10 January 1994  

Income distribution and income support systems fall clearly into two types, the targeted and the universal. Targeted schemes are characterized by means-testing, or by qualifying conditions such as illness or unemployment, and therefore require considerable administrative intervention. Universal schemes are designed to create an overall structure which will apply to all, and will meet the needs of all but a small minority of hard cases. Each type has its advocates. Basic income schemes are essentially universal.

The purpose of this paper is to explore, in a concrete way, some of the practical implications of introducing a basic income scheme in Ireland. How high could the weekly basic income be? What tax rates would have to be imposed to collect it? Could it radically alter income distribution in Ireland. Who would be the winners and who the losers? A comprehensive basic income scheme to replace all conditional welfare payments in Ireland is certainly difficult to attain and, bearing political realities in mind, may be out of reach for the present. Even if this is so, basic income is a useful reference point for thinking about and even for guiding the direction of partial reforms.

The basic income idea has been formulated in a variety of ways, based on different political philosophies, each of which has tended to generate a different terminology. Thus we can speak of a social dividend, a negative income tax or a demogrant: any of these terms will serve as a description of the same scheme. For those who like acronyms we can use BIG, standing for basic income grant. There are variants of the scheme, but they share most important characteristics, and even the cash amounts that could be involved can be fixed within narrow limits by (on the one hand) the need for a social safety net in income terms, and (on the other hand) by the resource constraints presented by national wealth and productivity.

Put simply, an unconditional payment to each member of society must entail alterations in other taxes and subsidies. One way of looking at it is to say that the grant involves a cost that must somehow be recovered, but I prefer not to stress the cost aspect, since everyone is going to receive the basic income. Better to think of the plan as a complete reordering of the tax-subsidy arrangements of the state. Indeed it is one of the merits of thinking about basic income strategies that they encourage us to look at the totality of these relationships and not focus on partial aspects of the tax and welfare code.

So, the delivery of the demogrant would be fully integrated with the tax system. For a majority the net position, after taking account of the demogrant from the state and the income tax payable to the state, would still involve a net payment to the state. This would be collected from most on a PAYE basis as at present. For those whose income is so low as to result in a net payment (demogrant minus tax liability) from the state, it would be the tax authorities who would arrange for the payment to be made. The demogrant itself would not be taxable, but other income would - there would no longer be personal allowances in the income tax code.

Let's now be more precise: what would the scheme look like in terms of rate of BIG and in terms of tax rates. Actually, there is not as much room for manoeuvre here as you might think. Indeed, if we start with the practical criteria that:

we narrow down the options considerably. In fact, any such scheme will have a "first high then low" structure to the income tax rates, in contrast to the present system whose tax rates we think of as being "first low then high" (though in fact they are much more complex). That is to say, the income tax structure will begin with a relatively high marginal rate of tax - higher than the present top rate. Any attempt to begin with a lower rate of tax will fall foul of the self-financing requirement we began with. Even with a high-low tax structure, since everyone gets the demogrant, the overall system will still be progressive, i.e. the rich will still be paying a higher average proportion of their income to the state in net terms than the middle income, and the poor will be net recipients from the state.

Unfortunately - and it is a big drawback - it seems that this high rate of tax on most incomes would have to be well over 60 per cent. This is undoubtedly high, close to the practical limit nowadays, in view of the openness of capital and labour markets and the potential that allows for tax avoidance. Still, it should be borne in mind that it would subsume employee PRSI contributions. You could think of the high tax rate that as being made up of a single income tax rate plus an additional element payable up to a ceiling. The additional element, depending on your point of view, could be thought of (and "sold" to the electorate) either as a "contribution to the basic income scheme" or as a "benefit withdrawal". It has the effect of clawing back an increasing proportion of the basic income from middle-income taxpayers.

The height of the overall tax rate involved even for a demogrant of around £60 a week in 1994 terms clearly rules out any idea of having a higher demogrant.

Of course if one is prepared to make other radical changes to the income tax code, such as the abolition of mortgage interest relief, relief for educational covenants and the like, then the overall tax rates required would come down. Another saving which could be important is that student and trainee grants could be reduced by the amount of basic income.

Nevertheless, there would have to be substantial winners and losers in the move to this scheme from the present one. That is partly because the social welfare system treats children and dependent adults relatively more generously than does the tax system at present. A further twist comes from the fact that the basic income as discussed here pays the same to each adult. In practice this would have the effect that among those households with a working member, those with children or with dependent adults would gain at the expense of the rest. There would also be a gain to those at work on low incomes (though the concurrent abolition of the Family Income Supplement would affect this). Finally, those who effectively conceal their income (and thereby avoid paying the higher tax rates that would come into effect) would also gain.

