Comments on UBI posts

This post relates to the sequence Arguments for a Universal Basic Income.

This makes the fourteenth post in a row on UBI. For a blog that isn’t explicitly about Universal Basic Income, some might consider this excessive! I shall be moving on to other topics shortly, but a round-up of comments and further thoughts on this sequence of posts seems appropriate.

Firstly – I have created a dedicated page collating all of the posts into a single article so that it can be read and linked to more easily.

Secondly – thank you to all those that read the posts, and to those that commented (either here, or in places that I posted links). I have had several interesting discussions about various aspects of UBI, some of which helped me to consider the policy from even more angles, and others that pointed me towards useful data that I had not previously encountered.

A summary of various questions, criticisms and discussions is given below:

• Tax Evasion
• Reduction in the Labour Force
• Immigration and Emigration
• Costing the First Stages of the Implementation
• Some Benefits Claimants Losing Out
• Taxing Very Low Incomes
• Devolved Welfare Spending
• Graphing Existing Benefits
• Negative Income Tax
• The Livability of £8,000 p.a.
• People Really Are Dying
• Child Benefit

Tax Evasion

Leonid commented:

The new tax scheme would roughly double the incentives for tax evasion for middle class earners…

In the US the income tax rates have changed drastically over the last 60 years (from >90% to <40% marginal rate) while the amount of taxes government manages to collect remained roughly constant (~30% of GDP). People do not necessarily do things that are strictly illegal, but they spend a lot of money and effort in searching for loopholes.

It is true that people do like to find ways to avoid paying tax and it is very difficult to assess what kind of impact this might have. To me, this definitely suggests that a gradual implementation of a UBI would be sensible, so that any issues can be picked up before a large budget issue develops. I will say however, that the top marginal rate in the US is quite an outlier – the very wealthiest of people are the ones with the most resources to avoid tax, so it is not too much of a surprise that the government didn’t receive much revenue from the 90% top rate. An ordinary middle-class worker may take certain steps to reduce their tax burden, but they don’t quite have the same resources available to them to mitigate a tax increase so thoroughly.

As a very rough attempt to quantify the impact of this, we can try to extrapolate based on recent estimates of tax evasion. Currently tax evasion accounts for a £5.3bn per annum gap – this encompasses income tax evasion, but also includes VAT evasion, capital gains evasion, etc. Even if we assume that all of this is income tax evasion, and assume that the change in incentive doubles the amount of evasion, an additional £5.3bn makes up about 0.8% of income tax receipts.

It is difficult to say whether this rough calculation would be an underestimate or an overestimate, but in the UK most middle-income people pay their taxes through PAYE, which is administered by the company they work for, so there is less opportunity for them to benefit from “under the table” payments. Again – gradual implementation would be key to ascertaining the extent of any problems here.

Reduction in the Labour Force

Several people raised the potential economic impact of people deciding to leave the labour force altogether (or just reducing their hours), resulting in either less goods/services being produced, or goods/services being more expensive due to having to pay workers more to entice them back to the workforce.

Chris Stucchio has done some good analysis of some UBI-esque schemes in North America, and has concluded that of the people included in the experiment, an average of around 10% left the workforce. He views this as an unacceptably large number, with some very reasonable comparisons to other disruptive economic events. There is however a very large selection effect going on here – these schemes were only targetted at low-income groups. We cannot apply this 10% figure to the entire working population, because people on higher incomes are far less likely to accept a large reduction in the their standard of living.

If we make the reasonably generous assumption that a full 50% of the working population are sufficiently low-income that this 10% statistic applies to them, we have a reduction in the workforce of 5%. We can then do a very rough calculation of the economic impact that this would have:

In the US there are 155m jobs, so losing 5% of the workforce translates to 7.75m jobs. The bottom 50% of US taxpayers earn an average of $16,000 p.a. – that results in an estimated productivity reduction of $124bn. The US GDP is $20.5tn, so that would correspond to a 0.6% reduction to GDP – as a one off hit, I wouldn’t consider this anything to be too concerned about.

