Universal Basic Income versus Guaranteed Minimum Income

By   /   October 10, 2015  /   19 Comments

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While I do not claim to be the first person to ever use the term, it was my coining of the name Universal Basic Income in 1991 that led to the worldwide growth of the concept under that particular name.

WASHINGTON, DC - APRIL 30:  U.S. Sen. Bernard Sanders (I-VT) speaks on  his agenda for America  during a news conference on Capitol Hill April 30, 2015 in Washington, DC. Sen. Sanders sent out an e-mail earlier to announce that he will run for U.S. president.  (Photo by Alex Wong/Getty Images)

I was pleased to watch the half-hour interview with Bernie Sanders – United States Democratic presidential candidate – screened on Three60 on 4 October 2015. The final question asked was whether Sanders could support the introduction of a Universal Basic Income (UBI) in the United States. Sanders’ answer was a qualified ‘yes’, though I was not convinced that he fully appreciated what a UBI was and was not. Of most interest is that the UBI s on the global radar at present, as it never has been in the past.

Language Matters

While I do not claim to be the first person to ever use the term, it was my coining of the name Universal Basic Income in 1991 that led to the worldwide growth of the concept under that particular name. It was after I attended the Basic Income European Network (now ‘Basic Income Earth Network’) conference in Vienna in 1996 that this name permeated to a wider than New Zealand audience, in particular as a result of long-time Basic Income proponents Philippe van Parijs and Guy Standing – intellectual leaders within the BIEN movement – adopting the name subsequent to the Vienna conference.

My paper at that conference – Constructing a Social Wage and a Social Dividend from New Zealand’s tax-benefit system – did not include the name ‘Universal Basic Income’ in its title. But UBI was the central concept which I defined in that paper as: “A full universal basic income (UBI) is an adequate social dividend, equivalent to at least an unemployment benefit”. While my main concern in then was to promote the more general concept of ‘social dividend’ (or, in my more recent writing, ‘public equity dividend’), it is clear that the nuances around the name ‘universal basic income’ resonated with the international audience. One reason, I suggest, is that this name avoids the words ‘minimum’ and ‘guarantee’. Further, the word ‘universal’ has a wider reach than the word ‘unconditional’. “Unconditional’ sounds to too many ears like a freebie that others pay for, whereas ‘universal’ more easily blends with a ‘property rights’ approach.

(Other pre-existing names for a ‘basic income’ included ‘demogrant’ and ‘refundable tax credit’. But they were not sexy, and did not reflect any underlying principle. It was the word ‘universal’ that gave the concept its underlying warmth and dignity.)

In order to move forward with an idea that has potential to break through policy impasses around poverty and inequality, the idea should be based on ‘sharing’ principles (such as those of equity within an organisation) that are widely held across the political spectrum, and should not be built around principles of ‘taking’ or ‘transferring’. That’s not to suggest that all income transfers are bad or wrong; rather it’s that a widely acceptable way forward needs to adopt redistributive transfers on its periphery rather than at its core.

A Universal basic Income is not a Guaranteed Minimum Income.

In December 1987, New Zealand Finance Minister Roger Douglas announced a new income tax system based on a ‘low flat tax’ (intimated to be about 23 cents in the dollar) and a Guaranteed Minimum Income (GMI). While the new system was scuppered two months later by David Lange, the compromise worked out still looked much like what Douglas wanted (albeit a 2-step rather than a 1-step tax scale), and it included a pared-down GMI called a GMFI (Guaranteed Minimum Family Income). The GMFI still exists in New Zealand, under the name ‘Minimum Family Tax Credit’.

The GMI was a top-up transfer; it was the antithesis of a universal payment. Only poor workers would receive it. And it came with a 100% ‘effective marginal tax rate’; meaning that nobody receiving a GMI could gain an increase in after-tax income.