If, as suggested above, further tax changes were made in order to reduce the marginal tax rates required, this too would create winners and losers. Unfortunately the lowering of tax rates that has occurred in recent years has not been accompanied by much widening of the income tax base; if it had, introduction of BIG might not require such high rates.

These substantial horizontal redistributions could generate serious political opposition to the plan. Losers complain more than prospective gainers in tax regime changes, and perhaps with reason. The argument that "moving over to a basic income could inject a new dynamism in the economy that would, in the medium term, bring benefits to all" lacks conviction for those who are to be hurt immediately. A giant leap to a basic income scheme may be ruled out by the inevitability of such opposition. For one thing, those concerned with the overall fiscal position will reasonably fear that what began as a self-financing plan could be watered down in the face of such opposition to the point where it generates a large borrowing requirement in the short-run and ultimately higher taxation or inflation later on.

For many years now, more than one-third of Irish households have been in receipt of some form of social welfare. That includes 300,000 registered unemployed, a group which, among other things, must show themselves to be without paid work in order to receive unemployment assistance or benefit. Of course, if offered a rewarding, full-time, well-paid job, the decision of the unemployed person will be straightforward. But many do not have such luck: at best all that is available to them in the current environment are bits and pieces of part-time work: worth doing for the extra income - if it were extra - and for the sense of being a useful member of society, but not paying enough to compensate for the loss of benefits.

It is important not to oversimplify the situation, as it is not true that there is no point for any of these people to go looking for part-time work for fear of losing the dole and other benefits. Some paid work is allowed under the regulations and efforts have been made to lower this barrier. Still, the principle of being "available for work" still pervades the system of unemployment assistance. There is not enough detailed evidence on the choices faced by the unemployed and how they respond: but the existence of dilemmas such as that which I have described - the unemployment trap - is not in doubt. This is a most controversial area, and an overall judgement about the degree of work disincentive is hard to make.

A key feature of the basic income is that it would remove the link between being unemployed and having a minimum income support. It would remove this "unemployment trap". Of course it will not thereby solve the unemployment problem: anybody who has any awareness of the labour market knows just how hard it is to get jobs at present. But it could help create the conditions that would begin to restore self-confidence and motivation among some of the long-term unemployed, as they get used to the idea of seeking and enjoying the fruits of part-time work. It could also reduce the degree to which people slide into the dependency frame of mind. Despite considerable a research effort, we are really only guessing here: there is little hard evidence to provide quantification. Advocates of the basic income approach see this as only the first step along a path which ultimately eliminates marginalization in the labour market.

A consideration often mentioned in the same breath, but quite different in kind, is that the incidence of welfare-fraud, by which is normally meant persons who are not entitled to benefit claiming it, would be greatly reduced or eliminated. After all, if everyone is entitled to basic income, then the only kind of fraud that could happen is for persons trying to get the basic income more than once. Claiming while working would, of course, no longer be a problem.

The down-side of all this incentive aspect of reform is the higher income tax rates that would have to prevail under BIG. These too have disincentive effects, and though the disincentives would tend be less severe than the unemployment and poverty traps we have spoken about, they would apply to a larger population including those working now. In Ireland's case, the response of young and adaptable workers to high tax rates might well be to emigrate - even when jobs are available here. This is a drain of a type with which we are familiar, but it could be worsened by the new tax-benefit regime.

As an unconditional or universal payment, the basic income could help address one aspect of the poverty problem, namely the failure of poor people to take-up the benefits to which they are entitled. The problem of take-up is not negligible (especially in programmes such as the Family Income Supplement which can involve relatively small payments) and contributes significantly to the poverty "gap" i.e. the degree to which there are household incomes falling below a poverty minimum.

However, in another dimension, the basic income would not help at all in the short-run. Specifically, there is no reason why the proposed unconditional BIG payment could be substantially higher than the conditional social welfare payments prevailing at present. The problem of higher income tax rates, to which reference has already been made, would represent an insoluble barrier to such an increase. Thus, to the extent that poverty continues as a result of inadequacy of welfare payments, the basic income cannot immediately help. Any calculations which purport to show the basic income greatly and quickly reducing the incidence of poverty should be scrutinized closely: they will invariably be found to involve much higher basic payments that does the existing welfare system. This is one point where the conflict between targeted and universal schemes has an important impact. For a given level of income tax rates, it appears to be possible to have a higher increase in conditional welfare payments than in unconditional (basic income).

On the other hand, if the basic income did succeed in having a very favourable medium term impact on employment and economic growth generally, then higher rates of basic income could be afforded: the "social dividend" character of the basic income would come into play. Furthermore, with unemployment one of the main sources of poverty in Ireland, its removal of the "unemployment trap" would mean that the basic income could help avoid the causes of poverty. Thus if we have confidence in the medium-term dynamic benefits of the basic income approach on unemployment, employment and growth, we can expect a favourable medium-term impact on poverty too.

