Basic Income Policy Analysis Kate McNab

Kate McNab A Universal Basic Income for New Zealand? October 2016

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A Universal Basic Income for New Zealand?

2016

A POLICY ANALYSIS FOR ERST 634Kate McNab 1126761

Lincoln university


ABSTRACT:

Universal basic income is an income unconditionally granted to all on an individual basis, without

means test or work requirement. It also represents an integration of taxes and welfare benefits. It is

fast becoming an integral part of the social policy debate in diverse locations around the world. The

inability to tackle unemployment with conventional means that has led in the last decade or so to the

idea being taken seriously throughout Europe by a growing number of scholars and organizations.

The idea of a universal basic income is relatively new in New Zealand. Serious discussions are

currently limited due to the dominant neoliberal climate and a lack of connection to international

literature. I hope that my paper will make some small contribution to the burgeoning literature on

this policy idea. I place the discussion in both international and local context, with reference to

international literature and examples. Having done this, I will discuss the potential issues involved in

the design, administration and implementation in New Zealand.

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TABLE OF CONTENTS

Introduction 3

Section 1: Context 4

Employment Trends 4

Social Welfare in New Zealand 7

Tax system 10

Section 2: The Arguments and Details 12

Why a Universal Policy? 12

Design Considerations 14

International Experiments / Evidence Base 17

Section 3: New Zealand Proposals 20

Morgan and Guthrie 20

Rankin 22

Section 4: Analysis 27

Conclusion 29

Policy Recommendations 30

Reference List 31

Appendices 35

Appendix 1: History of Social Welfare in NZ 35

Appendix 2: Benefit Adequacy 37

Appendix 3: An example of targeting 38

Appendix 4: Pros and Cons table 40

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INTRODUCTION

A basic income is an income unconditionally granted to all on an individual basis, without means test

or work requirement. The idea has been discussed in European policy circles since the 1970s.

However, in New Zealand the advent is very recent. The Labour party released a preliminary

research document as part of their Future of Work Commission, and earlier this year, publicly

announced they were considering it as a policy platform for the 2017 election. Though I suspect the

announcement was made to gauge public reaction more than anything else, it was still the first

incursion of the idea into mainstream politics, media and society. Keeping in mind that good policy

often takes at least two decades, it was a beginning. In politics I think it is important to occasionally

look beyond the status quo and the next few years; here in this paper I attempt to do that.

This analysis will examine the idea of a basic income and attempt to paint a picture of how it could

work in New Zealand. This analysis will provide an examination of the design principles that need to

be considered. I will then move on to an examination of the context and circumstances that are

driving the burgeoning interest in this idea. This will touch on future employment trends as well as

our current welfare and tax systems. Some of these issues are emerging, so one can only make

tentative predictions; but it gives some idea of a future where a basic income might make sense.

My own assumptions underpinning this analysis are: 1) That our current tax and welfare systems are

not perfect, can, and should be improved so that they deliver equity, efficiency and maximum social

wellbeing 2) That overall wellbeing is the primary goal of social policy. I also assume that the reader

is broadly familiar with the issues regarding poverty and income inequality, and will use this

knowledge to inform their reading of this paper.

My key reasons for considering a UBI are because it promises the potential for:

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heightened social cohesion,

a reduction in the stigma associated with receiving a benefit,

Increased economic security and flexibility to meet the needs of the future workforce,

Significant positive effects on wellbeing

There is still a lot to learn, but as experiments are conducted over the coming years we will continue

to understand more about the likely effects of a UBI policy.

SECTION 1: CONTEXT

EMPLOYMENT TRENDS

New Zealand has witnessed a decline in full-time jobs, increased part-time employment and casual

employment, and a rise in long term unemployment (Mays et al, 2016; p.2). Of particular concern is

insecure work. Insecure work means uncertainty over how long a job will last, fluctuating hours and

low and/or variable pay, limited access to benefits such as sick leave, and limited opportunities to

gain skills. According to a report by the Council of Trade Unions, insecure work affects at least 30

per cent of the New Zealand workforce; that’s over 635,000 people. Of course, some people

deliberately choose insecure work as an option to fit in around studies, or those whose job is project-

based. However, for many people insecure work has become the only option in a tight labour market.

It can impose severe costs on workers, their families and communities. There is reason to be

concerned on grounds of equity also, as this kind of work tends to affect Maori and Pacific workers,

young people, women, migrants and people with disabilities disproportionately (2013; p.2).

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We have seen a changing distribution of occupations, with increasing managerial and professional

jobs and service workers, and decreasing employment for machine operators, tradespeople, labourers

and agriculture workers. Service workers tend to have lower wages. Industries have also been

changing, with major job losses in primary and manufacturing sectors, and growth in service

industries (Callister, 2011; p.40). The graph below shows long-term employment trends in different

industries.

Sourced from CAANZ report -page 12

The role of technology plays into these trends significantly. Claims that “robots will steal all the

jobs” are overblown; in fact, historically technology has led to a net increase in jobs. This has

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certainly been borne out in the last few decades. However, the transition caused by technological

innovation can be difficult for many people.