The GMI proposal sounds deceptively similar to the Universal Basic Income; indeed both essentially work in conjunction with a flat rate of income tax. The most obvious giveaway is that a GMI is a highly targeted transfer payment that allows for a low single-rate income tax (eg a rate under 30 percent), of the type Roger Douglas wanted and the Act Party still does. A UBI on the other hand comes with a flat rate of income tax in the 33-45 percent tax range (or, as in Gareth Morgan’s version, comes with another form of tax in addition to a flat-rate income tax).

With a UBI, taxes are simple, high by neoliberal standards, and everybody (subject only to age and residency criteria) claims an equal share of that public revenue as a basic income. While a UBI should never be understood as the only form of publicly-sourced cash income (some ‘needs-based’ transfers will always be necessary) – and is a dividend rather than a ‘hand-out’ – for a substantial majority of the resident adult population, it would be their only publicly-sourced income.

A UBI on its own is not a cure for poverty. Rather, it’s a public-property-rights-based payment that incidentally serves as a hand-up rather than as a handout. Of particular importance is the additional bargaining power it gives to the relatively poor. It tides-over people during spells without income – like ‘strike pay’ once did – enabling them to hold out for fair private-sector wages; and it reduces pressure on self-employed people who might otherwise under-tender to get work. Of equal importance is the way it addresses the low-income poverty trap that accompanies all forms of targeted redistribution. The GMI accentuates the low-income trap. The UBI eliminates it.

UBI and SBI

My initial 1991 publication was The Universal Welfare State incorporating proposals for a Universal Basic Income. The paper incorporated a ‘pension’ – conceived in terms of the Australian usage of the term to mean a non-work-tested benefit – which in later papers I called ‘supplementary basic income’ (SBI; refer The Collective Valuation of Unpaid and Underpaid Work) or simply ‘supplementary benefit’ (as in A New Fiscal Contract? Constructing a Universal Basic Income and a Social Wage, Social Policy Journal of New Zealand: 1997).

Any attempt to make a universal basic income the only kind of cash benefit payable falls down because it is either too expensive or too meagre. I addressed the issue through making a ‘pension’ available for particular groups of people (especially retirees, lone parents, and persons with long-term health conditions). This pension would be an alternative higher UBI set at an amount comparable with New Zealand Superannuation, but subject to a higher flat tax than the normal UBI. Retired people, for example, would opt for this option if they had little private income, whereas richer retired people would be better off sticking with the regular UBI that applies to all adults.

My general view today is that supplementary payments should reflect the full range of circumstances of those in special need (and this could include a provision for debt-aid that falls short of bankruptcy), and should be ‘tapered’ or ‘abated’ at a consistent rate. Once a person’s private means are sufficiently high, then their disposable incomes would be simply gross private earnings reduced by a flat-rate tax (eg 35 percent), plus their universal basic income. Increased productivity over time – more outputs produced relative to inputs required – would be the principal cue for an increase in both the rate of income tax and the amount of universal basic income.

What if a country has a UBI with a graduated tax scale?

Consider this example. If New Zealand had a UBI of $10,000 per year and a very simple graduated tax scale (0% on the first $10,000 of income and 40% on remaining income) then that would be the same as having an unemployed person’s UBI of $10,000 alongside an employed person’s UBI of $14,000. (The extra $4,000 is the automatic tax discount that only ‘taxpayers’ can receive.) It cannot be called a universal basic income if poorer people get as of right less publicly-sourced income than richer people.

In New Zealand at present, if you try to introduce a UBI of $10,000 while maintaining or extending progressive income taxation you would just create a super-UBI for the rich. All persons in New Zealand earning over $70,000 per year already receive a UBI (in all but name) of $9,080 per year.

Proportional taxation is at the core of the UBI concept. The central concept – horizontal equity – is well understood by most economists. The peripheral concept – vertical equity – is complementary (an affordable UBI must be accompanied by some needs-based income support). This is less well understood. Gareth Morgan, for example (in The Big Kahuna) sees vertical and horizontal equity as rival concepts.