In the UK, there are 35m jobs, so losing 5% of the workforce translates to 1.75m jobs. The government doesn’t have income statistics for anyone earning below the Personal Allowance, so it is difficult to find the average income of the bottom 50%, but using £16,000 p.a. is probably a generous overstatement – that results in an estimated productivity reduction of £28bn. The UK GDP is £2.86tn, so that would correspond to a 0.98% reduction to GDP. I would further expect the impact in the UK to be smaller than this, as the 10% figure comes from a US study, and the UK’s existing benefits system is more comprehensive and generous, so we are starting from a different position.

Again though – this is a good reason to implement slowly, in stages. If huge swathes of the workforce start quitting their jobs at any point, it would be sensible to pause the implementation. The government could then see if the situation stabilises (i.e. if many people were simply using the opportunity to apply for different jobs, or get additional training before re-entering the workforce). If the losses were permanent and further losses at that rate were predicted to be problematic, the implementation could be stopped or even rolled back, before problematic levels were reached.

Immigration and Emigration

Another good point from Leonid:

Emigration of net payers and immigration of net receivers would go up.

According to Migration Observatory, the net impact on the UK’s public finances of migrants from the EU was positive, and from non-EU sources was negative. This is quite convenient really, as it is the non-EU immigration that we can exercise greater control over. If a UBI were found to have too significant an impact on the levels of non-EU immigration, we could always up the selectiveness of our immigration system.

Immigration is a complicated issue with many facets, but thankfully someone at LSE has already done some regression on the effect of welfare on immigration. This analysis uses a “de-commodification factor”, that “refers to the degree to which individuals, or families, can uphold a socially acceptable standard of living independently of market participation”. In the Western countries it analyses, this factor varies from 18.3 in the US to 35.9 in Norway. Their regression analyses asylum seekers separately from economic migrants, and shows that a 1 unit increase in this factor increases asylum seekers by 11.9% (with R squared of 0.63), but actually decreases economic migrants by 2.06% (with R squared of 0.52).

Given that only about 35,000 of the 627,000 immigrants to the UK in 2018 were asylum seekers, I think this suggests the increase would be fairly manageable. This factor is 23.6 for the UK, and if a UBI increased this factor by 10 whole points, this would imply you might expect the number of asylum seekers to be around 108,000.

Regarding the emigration of net payers, this UBI proposal doesn’t actually affect high earners much at all – the effective tax rate of anyone earning £120,000 or more has gone up by 1.8% or less. The most that anyone’s effective tax rate goes up is 5% (for people earning between £46k and £100k). Some people would probably be spurred to seek their fortunes elsewhere by this, but 5% is well within the bounds of a normal governmental policy shift, especially if spread over several years. There don’t appear to be any particularly good studies on this, but the most mobile people are the ones that are the most rich, which is why this proposal doesn’t include a higher rate bracket targeting them.

Another fine reason to implement slowly and incrementally, so that issues can be spotted and adjusted for, before they grow into bigger problems.

Costing the First Stages of the Implementation

/u/spacewall213 raised the following point about “Phase 3” of the implementation:

There are 31 million taxpayers in the UK and 66 million people. [Phase 3 takes] £3500 a year from the first group [and pays] £3500 to the second group.

This is a fair observation, and requires us to delve into the detail quite a bit. The end state is simple to calculate, and is demonstrably affordable, but the intermediate phases are more tricky to cost fully.

Phases 1 & 2 taken together result in an effective tax increase for anyone earning between £50,000 and £116,500 as well as small tax cuts for those earning between £8,600 and £12,500 and between £116,500 and £150,000. The tax increase should more than outweigh the small cuts, and through a rough approximation, I’d expect these phases to result in a net increase in the government’s revenues of around £3 billion.

Phase 3 then gets even more complicated, as although it is introducing a £3,500 UBI in place of the personal allowance, it also requires phase-out of some benefits. For the 31 million taxpayers, Phase 3 has no net impact, as the additional tax incurred by losing the personal allowance is precisely offset by the new UBI. This leaves the 23 million non-taxpaying adults to take into account. At face value, paying each of these people £3,500 would cost the government £80.5 billion – a significant hole in the budget. We haven’t taken the benefits phase-out into consideration yet though.