Technology does displace some jobs. A report by Chartered Accountants Australia and New Zealand

(CAANZ, 2015) estimates that 885,000 New Zealand jobs are at risk of automation in the next two

decades. Low skilled jobs are most likely to be automated and the resulting job loss will be most

severe in regional centres (p.6).

Sourced from CAANZ report- page 22

Job growth happens in different industries, occupations and places. It is likely that shifts will be

happening more often and with greater disruption. There is likely to be underemployment,

unemployment and the need to transition careers with some frequency (Eaqub, 2014; p.31). Workers

will need to take time between careers to upskill and educate themselves; lifelong learning will

become a necessity.

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Governments all over the world are growing more concerned with what the “future of work” will

mean for their populations and for the direction of policy, and some form of a basic income is

featuring heavily in these discussions.

SOCIAL WELFARE IN NEW ZEALAND:

A welfare system is a means of sharing resources (Rankin, 1991). While it is most often seen as a

safety net for the less fortunate, it also has other functions; as a system of economic stabilisation, a

system of human investment, and a system of income distribution (p.2). It can operate to minimise

social stratification and promote social cohesion. It also influences the types of coalitions formed

among interest groups (Korpi and Palme, 1998; p.682).

Our welfare system was created nearly a century ago,

before World War Two. It was predicated on full male

employment and family structures that were nearly

universally nuclear. Since then it has changed, gradually but significantly. Until the advent of the

neoliberal era in the 1980’s, it was based on principles of belonging and participation in the

community. In a 1988 report, the three objectives of the welfare system included:

dignity and self-determination for individuals, families and communities;

maintenance of a standard of living sufficient to ensure that everybody can belong and

participate in their community;

genuine opportunity for all people to develop their potential

a fair distribution of wealth and resources (Cheyne et al, 2008; p.49).

The original principles underpinning our social welfare system have been neglected in the

implementation. The focus has shifted from a right to income support, to responsibilities to obtain

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For some historical background on social welfare in New Zealand, please refer to Appendix 1.


employment. Our approach is now punitive and relentlessly work-focused. In particular, “benefit

dependency” is a term heard a lot; it was the focus of our latest welfare review in 2011. This problem

definition ignores the availability of work, the quality of work and the extent to which paid work is

possible and manageable. It also ignores the way government provides support to various groups

throughout their lifetimes, and to various parts of the economy. If you pay attention to how and for

whom this term is used, you will see it is linked to centuries-old understandings of deserving and

undeserving poor (O’Brien, 2010; pp.35-36).

Here is the current system in a nutshell:

The Three Core Benefits (introduced 2013) Amount

Jobseeker Support Amount dependent on situation (single or couple), children, and even age (under 25 gets less than over 25).

Range from $140 to $391.

Sole Parent Support $325

Supported Living Payment Amount dependent on situation (single or couple), and children.

Range from $262 to $462.

*Most core benefits are topped up with an Accomodation Supplement: Ranges from $55 to $255. Amount dependent on situation (number of children), and area of residence.

There are myriad other allowances, grants and assistance available. I counted 52 in total. The system

is so complex because it is trying to respond to the different and complex needs of different people

(Boston and Chapple, 2014; p.120). As a result, dealing with Work and Income can be a confusing

and harrowing experience. This situation increases the likelihood that some people are not receiving

what they are entitled to.

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The system also creates strange incentives through high effective marginal tax rates and poverty

traps. Effective marginal tax rates from benefit abatements can be very high for low and middle

income families. This situation generates poverty traps: ranges of income where additional hours

worked or salary increases do not make a worker better off. For example, an effective marginal tax

rate of 70 percent means a worker receives 30 cents for every dollar earned. Short term incentives to

work more are very poor (Crampton, 2016). Due to the complexity of tax rates and benefit

abatements, moving between benefits and work is extremely complicated. This is not helped by the

fact that many of the jobs on offer to unskilled people tend to be casual, low-paid and insecure.

Given the difficulties and costs involved in transitioning between benefits and such work, a person

may quite rationally decide to forgo employment.

In 2011, the Welfare Working Group was convened

with a somewhat narrow mandate to consider how to

reduce benefit dependency and reduce the costs

involved in running the welfare system. They did not consider benefit adequacy. One idea I will

mention briefly recommended replacing categorical benefits with a single payment set at the rate of

the Unemployment benefit. (This was partly done in 2013 when benefits were distilled down to three

core benefits). This idea was proposed in 1990, with the intention to call the core benefit a

“Universal Benefit” However this idea was scrapped when a new government came into power

(Mackenzie, 2016). The idea itself is good, and later we will see how this could tie in with a

Universal Basic Income.

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For a brief discussion on benefit adequacy, please refer to Appendix 2.


Sourced from Welfare Working Group, 2011; page 9.