Summary

It’s great that the concept of Universal Basic Income is being raised with people standing for the world’s highest office: President of the USA. We – the citizens of the world – have to be vigilant however that other similar-sounding proposals are not confused with a universal basic income. We need to be particularly vigilant with respect to names like ‘Guaranteed Minimum Income’.

A UBI is a truly universal distribution of a substantial portion of public revenue – an equal payment to poor and to rich. It is affordable if it coexists with needs-based welfare, rather than being set so high as to cover all conceivable needs. It is funded by a proportional tax system that reflects the importance of tangible and intangible property in the public domain as complementary to private property.

On its own a universal tax-benefit regime cannot end poverty. Rather it creates a power-balance; and a dynamic that confers dignity and puts an end to poverty traps. It enables people to say ‘no’ to exploitation, and ‘yes’ to private initiatives that contribute to social and economic wellbeing; to initiatives that, among other things, raise productivity and thereby raise the future level of universal basic income payable.

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19 Comments

  1. Stephen Keys says:

    A UBI could be funded by public credit from Reserve Bank. To avoid it being inflationary, trading banks would be limited in their credit creation by an equal amount each year. Even better, force banks to lend only money actually earned, saved and deposited, the way most of us think the monetary system works. The Chicago Plan sets out how to change the monetary system and allow a UBI. It will be essential in the next few decades as automation, AI and robotics replace huge swathes of the workforce. Robots working 24/7 for no wages don’t make great consumers!

    • Keith Rankin says:

      These monetary ideas may or may not be useful in a society with or without a UBI. It’s a different topic. UBI is about taxes and benefits.

      • Stephen Keys says:

        Not at different topic at all. Public credit is what ties all progressive spending ideas together. Trying to fund a UBI, a world class free education and health system, adequate public infrastructure from taxes on an economy essentially funded by debt won’t work. How money starts its life is fundamental to all economic systems yet most economists ignore money, private debt and banks in their models. Too inconvenient. Small changes to taxes and benefits are only tinkering and will never be sufficient

        • Keith Rankin says:

          Funding UBI is not a problem. It’s a simple accounting issue. We already have an implicit UBI of about $175 per week for about half of NZers and, and most of the rest already get a substantial part of that.

          The biggest problem by far is understanding the sheer simplicity of what a UBI actually is.

          Funding a super-generous UBI would of course be a problem in 2015, but that’s not the point. I’m arguing for an accounting concept that has the potential to halt and indeed reverse the rise in inequality. I am an economist, not a utopian. I am arguing for tax reform.

          You are arguing for something quite different. From what I can tell, whatever it is that you are arguing for does not actually involve tax reform.

  2. Robert Atack says:

    There quite simply isn’t enough ‘planet’ left for a Universal Basic Income.
    To give the masses the ability to earn/spend and consume takes energy for one thing, and a shit load of inputs from nature. The ability for nature to absorb all the pollution and waste, and supply ‘resources’ is over.
    We just can not grow anymore.
    We are fast running out of the ‘stuff’ we need just to maintain this uneven distribution, in the next 50 years, if we maintain this growth, humans are going to have to produce more food than we have done in the past 10,000 years. We will be unable to maintain a Universal Basic Diet, let alone turn every person into a happy happy joy joy consumer.
    Sorry man, but this blog is utter bullshit.
    Like telling the people in steerage “We will be back for you in a second”

    • Keith Rankin says:

      This comment is completely disconnected from the post it purports to be commenting on!

      • Robert Atack says:

        Keith, I think you are talking about some economic future where everyone gets a better deal than we currently have?
        If you are hoping to give all 7 billion of us this deal, then I’m just pointing out we have run out of time, space, and ‘resources’.
        This mangy dog of a planet will be lucky to support a fraction of the current population, call them the 1%.
        The global economy is in its deaths throws, no matter how you shuffle the deckchairs, without a habitat for a growing number of humans/consumers …… it is over.
        Admittedly for the first time in 4.5 billion years a species has enough equity in earth to be able to buy several other habitable planets, just have to find them, and someone to buy some US bonds.
        Money is not the answer to our collective destruction, we are not going to ‘fair pay’ our way out of this, we are heading for a cadaver economy, like the Chinese in 1960 “You eat my child, and I will eat yours” … we can’t print food, or soil.

