The OECD’s 2019 employment outlook publication, The Future of Work, is accompanied by a ‘transition agenda’. The chapter ‘Left on your own? Social protection when employment markets are in flux’ contains a section on Citizen’s Basic Income:
Moving towards greater universality through a form of basic income (BI) is an interesting proposal in this debate that has received considerable attention. No country has introduced a BI as a principal pillar of SP [social protection], however, and replacing large parts of existing support systems with a universal payment would be a major change. OECD simulations show that an unconditional payment to everyone at meaningful but fiscally realistic levels would require large tax rises as well as reductions in most current benefits, and would often not be an effective tool for reducing income poverty (OECD, 2017; Browne and Immervoll, 2017). Some disadvantaged groups would lose out when existing benefits are replaced by a BI, illustrating the downsides of SP without any form of targeting at all. In view of the immediate fiscal and distributional consequences of a fully comprehensive BI, reforms towards more universal income support would realistically need to be introduced gradually for specific groups (such as youth) or would need to be restricted in other ways. It would also require a parallel debate on how to finance a more equal sharing of the benefits of economic growth. From a broader economic-policy perspective, a downside of universal support is that, unlike out-of-work or needs-based benefits, it does not act as an automatic stabiliser: since it is paid regardless of income or employment status, spending levels do not go up during a downturn, and they do not fall during an upswing. A number of assumptions need to be questioned.
As we wrote when the OECD paper cited here was published in 2017:
The scheme envisaged would abolish tax allowances and ‘most existing types of cash benefits’, and would be revenue neutral. … In its final section the paper does discuss the possibility of implementing a Basic Income scheme that leaves in place means-tested benefits and recalculates them to take into account each household’s Basic Incomes and any changes in net earnings, but it then does no further work on such an option. This is a pity, as to do so would have enabled the researchers to respond to many of their own hesitations about Basic Income. As we have shown, a scheme that retains and recalculates means-tested benefits could largely avoid losses for low-income households and could reduce poverty. What would be really helpful would be to see further research from the OECD on a wider variety of types of Basic Income scheme, including schemes that retain and recalculate means-tested benefits.
We might add that, as we have also shown, it is perfectly feasible to keep Income Tax rate rises to 3 percentage points.
It is a pity that the new OECD document repeats uncritically its previous flawed research project on Citizen’s Basic Income, and that no further research on alternative schemes has been carried out.
In relation to the point about automatic stabilisers: It is of course true that means-tested benefits function as automatic stabilisers during economic downturns, and that Citizen’s Basic Incomes do not. Unfortunately, the OECD has made a common mistake. It would never be means-tested benefits or Citizen’s Basic Incomes on their own that would influence other economic factors: it would be the tax and benefits system as a whole that would do so. Any feasible Citizen’s Basic Income scheme would retain and recalculate means-tested benefits, meaning that they would still be available as an economic stabiliser. And for a Citizen’s Basic Income funded by changes to the existing tax and benefits system, the loss or reduction of the Income Tax Personal Allowance, and increased Income Tax rates, would mean that the Income Tax part of the system would act as more of a stabiliser. The overall stabilising effect of a system containing a Citizen’s Basic Income would therefore be much the same as the current system.
Just think how much simpler would be the discussion on BI were there no such complications as NICs or, on other than very high earnings, personal income tax to begin with. (Stay with me.) Moreover, the political dimension of how to get a basic income going must never be ignored and it is vital to recognise that those who, one way or another, must approve a scheme for a BI – voters – must see the proposals as simple and obviously fair – and of direct and immediate benefit to them. (Imagine how difficult it would be for a politician to put the case for a BI in the complexity usually brought to the topic by its advocates – especially in the face of the inevitable negative and reductive resistance of the media.)
A Introduction:
A1 Eliminating personal tax allowances and the equivalent disregards in respect of Employee NICs could yield well over £100 billion p.a. It is now common to look to this to fund a basic income (BI). A2 But it is the electorate that, in the end, must be persuaded of the merits of BI in the face of media spin that “hard working people” would thereby lose the £2500 p.a. (twice as much and more for the higher paid) their income tax allowances are worth, plus something over £1000 more in respect of NICs.
A3 So, how to eliminate those allowances in a way that would both shrug off any media fulminations and be simple to get across to the electorate.?