There are currently about 20 million people receiving benefits in the UK, however we cannot simply subtract 20 million from the 23 million non-taxpayers, as some of the people receiving benefits are actually taxpayers themselves (people earning more than the personal allowance, but perhaps receiving housing benefit due to living in London or similar situations). We need to make a reasonable guess about the number of people claiming benefits that are actually taxpayers too. These are people whose benefits we shouldn’t reduce immediately, as their incomes will not have gone up with the introduction of the UBI – their benefits will need to be phased out as the UBI increases further. If we make a reasonable guess, that 30% of benefits claimants fall into this category, we are left with 14 million people receiving benefits whose benefits can be reduced by £3,500 as the UBI is introduced. This brings our 23 million lots of £3,500 down to 9 million lots, for a total of 31.5 billion.

Furthermore, many of the 23 million non-taxpayers will in fact be working, but earning little enough income that it falls below the personal allowance. This means that there will be some increase in tax revenue from removing the personal allowance from these people. We want to avoid double-counting the people on benefits in the paragraph above (if someone is now paying £1,000 in tax, where they were paying no tax before, their benefits should only be reduced by £2,500 with the introduction of the UBI), so we can use the 9 million figure. If these people on average were working 1 day per week at minimum wage, this would earn them about £3,600 per annum, for a total income for this cohort of £32.4 billion. Taxed at 32% this would bring in a further £10.4 billion, bringing the shortfall down to around £21 billion.

Offsetting this against the £3 billion surplus from Phase 1 & 2 brings us to around £18 billion, which is about 2% of the UK government’s spending of £887 billion. Not insignificant, but not insurmountable either. These figures are all very approximate, but the rough order of magnitude should be correct, and a temporary deficit of this magnitude is well within the UK’s margin for error.

Because the end state should be budget positive, the subsequent phases should increase the net contribution of the system, so if the cost were deemed too high, the next phase should reduce it. If this were not sufficient, the UBI could of course be reduced – shrinking it by £350, bringing the UBI to £3,150 per annum would save £19 billion.

Some Benefits Claimants Losing Out

A couple of people commented that some people currently on benefits will be worse off under this system.

In any policy change, there will be some people that benefit and others that lose out. Trying to create a system in which nobody is worse off is doomed to failure, so the best thing to do is to create a system that is as fair as possible, and that is easily defensible.

Once fully implemented, this particular policy will likely result in lower income for anyone currently receiving large housing benefit payments (the working poor, living in London) or receiving both a state pension and housing benefits.

There are quite a few people earning minimum wage that are living in places that cost in excess of £1,000 per month, because this is paid for through housing benefits. This is a completely reasonable course of action for them, and it would be unfair to criticize them for benefitting from the rules of the system. The fact remains however, that there are plenty of people earning triple this amount that can’t afford to live in London, so they have to settle for a commuter town, or even just get a different job in a less expensive large city.

It seems bizarre that the government is willing to pay such large amounts for people to stay where they are, when there are far cheaper places to live that are empty and waiting. It could be argued that all of the companies in central London would lose out on cleaners, delivery drivers and other low paid workers if they were no longer able to afford to live there, but… the companies would just have to pay them more so that they could afford to live there, rather than the government picking up the tab.

It could also be argued that it is bad for children to change school repeatedly, but we are not really talking about repeated moves. Lots of children change school at some point or another during their time in education, and it is not a problem for the vast majority of transfer students.

In many ways, the fact that people may have to move out of expensive housing, in favour of more affordable housing under this policy is more of a feature than a bug. Treating everyone the same is a far more defensible position than paying some lucky people enormous amounts so that they can stay living somewhere most people can’t afford.

Taxing Very Low Incomes

Someone raised the point that the government wouldn’t get very much revenue from taxing people earning a couple of thousand a year, and noted that it might be more efficient to keep a minimum threshold, below which the government doesn’t bother to collect tax.

This may well be the case, but I can’t really see such a policy getting wide support. Firstly, you either have to phase this allowance out, adding complexity back into your tax code, or you have a sharp cut-off, where earning more ends up with less in your pocket, which is even worse. Secondly, getting rid of all of the means testing for benefits is controversial enough as it is – the tax authority’s ability to audit people’s income is the only check that you have left, so despite the seeming inefficiency of it, I would expect that removing it for those on low incomes, would resurrect people’s concerns about “fraudsters playing the system” and lose broad popular support.

