Universal Basic Income – panacea or snake oil?

Rory O’Kelly has his doubts on the benefits

The idea of a universal basic income (UBI), an unconditional regular payment made to everyone, is becoming increasingly popular on the left. This might seem surprising. However severe the obstacles facing people trying to claim current benefits there must surely be a solution which does not involve giving shedloads of public money to trustafarians and the trophy wives of oligarchs.

The UBI concept is however supported by an important perception. That is, that wealthy people already receive benefits through the tax system. The personal allowance in income tax has a cash value directly comparable to a social security benefit and in bringing this to light UBI proponents perform an important service.

The idea behind UBI is more ambitious. There is however a fundamental flaw in the simple amalgamation of benefits and tax allowances which can be explained simply through the concept of a ‘subsistence income’.

This can be defined as the amount of money which a person needs to live on. It should determine benefit levels, in that adequate benefits would bring everyone up to subsistence level. It would also determine tax allowances, in that income tax should never reduce people to below subsistence level. Taxable capacity is income in excess of subsistence.

Supposing therefore that subsistence level is set at £100 per week for each individual. This should be the basic benefit level for people with no other income and the personal tax allowance should be £5,200 per annum.

If however this allowance is simply converted into a cash payment of equivalent value this value, given a 20% tax rate, will not be £5,200 but £1,040, or £20 a week. Conversely a payment of £100 per week will be equivalent to a tax allowance of £26,000 a year. This will be the income level at which what the person pays into the system equals what they get out.

Using real-life figures instead, the standard rate for benefits paid weekly is £73.10, which is too low. This is equivalent in value to a tax allowance of £19,006, which is much too high. Conversely the current personal tax allowance is £12,500, which is too high. Converting this into a benefit produces a figure of £48.08 a week, which is much too low.

The present 20% tax rate is of course too low. Governments have come to dislike income tax because it is too simple and too progressive and it has been gradually displaced either by openly regressive alternatives (e.g. VAT, charges for services) or by strange fiscal devices which may be intended to be progressive but which are hopelessly complex and expensive to operate (e.g. student loans). Taking the income tax rate back to 25% or 30% would indeed reduce the problem with UBI but only a 100% income tax rate would eliminate it completely.

There are also major administrative problems with a universal basic income. A tax allowance system makes it possible to ignore a very large number of small and irregular incomes. UBI advocates claim that it would simplify the benefits system, which is true enough. It would however hugely complicate the income tax system. Sick or unemployed people who did occasional bits of work for cash and did not declare them would no longer be guilty of benefits fraud but they would all be guilty of tax evasion instead.

To summarise, a UBI would achieve neither of its objectives. If paid at any realistic level it would still have to be topped up by other benefits to provide a living income and for practical reasons some sort of tax allowance would have to continue alongside it.

There is a more fundamental objection for socialists. When one sees that a UBI is equivalent to a huge increase in the personal income tax allowance it follows that introducing it would virtually wipe out the income tax base. Obviously it could be replaced by other taxes, but why would we want this? Income tax is an excellent tax and we should use it more, not less. Proponents sometimes say that within a UBI system we could make income tax more progressive, with more bands leading to a higher top rate, but of course we could do this within the present system instead.

Finally, we should question how electorally popular a UBI would be. Many of our present problems arise from the fact that people seem to like tax allowances more than benefits, however described. The current policy of huge increases in personal tax allowances alongside a Child Benefit freeze has aroused virtually no criticism though the combined effect, a transfer of money from children to adults, is not one that anyone has ever advocated. Without challenging this attitude we would never be able to achieve a UBI but if we were able to challenge it successfully we would not need one.

At this point we may ask why so many people on the left are so attracted by the UBI concept. The simple answer seems to be that it is a response to the undoubted problems with the present benefit system. It is unnecessary to describe yet again how extraordinarily oppressive this system is or how it systematically generates poverty, fear and mental ill-health across an ever-increasing proportion of the population, in and out of work. Against this background it is easy to see how giving people an absolute and unconditional right to an income might seem attractive.

At earlier periods benefits were largely unconditional, with entitlement depending on showing that one fitted into a certain category rather than on doing anything specific. People too ill to work could receive Incapacity Benefit for as long as they were ill and it was largely accepted that unemployed people were responsible for getting themselves back into work. There were some sanctions for people who ostentatiously refused to do this but they were light and rarely applied.

It need hardly be said that none of this produced any adverse social or economic effects. The entire theory underlying the present approach – that significant numbers of people actually prefer to live on benefits rather than working and that it is therefore necessary to build the social security system around incentives to work and punishments for not working – is delusional. It is also self-defeating. We have seen that withholding or reducing benefits to increase incentives to work fails not only because so many working people need to claim benefits but also because falling benefit levels tend to pull wages down behind them.

An incoming Labour Government could eliminate all the most abhorrent features of the present regime almost at the stroke of a pen simply by returning to something like the pre-1979 system. Getting away from means-testing, another objective of UBI, is a bigger task. Means-tested benefits are complex and expensive to administer, always have take-up problems and are disliked both by those who claim them and those who pay for them. At the same time however the deep feeling that benefits should be paid to those who need them, not those who do not, cannot simply be ignored.

Again the answer lies in the past. The contributory principle embodied in the National Insurance fund means that people who are no longer working or able to work can draw money out as long as they have previously paid in, however rich they may be. This is something which most people would recognise as fair, within its context. Redistributing from rich to poor is a separate task; one for the tax system, not the benefit system.

This conclusion is actually quite a common finding when looking at many aspects of social policy. People who think long and hard about causes of the present housing crisis and possible solutions generally end up by inventing council housing. It is not surprising if those who think equally long and hard about the crisis in the Social Security system should end up by inventing National Insurance.

For a more detailed analysis of the basis for conditionality in the benefit system, see my Chartist e-book The Work Agenda.

Rory O'Kelly

Rory O'Kelly is a former civil servant in the DHSS and has provided advocacy services for a mental health charity.