New IPR report, Exploring the Distributional and Work Incentive Effects of Plausible Illustrative Basic Income Schemes

Luke Martinelli, Exploring the Distributional and Work Incentive Effects of Plausible Illustrative Basic Income Schemes, Bath: Institute for Policy Research, free to download 

This second paper from the Institute for Policy Research’s project on Citizen’s Basic Incomes builds on the first paper, The Fiscal and Distributional Implications of Alternative Universal Basic Income Schemes in the UK, by exploring further the distributional effects of illustrative schemes, and also by evaluating marginal deduction rates, i.e., the extent to which additional earned income fails to become additional disposable income because benefits are withdrawn and earned income is taxed. (The paper employs the terminology of ‘participation tax rate’ for the marginal deduction rate as it relates to individuals not initially in paid employment, and ‘marginal effective tax rate’ in relation to individuals already in paid employment.)

The paper explores these and other indicators for three different Citizen’s Basic Income schemes:

  • Model A sets the working age Citizen’s Basic Income at a value equal to that of the cash value of the Income Tax Personal Allowance, and the scheme retains and recalculates means-tested benefits (this scheme is the most similar to the scheme evaluated in recent Institute for Economic Research working papers and in the Citizen’s Income Trust’s 2017 introductory booklet. The major dissimilarity is that model A is not designed to be revenue neutral);
  • Model B sets the working age Citizen’s Basic Income at a value equal to existing benefits, and abolishes most other benefits;
  • Model C sets the working age Citizen’s Basic Income at the level of existing benefits, and adds premiums for individuals with disabilities. As with model B, most other benefits are abolished.

The paper fills a gap left by the previous paper by evaluating the numbers of households experiencing gains and losses of various levels. The previous paper had published aggregate gains and losses, but aggregates can mask significant gains and losses among low-income households. A useful new addition to our understanding of different models is the tables showing gains and losses experienced by different family types, and by families with different labour market statuses. A drawback of the research is the fact that model A is not revenue neutral whereas models B and C are. This means that the result that model A avoids significant losses among low-income households, and imposes few significant losses on households in general, whereas models B and C would impose significant numbers of large losses on low-income households, might be as much to do with the additional revenue as with the model’s structure. It would be useful to see results for a revenue neutral version of model A, as this would enable a more useful comparison with results for models B and C.

Because model B abolishes most existing benefits, its implementation could leave people with disabilities worse off: hence the addition of disability premiums in model C. Unfortunately these would compromise the unique administrative simplicity of the Citizen’s Basic Incomes. The temptation should be resisted: and if it was then model C would become model B, people with disabilities would suffer significant losses, and model A would be the only model that would not impose such losses. The reports results for the different effects of the three models on people with disabilities is complemented by results on the three models’ effects on people of different genders.

As well as evaluating the numbers of gains and losses at particular levels of loss or gain, the paper also evaluates participation tax rates (PTRs) and marginal effective tax rates (METRs) for the three models, in relation to breadwinner status, income quintiles, labour market status, and means-testing status. A detailed section of the report intelligently explores the complex issue of the effects that a Citizen’s Basic Income might have on employment market behaviour. Perhaps it does not recognise sufficiently that PTRs and METRs can only function as a very approximate proxy for employment market disincentives: but it does recognise that they only capture the incentive effects of the lower PTRs and METRs, and not the possible disincentive effects of providing an unconditional income. Having said that, the results that Martinelli has obtained are significant:

We find that on average, PTRs and METRs increase as a result of all three illustrative basic income schemes, a consequence of tax increases and the elimination of the personal allowance. However, this does not mean that the schemes modelled here would necessarily have negative consequences with respect to labour market participation. We find that the lower income quintiles, workless households, and households in receipt of at least one means-tested benefit, tend to contain larger proportions of households facing improved PTRs. It is highly plausible that the effects of stronger work incentives on particularly sensitive groups may outweigh the more generalised effect of weaker work incentives over the wider population. (Abstract)

Martinelli recognises, of course, that research results of the kind found in his paper are not all that there is to be said. A Citizen’s Basic Income would not only have distributional and employment market incentive effects: it would also offer basic income security as an unconditional right, without fear of sanction or stigma; improved protection in the face of increasing labour market precarity and irregular employment; and the strengthening of workers’ bargaining position due to the presence of a (partial) exit option. (p. 51)

The concluding section also explores two ‘normative/ethical’ arguments relating to the justice or otherwise of paying an unconditional income regardless of social contribution, and the wisdom or otherwise of paying an income unrelated to need. It would be difficult to argue with Martinelli’s concluding paragraph:

Advocates for basic income must address these normative and theoretical issues as well as make a robust case on the political and institutional feasibility of specific basic income schemes with respect to costs and distributional implications. Whether there exists a basic income scheme able to generate sufficiently broad support in the UK – given the demographic groups opposed on the grounds of self-interest, and given the complex normative trade-offs involved – is an open question. (p. 52)

This paper has filled some significant gaps left over by the IPR’s previous paper on the subject. There are still gaps, of course, as there always are: and in particular it would be useful to see results for a model A scheme that raised Income Tax rates so as to achieve revenue neutrality; and it would also be useful to see how many households would be taken off means-tested benefits by model A, or would find themselves close to being taken off them. Whether any of the three schemes would make an impact on the number of Housing Benefit claims would also be useful to know.

This is a most useful paper, and we look forward to further useful results from the IPR’s Basic Income research project.