Devolved Welfare Spending

Someone else queried the cost of benefits in the UK that I was using in the Realist. I quoted a total of £192.7 billion of benefits that would be replaced by the UBI, however according to this website, pensions cost £159.5 billion and welfare costs £112.7 billion for a total of £272.2 billion. Why are these numbers so different?

It turns out that ukpublicspending.co.uk just groups spending differently:

Firstly, they include £45 billion of sickness and disability benefits under the “pensions” heading. I explicitly exclude these from the benefits being replaced by UBI, as they should really be administered by the NHS. By transferring this health related budget item into the purvue of the NHS, the government would be allowing medical decisions to be made by doctors, rather than underqualified Atos contractors.

Secondly, the source that I used includes only central government spending, whereas they include £55.1 billion of local expenditure. This local expenditure is administered and funded entirely differently. Because it is devolved to local councils, different councils provide different services and different levels of service. They then charge different council taxes to cover it. It makes sense to exclude this from the analysis, as it is not something the central government has direct control over.

Looking into it a little deeper, most of what this “welfare” is, is actually social care, which is rather NHS adjacent. There have actually been suggestions in the past by politicians to create a “National Care Service” to create a unified national approach to this.

After removing these two items, the numbers aren’t exactly the same, but they start to look a lot more comparable.

Graphing Existing Benefits

Galerion commented:

I think I would have liked to have seen a comparative graph that included universal credit’s and legacy benefits marginal tax rate.

This has indeed been a frustration of mine – the data available on current benefits is very much aggregated – not split by income or anything useful. This does make sense however, as benefits are highly variable depending on people’s situations – housing benefit can vary hugely depending on where you live, even if you have the same income otherwise. Other benefits often depend not only on your income, but other aspects of your living situation as well.

One possibility could be to input details into an online benefits calculator, and use that to give an indicative benefits amount for each income level, however there are so many variables that this would hugely oversimplify the situation. Any such graph would either be so simplified as to be misleading, or would require several additional dimensions to capture all of the important information.

Negative Income Tax

Why support a UBI over a Negative Income Tax?

Personally, given a choice between a Negative Income Tax and the current system, the NIT would still be a huge improvement. Mathematically, a Negative Income Tax is equivalent to a UBI, given the right rates and thresholds.

The system proposed here, of an £8,000 UBI and a 47% flat tax, is equivalent to a Negative Income Tax set at 47% with its threshold at £17,021. Earning below the threshold, you receive 47% of the difference between your earnings and the threshold amount, and earning above the threshold, you pay 47% of the difference:

Pre-tax Income	Difference to Threshold	Tax Paid	Net Income after NIT	Net Income under UBI propoal
0	-17,021	-8,000	8,000	8,000
5,000	-12,021	-5,650	10,650	10,650
17,021	0	0	17,021	17,021
30,000	12,979	6,100	23,900	23,900
50,000	32,979	15,500	34,500	34,500

So, if they are equivalent, why not push for NIT instead?

Despite their seeming equivalence on paper, there is a real world difference – their failure modes. If someone loses their job suddenly for example, they will need to be reassessed under a Negative Income Tax, to determine their new tax status. They were previously paying tax, and should now be due to receive it, but this could take time to process, during which they have no income. With a UBI, they are already receiving everything they are entitled to, so there is no delay. In the opposite scenario where someone gets a new job suddenly, it is in the government’s interest to assess their tax status quickly, as any delay only inconveniences the government.

This type of scenario demonstrates how people could still “fall through the gaps” in a Negative Income Tax scheme. Therefore, even though they might look equivalent on paper, Universal Basic Income is a more robust way of ensuring people’s wellbeing.

The Livability of £8,000 p.a.

Several people have expressed that £8,000 is too little to live on:

This… misses the point of UBI being a livable amount as a genuine alternative to working. £8k per annum is not livable for a single person.

