Would an 'unconditional basic wage' work?

Bookmark and Share Economics & Deregulation | Mikayla Novak
On Line Opinion 3rd December, 2013

One of the more unconventional public policy proposals discussed in academic and political circles is all people should be provided with a form of guaranteed income, regardless of their circumstances.

In Switzerland, citizens will eventually vote on a referendum proposal to provide each citizen a monthly 'unconditional basic income,' to ensure 'a dignified existence and participation in the public life of the whole population.'

Advocates for the Swiss basic income have called for a universal, flat payment of 2,500 francs ($A 3,017) provided by the state, and recently secured the requisite minimum number of petition signatures for a referendum on the matter to take place in that country.

Support for a basic income is not limited to social democrats or progressives seeking to reduce inequality, but variations of this have also been suggested by prominent classical liberals such as Milton Friedman, Friedrich Hayek, and James Buchanan.

Friedman famously advocated a 'negative income tax' arrangement, whereby individuals earning above a threshold income level would be liable to pay income tax, but those below the threshold not only pays no tax but receives a government subsidy.

The lower an individual's income falls below the income tax threshold, the greater the subsidy (or 'negative tax') he or she would receive to ensure their upkeep.

Writing in the 1960s and 1970s, Friedrich Hayek gave qualified support to 'a certain minimum income for everyone, or a sort of floor which nobody need fall when he is unable to provide for himself.'

During the 1990s the public choice theorist James Buchanan suggested that the government should provide an equal-per-head 'demogrant' transfer payment, in combination with a flat rate or proportional rate income tax.

Other figures within the modern liberal and conservative traditions have expressed support for a basic or guaranteed income, including Charles Murray's $US 10,000 ($A 10,958) per annum basic income for Americans with pulses, as well as the respected British economic journalist Sir Samuel Brittan.

Leftist aspirations to alleviate poverty may seem, to many, as an intuitively obvious reason to support a basic income model, but why did some of the most famous liberals of the last century support what appears to be a socialist redistribution scheme?

A key argument put forward by some liberals is that a basic income would be a more efficient way to redistribute resources, at least compared with the plethora of current welfare state subsidies.

Substantial amounts of taxpayers' funds are presently siphoned off enabling bureaucratic middlemen to administer numerous welfare programs, each with their own eligibility and other criteria, which leads to unnecessary administrative complexities.

There is an expectation among some that simplification of the welfare state, through a process of rolling all subsidies into one basic income program, could deliver significant cost savings and bring rationality to subsidy design.

For liberals such as Buchanan, a basic income system was justified to prevent politicians and bureaucrats from implementing discriminatory spending arrangements, which benefit some people at the expense of others thus violating political generality norms.

There is little doubt that the existing welfare state is administratively unwieldy, fiscally unsustainable and ensnares people in poverty traps due to high effective marginal tax rates, but there is no guarantee that the basic income would necessarily resolve these problems.

Over a century of experience across the Western world consistently illustrates that the fiscal size and scope of the welfare state has grown enormously, as rival politicians seek to outbid each other for votes by partitioning the general electorate into new constituencies.

This process, coupled by the incessant demands of interest groups for policy favouritism, has inevitably led to a proliferation of different welfare programs for different groups, such as the unemployed, families, people with disabilities, war widows, and so on.

Introducing a basic income would not quell or override these practical, yet endemic, features of modern political life.

It is unlikely that the concentrated beneficiaries of existing welfare subsidies would support the abolition of their favoured programs, and even if a basic income scheme was successfully implemented the interest groups would quickly seek to undermine the generic application of the basic income.

For example, there would be immense pressure placed upon politicians to apply differential subsidy loadings on top of the basic income level, assisting those groups deemed to be needier than others.

Compounding these distributional conflicts is the prospect that even a modest basic income could significantly reduce labour supply, as some people elect to abstain from work, either in part or as a whole, in response to a "no questions asked" government payment for all adults.

Dampening labour supply following the introduction of the basic income would only further aggravate tax pressures borne by those who remain in the workforce, or choose to exercise their entrepreneurial flair to produce goods and services for others.

The application of a basic income may also hamper the financing and provision of charitable services, as people become disinclined to donate to charities in the face of an all-round government subsidy.

The basic income proposal is a seductive idea for people of varied philosophical persuasions, but if introduced it could risk ending up as another initiative in which good intentions do not align with desirable results.