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UBI: For individuals or households?

Summary:
This post is about a point which has come up here and there in the discussion about Universal Basic Income, but which I’ve never worked through properly.   A preliminary observation is that it’s necessary to consider tax and welfare together as an integrated system. What matters most is the effective marginal tax rates (the sum of marginal income tax and benefit reduction rates).  Then, starting with the current Australian tax-welfare system, and considering possible paths towards UBI, the key problem is that the tax system is organised (mostly) on an individual basis while the welfare system is organised (almost entirely) on a household or family basis.  The Negative Income Tax version of UBI is one way of implementing a universal payment if you work exclusively on an

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This post is about a point which has come up here and there in the discussion about Universal Basic Income, but which I’ve never worked through properly.  


A preliminary observation is that it’s necessary to consider tax and welfare together as an integrated system. What matters most is the effective marginal tax rates (the sum of marginal income tax and benefit reduction rates). 


Then, starting with the current Australian tax-welfare system, and considering possible paths towards UBI, the key problem is that the tax system is organised (mostly) on an individual basis while the welfare system is organised (almost entirely) on a household or family basis. 


The Negative Income Tax version of UBI is one way of implementing a universal payment if you work exclusively on an individual basis. Start with the standard version where people with zero income receive a refund (negative tax) and all income above zero is taxed according to some scale (rightwing fans of NIT usually want this to be flat-rate, but there’s no logical reason for this).  All you have to do is relabel the refund as UBI. 


The difficulty with a fully individual system is that it disadvantages single people relative to our current system. The same payment goes to a single parent and to a stay-at-home parent with an employed partner. Similarly, a retired couple with no market income (currently getting the couple-rate age pension) would get twice the income of a single retired person (currently getting the single-rate pension which is more than half the couple-rate).


The other way of getting consistency is to tax incomes on a household basis, but this is also tricky. Most obviously, if one partner (commonly the husband) is already employed on a high income, the other faces a very high marginal tax rate.


The Livable Income Guarantee I’ve worked on with Tim Dunlop, Jane Goodall, Troy Henderson and Elise Klein starts with the existing tax-welfare system, taking the age pension (including the income-dependent benefit reduction)  as the model and proposes to expand it to a larger group of people, subject to a participation requirement. That’s why it’s best seen as a plan-in-progress.


It’s easy enough, in principle, to move the LIG towards universality in one way by allowing a wider range of participation options and ultimately removing conditionality altogether. The major constraint here is political support – given the prevalence of punitive attitudes, a participation income represents a radical change, even with conditionality.  Having done that, it ought to be possible to relabel the payments everyone receives and makes so as to have a household-based UBI, but I’m still thinking about this.

John Quiggin
He is an Australian economist, a Professor and an Australian Research Council Laureate Fellow at the University of Queensland, and a former member of the Board of the Climate Change Authority of the Australian Government.

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