B What to do:
B1 Gradually, over around six years (seven steps but see D7), starting very soon after the election that mandates it, reduce to zero the rates for Employee NICs (including the rate above the Upper Earnings Level) and the 20% standard rate part of income tax .
B2 Concurrently, gradually raise the rate for Employer NICs to replace the lost revenue.
B3 Early on, give the job of paying the remaining 20% and 25% tax on wages above the present thresholds for higher wages (or whatever rates and thresholds are then current) to those higher wage earners (see D8). Let’s call this Pay It Yourself (PIY).
B4 Concurrently with B1 and B2, gradually eliminate the Secondary Earnings Threshold so that, after the six years, employers will pay a flat-rate tax on all of all wages (and bonuses) (FRTAAW).
B5 So that all wage-earners get a rise in take-home pay in each of the 6 years, continue with the now usual annual increases in the minimum wage.
C Key outcomes:
C1 Income tax and Employee NICs currently add up to about 20% of the median wage so, most wage-earners would be guaranteed 7 increases in take-home pay of around 3% p.a. (around the current average). Some employers might wish to pay more.
C2 Employee NICs will be eliminated for all as will income tax for all but higher earners.
C3 The FRTAAW will produce a payroll administration system of irreducible simplicity whereby a simple app would automatically combine each payment of a wage into an employee’s bank account with the simultaneous payment of the FRTAAW to HMRC. This will produce multi-billion savings in payroll tax administration for employers and government along with many benefits such as administrative simplicity when working for multiple employers or moving from one (poor) job to another (better one).
C4 Businesses will be weaned off profiting from the tax-payer subsidy of low wages and the zero hours business model..
D Brief discussion:
D1 The reform will smooth the way towards a BI because there can be no emotive resistance to the loss of something that one doesn’t have (reduced charges on one’s income from personal allowances and NICs thresholds).
D2 If done on a revenue neutral basis many employers will see lower employment costs: only those who would have awarded rises leading to lower rises in take-home pay than this proposal and those who currently pay very low or very high wages, seeing increases.
D3 The great majority of voters will welcome a BI with open arms because of the guaranteed increases in take-home pay and the eventual elimination of wage taxes (for most) and they will ignore the reactionary resistance of the media.
D4 At present, under PAYE, employers already find and pay the money for all take-home pay and all payroll taxes and the question of from whom the taxes are due is, even now, really only a matter of attribution and perception. Note too that “tax on all of all wages” is already gradually introduced over the wage range of £100000 to £125000 p.a. and, thus, the principle already established.
D5 To be able to keep all of one’s wages, which will be the case for most wage-earners, is a great incentive to work. Moreover, paying no tax on one’s wages will rather defuse the resentment felt by some that the tax/welfare system (or a BI) takes money out of their pockets to support the idle and inept.
D6 The BI system might wisely allow the voluntary deferral of one’s BI in return for a higher BI in retirement – a simple and unbeatably financially efficient accompaniment to the orthodox pension system which would both ameliorate the growing pension problem and much reduce the introductory costs of a BI
D7 The reform’s gradualism eases the necessary adjustments. The steps need not be annual. Quarterly steps might make for adjustments which are even easier (and less worthwhile to game).
D8 The extra taxes on higher wages need to be paid directly by their earners (PIY) to permit the establishment of the FRTAAW. To the same end, workplace pensions and all employment tax related allowances (the Blind Person’s Allowance, Trading Allowance and the Employment Allowance for example) need to be managed separately from the FRTAAW payroll tax.
D9 Business people might perceive their higher Employer NICs (which would still, for many employers, be less of a total burden than they were, in reality, paying before – and should be renamed under this reform anyway) less objectionable if they reflect on the cost to the state of the regulatory, social, and physical infrastructure without which business would be impossible and the £100000 or so the state has spent on the education and upbringing of each employee – and if they also reflect that they don’t think twice about paying all their other suppliers for what they get from them.
D10 To eliminate the question of whether benefits (and a BI) should be seen as taxable income, all benefits and the state pension (and BI) could simply be paid net of a notional tax paid at source which, because the source is the government, would be self-cancelling.
D11 Any monies left over from funding a BI from the proceeds of the elimination of personal allowances etc. (see D6 too) could be used to reduce the remaining taxes on employment (exactly where the dead-weight burdens of taxation should not fall) or, say, to resurrect the NHS.
Robin Harrison 2 March 2020