Some concerns in response to Keith Rankin's Comparing Tax-Benefit Systems

by Graham Howell, 20 November 1998

As indicated when on email, and at UBINZ conferences, I am concerned about setting up systems with a "modest" UBI and with "general means-tested benefit" (GMTB). I accept Keith's point about setting a "generous" UBI so that those with special needs have no need for any extra forms of state or community support. Hence the setting discussed below has two sets of rate, one at $158 adult/$79 child, and the other $145 adult/$72.50 child. (Note, I reject the third set $103/$51.50.)

The following is a brief outline my concerns and a description of a system I proposed in a research paper I wrote for my Public Sector Economics paper (a stage three paper at Victoria), where I presented some ideas around UBI.

My main concern is that I cannot see how any system of "means-testing" can avoid some of the pitfalls of the current system, which is highly means-tested. An "universal income" of $123 a week, as suggested by Keith, is less than most benefit rates paid via the Social Security Act. It thus would mean for many a continued reliance on a system of means-testing. This requires a "dependency" of the recipient of the GMTB on the department administering the system. In a post-UBI society where all citizens should be accorded the same rights and opportunities, deliberately building a "dependency" element seems to create two types of citizen. Those needing the GMTB, and those that do not. (I will deal below with how a reasonable UBI may be set, which when married to systems of universal, tax-funded education and health, some of the extra needs of fellow citizens may be met.)

Dependency is increasing under the current system of main benefits and supplementary assistance. This is quite invidious and those trapped in the system are subject to various propaganda techniques and methods which exploit stigma and low self-esteem. Examples are:

• the six-monthly newspaper headlines on benefit fraud;
• the television advertising about benefit fraud;
• the repeated failure of the payment system;
• the non-use or arbitrary use of discretion of WINZ staff in a range of areas where discretion is allowed. (Debt repayment, not allowing supplementary assistance and forcing the applicant into debt with third parties.);
• regarding all applicants for main benefits by students as "new" regardless of past records held by WINZ;
• re-establishing previously written off debt;
• the shop fronts and lack of privacy;
• the non-acceptance of "applications" by the 0800 system.

Without a major change in culture in the department administering the GMTB it is hard to imagine some of these examples disappearing. Benefit fraud figures could still be inflated and even if the figures published were "correct" should they be published at all, and if so in what way. The payment system for the GMTB could still fail, causing down-stream affects for recipients paying creditors such as landlords. The interface between earning ones own income and not becomes more crucial when one relies on extra income from the state (that is the GMTB). (For example does society demand reasons for leaving "paid employment.") The shop fronts (lack of privacy) can still stigmatise those trying to interface with the GTMB department, and counter-posed to this, the invisible 0800 system can deny access, and how does one prove the denial.

Many of these pitfalls are removed if there is no GMTB, and the UBI is set as far as possible at a reasonable level, with a re-introduction of "free" prescriptions, and an accommodation benefit of some type etc.

Any GMTB department carries an administrative cost. This cost is hard to estimate, as it depends on the numbers needing the GMTB and the frequency of those people moving into and out of the system.

I believe it will be difficult to move any system which starts with a "partial UBI" to a full system, because those being means tested may easily be forgotten, and those not needing (or receiving) it may be reluctant to increase the "tax" they pay. To move over time from 39% to 49% (from Keith's partial to a full) will require convincing those, that via the "effective marginal tax rate" (EMTR) have their partial basic income taxed away to zero, that there is benefit in paying more tax.

(As it is, I believe we need to exercise vigilance to ensure the full UBI moves with inflation, that is we don't end up with the reverse of "fiscal drag." My paper on the "Beneficiary Price Index .- presented to the Beyond Poverty Conference - indicates the CPI may be an inappropriate index to ensure benefits move in accordance with price movements low income people face. CPI may be equally inappropriate for those relying solely on UBI as an income source.)