This point is effectively the counterpoint to the “Reduction in the Labour Force” point above. It can’t simultaneously be both so appealing that huge swathes of the workforce quit work to live on it, and so miserly that no-one could afford to live on it. It is all about finding a middle-ground where people can survive on it, so that no-one starves, but it is not so luxurious that everyone quits their job and it crashes the economy. I think £8,000 p.a. sits in this middle-ground – it might not sound like the most comfortable of existences, but providing comfort is not what the aim of a UBI is – it’s to make a completely bullet proof safety net, and avoid any poverty traps, where earning more means you actually take home less. I can demonstrate its livability thus:

Firstly, there are plenty of 1 bedroom places you can rent for under £300 pcm, and that isn’t even including flatshares etc. That consumes £3,600 per annum.

Council tax on a 1 bed flat should set you back less than £1,000 in most councils.

Water, gas and electricity are likely to come to around £1,600 per annum given average usage.

You could probably do better on all of these fronts, but even these costs leave you with at least £1,800 left for food and anything else. £150 per month, or about £5 per day.

Obviously you need vegetables and protein too, but to meet your caloric requirements, this rice clocks in at 1064 calories per £1 spent, these cornflakes at 3225 calories per £1, this pasta at 4350 calories per £1 and this flour at a whopping 7340 calories per £1. Eating roughly equal quantities of each of these, you can get all the calories you need for just £0.80 a day, leaving you with just over £4 for vegetables, and anything else you need.

People might have to relocate to a less expensive residence, and it’s not a luxurious existence by any stretch of the imagination, but it is doable, and every pound you earn above this means 53p in your pocket to do whatever you want with.

People Really Are Dying

In response to the Libertarian post, several people questioned the idea that people are dying due to bureaucratic failures and “falling through the gaps”.

I think it is important to clarify that when I wrote that some people are easily exploited because they “don’t have time to wait for a better job”, I didn’t mean that they are in some way exceptionally busy. By “don’t have time”, I simply mean that they can’t wait it out. They need to find some money now or they’ll be evicted. They need to get some food now because they’re so desperately hungry now. They might have all the “free time” in the world, but they have a deadline that they must meet. Anyone that has been denied the safety net can be forced to accept below market returns on their efforts because they must meet their deadline.

If the idea of people being in such dire situations sounds unbelievable, I have several sources that can back up the fact that the system does fail people, and lives have been lost because of it. There are plenty of anecdotal stories that can be referenced, of people dying after falling through the gaps in the current UK safety net: David Clapson, Errol Graham and Stephen Smith to name a few, but it is more rigorous to try to find actual statistics on the issue.

We can look at the Government Statistics – whilst 2/5 of the deaths of homeless people are due to drug/alcohol issues, that of course means 3/5 of the deaths are caused by other things. Ignoring the drug related deaths, you are left with 432 deaths in a year, out of a homeless population of 320,000 – that is a death rate of 135 per 100,000. This is over 13 times the fatality rate of the most dangerous sector of employment in the UK – the waste & recycling sector with a death rate of 10.26 per 100,000.

Here is a news article about the numbers of homeless deaths, and here are more government statistics, showing that of the approximately 2 million people declared “fit for work”, and therefore not eligible for benefits, 40 thousand were dead within a year – that is 2% per annum.

Child Benefit

The importance of addressing child poverty has been raised by several people. This is indeed an important thing for any society to overcome, but wasn’t something I devoted significant verbiage to.

At the end of the Realist post, I note that:

Every £500 of UBI given per person over-16	will cost £27.1 billion
Every £500 of UBI given per person under-16	will cost £6.3 billion
Every 1% of tax applied to personal incomes	will raise £11.1 billion

If you are eligible for it, the UK’s current Child Benefit gives £1,095 p.a. for your first child, and £725 p.a. for each subsequent child, so in order to provide a similar level of help to families with children, this policy could include £1,000 UBI per child. As per the table above, this would cost an additional £12.6 billion, bringing the policy’s net contribution to government finances down from £88 billion to £75 billion – still £5 billion more than the current system of benefits and income taxes.

This would give a family with two adults and two children a combined UBI of £18,000 per annum, while a single parent with two children would receive £10,000 per annum. The EU defines poverty as earning less than 60% of the median household income, and this article suggests the median is £22,100. This puts the poverty line at just over £13,000 for a single parent household and suggests that this policy would be remarkably close to ending child poverty once and for all.