Modest but sensible UBI schemes do not make the state any bigger than it already is in most rich countries

The people of Switzerland rejected a proposal for a universal basic income in a referendum last weekend. As Leonid Bershidsky writes, the right conclusion to draw is that the proposal — of paying every citizen a regular amount of money without a work (or any other) requirement — was pitched too high, too soon, and in a place least likely to need it. As he also writes, the wrong conclusion is to bury the idea. …

Claims about the supposed economic unfeasibility of UBI, however, have an unfortunate tendency to intellectual fogginess. …

The relevant reference to the right level of UBI is surely households’ disposable income — the amount they have left on average after taxes and transfers to cover their material standard of living. To be guaranteed 50 per cent of this surely qualifies as reasonable, perhaps too reasonable. But in the UK, for example, “disposable income” (what households have to spend) is less than two-thirds of national income (what the nation has to spend if it does not borrow from other countries). So paying 50 per cent of current disposable income to every citizen would, on its own, cost about 33 per cent of national income.

The share of the government’s tax take and redistributive spending in the economy does not include tax exemptions and allowances, where the state selectively refrains from imposing normal taxes. If such “tax expenditures” — a technical term for the money not raised — were included in tax revenue and spending, all rich countries would look like they had much bigger states already.

Take the UK’s income tax allowance, under which the first £11,000 is exempt from income tax. This gives up on almost £100bn in tax revenue annually. If instead of an allowance, income tax had been imposed from the first penny earned, then returned in the same amount as the current allowance, would the state have been any bigger? Surely not — though it would be more transparent and reveal that the policy mostly benefits those in the top fifth of the income distribution (the allowance is worth most for those earning between about £40,000 and £100,000). The non-imposition of national insurance on some earners costs another £50bn. Together these exceptions amount to close on 10 per cent of GDP, which is currently being redistributed (by not being levied) in a highly regressive manner.

The government generously informs us of plenty of other such hidden expenditures, many of which a UBI would remove the rationale for. And the same situation can be found in most other countries; Alexander Holt discusses the US numbers in a Quartz column.

The point is that a state paying UBI may look bigger than what we are used to, but it would not in fact be bigger. Conversely, a UBI can be designed (like tax expenditures) to make the state look smaller. Design UBI as a tax credit people get even if they pay zero taxes, then levy the net amount of tax — which means only the lowest earners get an actual payout from the public treasury. For the richer, the UBI is then accounted for as a tax expenditure.

What is true is that UBI requires higher tax rates on higher earners than most countries levy today. UBI being redistributive, that is part of the point. A fresh simulation by Howard Reed and Stewart Lansley shows that a generous UBI system for the UK (which keeps most existing benefits intact, including state pension and housing benefit) can be fully funded by combined income tax and national insurance rates at 35 per cent for the basic band (against 32 today), 55 for the higher band (against 42 today) and 60 for the top band (against 47 today). …

In summary, modest but sensible UBI schemes do not make the state any bigger than it already is in most rich countries. They require marginal tax rates no higher — but more fairly and rationally apportioned — than already exist.

Free Lunch: An affordable utopia