In the research paper I discussed mainly micro-economic concerns. My paper introduced UBI; discussed equity and efficiency, indicating the need for some sound inter-temporal analysis (which I attempted in a simple two person economy); optimal government spending; UBI and Labour Supply; the "optimal tax system"; and a minimum equitable UBI - where I compared various rates of UBI with the current benefit-tax system across a number of different family/household types and income levels. (I am working on the equity-efficiency issue from an inter-temporal for Victoria Economic Commentaries.) (The title of the assignment related to Winston Peter's comments in one of his Budget speeches that the current Income Support system was failing.)

I compared three UBI scenarios ($101 per adult per week, and $50.50 per child, $145 and $72.50, and $158 and $79) with the current tax-benefit system. My comparisons were different family sizes over a variety of incomes. (I rejected the lowest scenario on the grounds it failed an equity criteria, as too many beneficiaries lost.) (There is no conceptual reason why I set the UBI child rate at 50% of the adult rate, and whatever relationship is settled on needs debate.)

At the macro-level I aggregated up the UBI rates (based on population data from Lowell Manning). This I added to "Current Government spending less Social Services" (from the July 1998 Fiscal and Economic Update). Current Government spending in 1996/97 was $32.9 billion. Social Services total $12.6 billion (that is, Income Support administration and social security "transfer payments.") I added back to total Government spending Income Support "Supplementaries" for Accommodation Supplement, Disability Allowance and the differences between National Superannuation and the Invalids Benefit and the single adult over 25 adult Unemployment Benefit (calculated from the 1996/97 DSW Annual Report). This totalled $1.1 billion. I argued this money is distributed to the same beneficiaries via the health system or a "department of housing." (Leaving the Accommodation issue to one-side, the payments to those a medical condition and those over a certain age (65) would receive this extra as of right.)

Because the total "transferred" under a full UBI system is greater than the current tax-benefit system GDP may alter. I could not model this. The $145/$72.50 scenario would cost $24.2 billion. Other "current Government spending less Social Services" plus the $1.1 billion add back comes to a total of $45.7 billion. GDP was $96 billion in 1996/97. Government "spending" including UBI is 48% of GDP. Under the $158/$79 proposal government spending is $48 billion.

The following sections were not addressed in my research paper, but indicate some thoughts of how I imagined the four areas I "added back" would work. (At this point they are unrefined.) The first two sections relate to medical situations. Universalising prescriptions and doctor visits impacts on both total government spending and the individual inter-face the UBI and costs of living.

Clearly there may be some people not currently getting an Invalids Benefit, due to the level of their private income effectively meaning it would be abated away, or they are in permanent care. The current total state expenditure on the Invalids Benefit includes some which is abated already, so the aggregate expenditure I have been able to identify is under-costed from what it might be under a full UBI with extra for those meeting "medical criteria." Th extra funding to ensure those who meet the medical criteria but are not getting the Invalids benefit for various reasons is I presume relatively small. The extra entitlement per recipient is medically related, so in some sense is "means-tested", but the means would not related as the ability to earn income as it in effect currently states.

My system relies on a medical professional indicating costs associated with a medical condition and is not abated as income rises. Obviously the disability allowance aspect of my proposal advantages the present recipients, so some unfairness is present. To resolve this, entitlement to a Disability Allowance may have to granted to all those with "extra" medical related costs. (As with the Invalids Benefit this would add to total state spending, and may not all be captured within an "universalised" health system.) While the Disability Allowance is small in national expenditure terms, and is mainly tied up in direct medical costs (doctor visits and prescription "part-charges") not all of it is, for example come can be transport costs, heating, laundry etc. For those facing these extra costs - due to a variety of medical conditions - a UBI at $145 or even the rate of the current Invalids Benefit may not help. (Please note not all people eligible for the Disabilities Allowance are eligible for the Invalids benefit, or even the Sickness Benefit as it was.)