A serious drawback to partial schemes is that they do not offer the substantial administrative savings that would be entailed in the full BIG which would allow a drastic simplification and slimming down of the social welfare delivery structure, albeit at the cost of some additional administrative burden on the tax side.

Two main intermediate possibilities have been discussed, namely

A basic income for children only is much less radical than the full basic income, involves much less horizontal redistribution and a much lower increase in tax rates. At the same time it removes a lot of the unemployment trap in that the child-portion of the dole is replaced by an unconditional payment which is not lost if the unemployed person accepts a job. The basic income for children is conceptually very similar to child benefit (the old "children's allowances"); but if it were to compensate for current rates of social welfare child increases, child benefit would have to be raised from £20 a month to £20 a week. Bearing in mind the incidence of poverty among low-income working families, that seems to me to be an interesting and attainable objective.

Having a minimal basic income for all, topped-up by a social welfare structure much the same as at present - but with amounts reduced by the same sum - would represent another middle course. One version of this approach cashes out the personal tax allowances at the higher marginal rate: these allowances are at present worth £20 per week to a higher rate tax-payer, and double that for a married couple. The idea would be to cancel the personal tax allowance, reduce all social welfare payments by £20 per person and pay a minimal basic income of £20 to all adults. This would entail a transfer to those at present on the 27 per cent marginal tax rate, and those who are not in receipt of social welfare payments but whose incomes are too low to reach the tax thresholds. A somewhat higher income tax rate would be needed to cover this. Clearly this too would move in the direction of reducing the unemployment trap.

A number of other types of tax and welfare reform have been suggested over the years designed to achieve worthwhile efficiency and equity improvements without requiring the drastic changes that would be involved in BIG. Most of these come from the targeting approach rather than the universalist. Let me conclude with a brief reference to one such scheme recently proposed and which has caught the public imagination. According to this scheme the unemployed would be offered part-time jobs in lieu of the dole, paid at the normal rate for the job and for a number of hours sufficient to ensure that the person is at least no worse off. This is not the place for a full analysis of that right-to-work (RTW) scheme: I simply wish to draw out the contrasts with the basic income scheme. There are similarities too: in particular the fact that participants are not precluded from taking on extra work. But the contrasts are considerable.

There are a number of other aspects which I have not touched upon, including especially the more philosophical aspects on which I don't feel competent to comment. The role of women in Irish society both in and out of the paid work-force, and the relevance of basic income in recognizing and supporting that role, is another aspect that needs to be borne in mind. The rapid growth in women registering as unemployed in recent years is a phenomenon of direct relevance to BIG from a number of perspectives.

There is also a potential European dimension. With a growing perception across Europe of threats to the social welfare system as a result of increased globalization and the mobility of capital, the question of securing a minimum income guarantee on a Europe-wide basis is likely to become a live issue in the years ahead, in which context some form of BIG will undoubtedly be on the agenda.

Overall, it appears that, attractive though it may be in principle, introducing BIG in Ireland would involve more horizontal redistribution than is likely to be politically acceptable. This could reflect more on the conservatism of the policy process than on any intrinsic unsuitability of Ireland to BIG. Indeed, while it is true that no other country has introduced a full BIG, arguably no other country has as favourable preconditions for BIG as has Ireland: a very high welfare population already, a flat-rate welfare system (so no serious problem of eliminating generous income-related unemployment benefits), and a tax-paying population which has been well-used to high marginal tax rates. Let's not rule out this radical alternative which might just help us to break out of the economic malaise we have been suffering from for too long!

I have deliberately avoided peppering the text with literature references. Let me mention just a few which will act as guideposts to the rest. First, Tim Callan and Brian Nolan are the editors of an important book: Poverty and Policy in Ireland, which will be published by Gill and Macmillan in February. It contains a lot of the underlying research findings together with plenty of references, especially to the empirical literature. I have benefitted a lot from reading parts of this volume in draft. On the specific question of Reforming Child Income Support, the Combat Poverty Agency has recently published a short pamphlet by Brian Nolan. The philosophical issues are explored by Philippe van Parijs, ed., Arguing for Basic Income (London: Verso, 1992). The RTW scheme is presented, along with other recommendations including a BIG, in Sean Healy and Brigid Reynolds, "Work Jobs and Income: Towards a New Paradigm", in their New Frontiers for Full Citizenship (Dublin, CMRS, 1993). My own earlier work on a basic income scheme for Ireland appeared in Administration, Spring 1987. I would also like to thank C.J. O'Neill for letting me see his unpublished M.Phil. thesis (1993) for Trinity College, Dublin, on the subject.