A universal basic income could be a better option for New Zealand … or it might not
Friday, 13 September 2019
If some people had their way, every New Zealander would get a set amount in their bank account each week - for doing nothing.
It might sound too good to be true, but it's the concept behind a universal basic income (UBI) and, some argue, it could be a solution to some of the less favourable outcomes currently being generated, particularly by Working for Families.
But would it work, how much would it cost — and how is it better than what we've got?
STATUS QUO
New Zealand has a welfare system to support those who cannot work, whether that's through not being able to find a job or other factors such as sickness.
Then there's Working for Families (WFF), targeted at employed people with children.
It works by giving tax credits to boost incomes and the more you earn, the less you get. Once you earn a combined $100,000, you get very little - although even people earning more than $120,000 can qualify if they have four or more children,
But in the year to the end of March last year, the average amount received was just under $7000 a year.
Average entitlement for Working for Families Tax Credits in New Zealand.
TARGETING
One of the most obvious benefits of WFF over a UBI is that it is targeted directly at those it seeks to benefit.
Almost all New Zealand families earning less than $65,000 get some support.
But those who earn more and those who don't work — or don't work enough to qualify for the full payment — get less. People without kids don't get anything at all.
Researcher Jess Berentson-Shaw, of think tank The Workshop, proposes a UBI aimed at families.
She said targeting of some kind was necessary.
Giving everyone the same amount would not be fair, she said. 'It will be taken up first, and used best by people who need it least.'
Someone who had grown up wealthy parents and a good education would know what to do with an extra $10,000 a year to get the most value but those who were more disadvantaged would not.
Targeting assistance at families with young children tackled issues from the beginning, she said.
There was evidence that children in all income brackets benefited from extra payments to their parents.
DISINCENTIVES TO EARN
Some argue Working For Families reduces incentives to earn because support is withdrawn as income increases.
Tax commentator Terry Baucher said that meant someone who was a sole earner being paid $42,700 would pay an effective marginal tax rate of 42.5 per cent on each extra dollar earnt - broken down, this is the combination of their 17.5 per cent tax rate, and the loss of 25 per cent of their Working for Families credits.
Eric Crampton, chief economist of the NZ Initiative, said only a small number of taxpayers were in that position but the effective marginal tax rates they paid were significant.
A universal basic income that paid the same amount regardless of your earnings would remove this disincentive. Every extra dollar you earnt would leave you another dollar better off.
But a universal basic income would probably mean higher taxes for everyone, and potentially higher tax rates still for those who were the highest earners.
Economist Gareth Kiernan, of Infometrics, said that could create a disincentive of its own at the top end
Crampton said the current system involved a high effective marginal tax rate for a small number of people. A UBI would require higher - though not as high as the current rate a small number of people paid - across a much wider range.
UBIs aren't just theoretical, they have been used around the world. Finland ran a two-year trial and Hamilton, Ontario, san a three-year experiment. Alaska still has a partial basic income in place.
COST
Economist Kevin Milligan is quoted as saying a universal income can have two of these things: A high-enough basic income that few people on current benefits are worse off; a low-phaseout rate so that lower-income people do not face sharp penalties going into a work; and a cost that isn't a lot higher than current spending on welfare.
The problem is, that you can't have all three.
Crampton said in 2010, Treasury worked out what would happen if the Government replaced all existing benefits, including NZ Super and Working for Families, with a universal payment of $300 per week for adults plus $86 per child per week. They found that income tax rates would have to rise to over 55 per cent on everyone to fund the scheme. And, the proportion of people living on less than 50 per cent of median household disposable income would rise by 5 per cent.
'The system would be costly and would leave the worst off worse off.'
That would mean more benefits were needed to help those on the lowest incomes or who needed extra support.
There was no way to pay for a UBI that was equal to the level received by people currently getting multiple types of support, he said.
UNINTENDED CONSEQUENCES
Berentson-Shaw said there would need to be other policy changes alongside a UBI.
If there was not significant reform in the rental market, any UBI could be swallowed up by a commensurate increase in rents.
ADMINISTRATION
The more targeted a system is, the more costly it is to administer. A universal basic income should be simpler and more transparent.
It could also reduce the interactions that people have to have with Work and Income to get their entitlements, which some cite as a barrier.
Berentson-Shaw said she liked the fact that a UBI took away the element of someone else deciding what a person needed. Work and Income has been coming under increased scrutiny over the sanctions applied to beneficiaries.
Kiernan said a UBI would make it easier for the public to understand the trade-offs involved. If there was pressure to lift the payment in future, the Government would propose a tax increase to make it possible.
'The value judgement that people implicitly make when choosing who to vote for becomes easier to do.'