fiscus

IF something sounds too good to be true, it probably is. That adage comes to mind when discussing universal basic income — that is, cutting a cheque of the same amount to all citizens, regardless of earned income — the kind of initiative that Switzerland will be voting on next Sunday.

That’s right: every adult Swiss citizen — even the multimillionaires who sport Breguet watches — could potentially receive an equal monthly payment from the government.

Proponents of universal basic income argue that giving citizens money directly is an effective poverty relief measure, can improve incentives to work and offers a way to streamline a plethora of income-support programmes, all while removing the stigma associated with receiving them.

Such reasoning, however, may run into political and economic headwinds.

In a presentation to the Canadian Association for Business Economics, University of British Columbia Professor Kevin Milligan explained why it is unlikely that any basic income initiative will receive sufficient support or accomplish all its goals. Any such plan would involve trade-offs that should prove distasteful to either the left or the right, if not both.

Milligan noted that it’s important to distinguish between universal basic income and minimum-income guarantees.

Under the latter, there would be a phase-out threshold whereby those who earned in excess of a certain amount wouldn’t receive any income supplement. For instance, under a 100% phase-out rate set at R250 000 a year, an unemployed individual would receive R250 000, a person earning R150 000 would get R100 000 and anyone making R250 000 or more wouldn’t get a cent. Ontario, for instance, plans to pursue a minimum-income guarantee pilot programme in a select community.

However, no basic income initiative needs to be that black and white; it could be designed so that the size of the cash payment decreases gradually as earned income exceeds select thresholds, in the same fashion as marginal rates increase under a progressive tax system.

For example, an individual making nothing might receive R250 000, someone earning R250 000 a year might receive an additional R150 000 as an income supplement and a person who makes in excess of R500 000 might receive R50 000.

The critical features are this phase-out rate, the size of the payout and the overall cost of income assistance programmes.

Therein lies the “impossible trinity” of basic income, as outlined by Milligan.

All these features are desirable, but all three can’t be done at once.

A large basic payment ensures that such an initiative will make a difference in alleviating poverty. Having a relatively low phase-out rate (a high degree of universality in such cash transfers) is a presumptive feature, not a bug, of a basic income system, as it addresses the disincentives to work that arise when workers hit the “welfare wall”. (That’s when returning to work or working more hours causes some to be worse off because of decreased state help.)

But if you accomplish both those goals, the costs will be

Every adult Swiss citizen could receive equal payment

staggering and would entail the elimination of other income assistance programmes and/or raising taxes on not just the rich but also middle-income earners — only to return those funds to them by way of a basic income transfer.

Sacrificing the low-phase-out rate — in other words, implementing a basic income guarantee system — means that the initiative doesn’t address the problem of the welfare wall and, in fact, “makes it bigger and worse”, said Milligan.

Alternatively, if a government wants to cut a cheque to everyone without meaningfully increasing the cost, compared with the current income assistance regime, it would be sending peanuts. “Basic income advocates need to show us their math,” said Milligan. — Bloomberg

Ron Derby is away