        • Sam Sam says:

          That’s preposterous. Demands change, close down, open up. It’s not static.

          40 years ago, demand per capita for internet usage was ZERO – that’s because there was no internet.
          Today, it’s quite high and growing – because there is now an internet.

          40 years ago, demand per capita for ATM machine services was ZERO – because there were no ATM machines.
          Today, there is plenty of usage of ATM machines.

          70 years ago, the demand for smallpox vaccinations was quite high, because smallpox was a scourge.
          Today, the demand is ZERO because smallpox has been completely eliminated.

          70 years ago, the demand per capita for air travel was quite low – because there was no affordable air travel.
          People went by boat, train, or car, etc.
          Today, there is strong demand for air travel, because it’s now within reach.

          Today, the demand per capita for space travel is quite low.
          40 years from now, the demand for space travel could be much higher, because it may become much more affordable and within reach.

        • Keith Rankin says:

          A UBI makes it possible to have less inequality, higher productivity, and negative economic growth. There are modern solutions to the economic growth problem, that we can see if only we can get over our cynicism.

          • Robert Atack says:

            My god I’m in a time warp?

            • Sam Sam says:

              There people who can help you your temporal problems.

              Of course there are limits to the resource economy. Technological growth how ever is unlimited.

            • Reducing inequality and increasing average people’s spending power is essential to an effective degrowth strategy. There’s no need for economic growth to make sure everyone has enough to eat. You just redirect the 30-40% of food currently grown that ends up in supermarket dumpsters etc, and the UBI is a simple way to do that. Same with house, look at all the empty, falling down houses in NZ (not the mention the entire *suburbs* bulldozed in Detroit) that people could be living in with a UBI to help them with rent/ mortgage/ maintenance.

              BTW Robert, you’re not in a timewarp, you’re stuck in a confirmation bias. For whatever twisted reasons, you *want* to think there’s no hope. I’ll go out on a limb and suggest it’s because you don’t have the courage to allow yourself hope and risk being wrong. Your doom and gloom accomplishes exactly nothing and I wish you would just go for a nice walk instead of wasting your time and ours spewing it.

    • Brigid says:

      Robert
      First you need to refer to Stephen Key’s comment, then you need to read this:
      UNIVERSITY OF MANITOBA
      THE TOWN WITH NO POVERTY
      Using Health Administration Data to Revisit Outcomes of a Canadian Guaranteed Annual Income Field Experiment
      http://public.econ.duke.edu/~erw/197/forget-cea%20%282%29.pdf

      • Robert Atack says:

        I’ve read enough to understand that without food and warmth humans die, and without some form of energy we don’t have food,warmth,law and order etc.
        The amount of energy in a 1 dollar bill is the same as a 1,000 dollar bill.
        What part of this lecture don’t you understand ?
        https://www.youtube.com/watch?v=vII-GxsrR2c
        Dr. Albert A. Bartlett from the University of Colorado in Boulder gives a simple, and fully comprehensive lecture on the most important issues facing humans today and demonstrates that “the greatest shortcoming of the human race is our inability to understand the exponential function.”

        • Brigid says:

          It’s obvious you didn’t read the link I provided. I guess knowledge is just wasted on the arrogant.

  3. Mike the Lefty says:

    For this to work properly, the rich must necessarily take less so that the others can take more. We all know that this will never happen, unfortunately.

    • Keith Rankin says:

      No. To achieve what is essentially an accounting change requires minimal change in the distribution of income in the year of implementation.
      The important change is to the distribution of income over time, compared to what it otherwise would have been.
      UBI is an evolutionary development of the welfare reforms in NZ in the 1930s and 1940s started the process. The biggest obstacle to this evolutionary progress is the people who trumpet it as some kind of utopian revolution.