Clearly as we age, more extra funding based on age will need to funded if we are to retain extra income for those over 65. But I am unsure how consistent an extra entitlement based solely on age is with the concept of a social dividend or its cash-payment component (the UBI). Extra medical costs related to aging could be provided for via the health system (prescriptions, community nurses etc.) and issues of asset rich/income poor may be resolved by aged people not living alone in their own homes. That is they could take in boarders and in a sense build "community" and share in the costs of maintaining the asset.

I accept this area of funding needs to income tested, but as with the UK Basic Income Group, accommodation support is a difficulty given the "market." I am reluctant to pay income to a house (household) as Lowell suggests. (I refer people to the Community Housing Association Aotearoa New Zealand (CHAANZ) idea of revolving funds to re-stock our housing asset, where housing becomes a community asset, not private property as such. This has implications on the need for credit to finance mortgages etc.)

My costings assumed no changes to rents and the amount people were getting from Accommodation Supplement. (Technically this will need a change to the Accommodation Supplement formula and may result in extra spending by the government.)

I compared various situations under the current tax-benefit system with post UBI systems. This took into account eight different family/households (single no children single with one, two or three children, and two adult no, one, two or three children) and nine different levels of "earned" income (zero, five, ten, twenty, thirty, forty, fifty, seventy-five and one hundred thousand per annum. In two adult families I decided to have just one income earner.)

Under the $145/$72.50 scenario I came up with the following results. (They contain no add back for accommodation supplement as this varies per rent etc.) The figures are gains/losses per week.

Taking two family types and two earned income levels results in the following calculations:

The above comparisons indicate at the $145/$72.50 scenario single parent families miss out when on low incomes from other sources. (Keith notes similar problems.) Two parent families have a clear advantage, especially in the $10,000-$50,000 range. This is partly due to the way the current tax-benefit-abatement system works - that is the non-earning spouse receives an income. (Note, I have assumed only one partner "earns" for ease of tax calculations under the current system.) Single income earners at high incomes also miss out for similar reasons.

The $158/$79 scenario improves the lot for most families/households with only UBI, but I am still concerned about how single families with children at low levels of earned income are treated. It could be argued the current system is "generous" <grin>. It might also be argued with a more tax funding of both health and education that some of the strains on the budget of these types of household may diminish.

By way of comparison to Keith's figures (graphs) my single parent+three children receive $362.50 (or $395) before an "accommodation benefit", whereas Keith's family gets $360 (full UBI, exactly what they get under the partial UBI and GMTB or sole GMTB system is hard to say as it depends on their benefit status.) Assuming the same rules for the accommodation supplement that exist at present, I work out $106 under the $145 scenario, and $102 under the $158 scenario. (Keith is silent on this issue.) Any comparison with current and post-UBI would need accommodation factored in. (Note Accommodation Supplement is not factored into either current or post-UBI systems in the tables above.)

Working through various family/household and income types is an almost endless task. However assuming neutrality of treatment as per accommodation, it does devolve into a manageable number of family/household sizes, and splits of income among partners. Much also depends on current benefit status when comparing ex ante and ex post UBI systems. The distributive effects depend on the adult:child ratio as much as how "full" or "partial" with GMTB the post-UBI system is.

The level any partial UBI is set at, with supplementary GMTB of full UBI is derived in part on the prevailing tax rate (or vice-versa). It is therefore necessary at some point to debate the level of tax and government spending. Thus debate what is a reasonable UBI. This probably relies on costing a budget of various family/household types. (My $158/$79 scenario is close to figures in the Stephens, Frater,Waldegrave "Poverty Line" Report.) However building up an appropriate UBI, then aggregating it, and deriving the tax rate needed is an exercise needing further research as the $159/$79 scenario equated to the Stephen's et al figures only be chance.

Funding the UBI needs a "flat tax rate" on "earned" income, but this still means an EMTR which rises as earned income rises. The limit is the effective average tax rate on earned income, or the flat tax rate. Having EMTR over 50% creates problems, as those who currently face this situation know only too well. Keith's EMTR of 59.2% applies for low income earners. It catches a group not current affected by an EMTR of over 50%. A full UBI resolves this problem, but probably needs a higher flat tax rate.

I am unsure if all Keith's situations result in the same level of government spending. This is because I do not have enough figures on current income distributions to calculate total government revenue. I assume the scenarios are equivalent. That said, I am unsure if we can devise a system whereby everyone gains, or alternatively no one looses. In this sense income will be re-distributed, both across income bands and family types. My rationale is to ensure low income people are not disadvantaged, and is possible made better off, but this would probably rely on too high a UBI-flat tax mix - hence my compromise that they be no worse off.

As can be seen from my tables, single income parents with no or little earned income loose when compared to the current system. This is a big hurdle in the sense it is inequitable, under my criteria. This may be overcome by relaxing the 2:1 ratio between adults and children, or may be resolved by having a higher rate of UBI (for example $180/$90). This would need a flat tax rate of 53.75%. Such rates push up the advantages for some family groups, and disadvantages others - particularly no child households. Keith's one adult-one child family ($240) are slightly worse off than the current system ($253), and his one adult-two child family break even ($300). Keith's partial UBI plus GMTB is more generous than the current system as the number of children rise, but is less "generous" than mine. As with Keith's costings, two adult-single income households gain under any UBI system. These advantages are there under a two adult-two income situation.

Reducing the 2:1 ratio permits an increase for child rate, while increasing it permits an increase in the adult rate. It depends on views of children I suspect which way this ratio needs to swing. I have not yet attempted costing the scenarios (each scenario generates heaps of tables). Any increase in government spending means a higher tax rate.

Clearly how any UBI system compares with the current system for low income people depends on the rate it is set at. Entitlement is based on citizenship, as Tony Atkinson, this is a constitutional issue. The rate becomes a political issue. In terms of criteria, of which reasonableness is one, we need to set them, debate them if necessary. We may never be certain as what is reasonable for all family types, but we can be certain on the constitutional issue, and have a fair idea of what is unreasonable. Deliberately building in a supplementary system for hundreds of thousands as Keith's partial UBI and GMTB does seems opposed to my understanding of our constitutional argument. Costing a rate of UBI that genuinely recognises our citizenship may well require a flat tax rate of around 50% - but then so be it. The adult:child ratio becomes more important in determining winners and losers. The ratio is also implicit from our criteria. Thus Keith is implicitly judging the child and childless household situations, as I have done.

Certainly, low income earners currently have a high EMTR, well over 50%, which is part of the problem. However having an EMTR of more than 50% over an extended range as Keith suggests the GMTB option just means the poorest 80% share the burden, while the top 20% do not carry any. It is unclear how many of the lowest income earners pay the highest EMTR under the partial basic income scenario Keith suggests. Given this, I am unsure how a system with the EMTR skewed as it is against low income earners (as with both GMTB systems) can be viewed as being equitable or necessarily efficient and effective in terms of administrating the tax-benefit system. (See above my comments on administering a tax-benefit system with GMTB.)

The student loan situation is I think a red herring. Students regardless on the time at education institutions get the UBI. The funding of course fees is a separate debate, and for the record I think the state should fully fund the course costs etc.

My concerns are three-fold. The first relates to the very real concerns I have of maintaining a means tested system. These issues are outlined in the sections of the culture of means testing and how we move to a full UBI. The second relates to having a system where those on the lowest incomes are no worse off than under the current system. The third is to set the UBI at a reasonable rate, for both households with children and no children. The second two are closely connected. Resolving the third needs a process, perhaps similar to the Stephens et al project. Resolving the second depends in part on the adult:child ratio, and then on a complex series of before and after calculations, By holding a line on a minimum UBI (for a given type of family situation) one can derive the aggregate spending on UBI. This aggregate is added to other government spending to derive the total tax revenue needed. My sections under the Invalids benefit etc obviously need further work, and may add to government spending. The Invalids Benefit and Disability Allowance is essentially a health issue and should not be income tested. The aged entitlement may need further debate, and the accommodation issue certainly needs further discussion.

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