TAX SYSTEM IN NEW ZEALAND:

Tax changes over the last three decades have been an important contributor to the greater inequality

seen in New Zealand. Tax rates for the highest incomes have halved. In any comparable country,

they would pay significantly more taxes than they currently do (O’Brien, 2013; pp.223-224). Our tax

revenues are lower than the OECD average, and significantly lower than the countries who do the

most to reduce poverty and inequality. We also do significantly less to redistribute wealth (Fletcher,

2015).

Currently our tax rates look like this:

Income Tax Rate Effective tax rate First $14,000 10.5% 10.5%Next $34,000 17.5% 10.5-15.5%Next $22,000 30% 15.5-20%$70,000 and over 33% 20-33%

Our most recent review of the taxation system from the Tax Working Group in 2010 identified

significant concerns with its efficiency, equity and integrity. We hear so much about benefit fraud,

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but comparatively little about tax fraud which is both more widespread and more costly. People who

possess high incomes and wealth currently have opportunities to shelter taxable income in trusts and

other tax avoidance vehicles, and the data shows that those opportunities are being taken. IRD

income data for 2008 shows an unlikely spike in the frequency of declared incomes just below

$70,000. It also shows slowing growth in the number of people earning more than the maximum tax

threshold, despite general rising incomes in this period (Morgan and Guthrie, 2013; p.122). A 2007

figure posits this costing the government $300 million in tax revenues (TWG, 2010; p.29). Yet any

attempt to address this issue would cost a lot of votes, so there is no incentive for policymakers to do

so.

As a result, the tax burden is borne disproportionately by PAYE taxpayers, through income tax and

GST. This situation is neither equitable nor sustainable. The Tax Working Group identified a need to

broaden our tax base to address this situation. The major hole in the tax base is that of capital.

Capital refers to accumulated wealth in financial assets, land, or buildings. For a long time, New

Zealand was unusual in the OECD for not taxing capital. Since 2015, we do technically have a

capital gains tax, but there is significant scope to avoid it and it is not broad. How to broaden our tax

base is still open to debate, as all methods have potential design challenges. The Tax Working Group

came out in favour of a low rate land tax and a risk-free rate of return method on property

investment. Obviously the political implications of these measures are not small. And yet, if

designed correctly, taxes on capital have the potential to significantly increase the productivity gains

of capital investment, which are currently too low in New Zealand (TWG, 2010; Morgan and

Guthrie, 2013).

Changes to the tax system make sense, and indeed, must happen, if we are to meet the challenges

ahead. It is important to say that they make sense regardless of what they are used to fund (whether a

UBI, other programmes, or to further cut income tax rates) (Crampton, 2016). However, sometimes

with fundamental issues such as wealth distribution, it can be worthwhile to think long-term.

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SECTION 2: DETAILS

WHY A UNIVERSAL POLICY?

In this political and economic climate, a common reaction to a universal policy proposal is to say

“but it makes no sense to give it to people who don’t need it!”. The argument for targeting assistance

to the poor makes intuitive sense; provide maxiumum assistance to the deserving poor, at minimum

cost to taxpayers. This way the money is more likely to translate into basic needs, and means-testing

provides incentives to work. Just giving people money would encourage unemployment, labour force

withdrawal and single parenthood (Brady and Burroway, 2012; p.721-722). Yet despite their

prominence, these arguments appear to have little empirical validation.

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There is more evidence for the phenomenon known as the “paradox of redistribution”: the more

benefits are targeted, the less they reduce poverty. This can be seen in the graph below:

Sourced from Kidd, 2012 – page 4

The main argument against targeting is that it helps

perpetuate existing social and economic inequality by

reinforcing distinctions between the poor and the rest of society (Morgan and Guthrie, 2013; p.49).

Targeting also creates poverty traps.

While there is some evidence that targeting is counter-productive, there is no evidence that

universalism is. Universal policies are not unusual in the OECD, and in fact, universal policies can

have significant merits. Though much depends on the design of the policies in question, evidence

suggests that universal arrangements are no less efficient than targeted ones. In fact, universalism is

increasingly seen as the most efficient and effective way of dealing with stubborn issues such as

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For an example of what targeting does, please refer to Appendix 3.


child poverty and social and economic marginalisation (Forget et al, 2016; p.9). Other research

suggests that universal social policies actually generate work incentives because if citizens are

getting significant benefits in return for their taxes, take-home pay is not the only work incentive.

There is no evidence showing any negative effect on labor supply, or any increase in single

motherhood or welfare dependency (Korpi and Palme, 1998; p.682).

Universal social policies tend to lead to redistributive budgets that are more generous and more

secure (Brady and Burroway, 2012; p.723). Programmes that build alliances between the poor and

middle classes are more likely to be popular and to receive higher budgets, because the middle

classes are willing to pay higher taxes if they are also beneficiaries (Kidd, 2012; p.5).

DESIGN CONSIDERATIONS

Considering basic income as a general idea and considering it as

a concrete policy proposal are two very different things. De

Wispelaere and Stirton (2004) identified seven design dimensions

that need to be considered:

1) Universality

How do you define who receives a basic income and who doesn’t? Most proponents envision

it as a right of citizenship (with a proviso of citizens who are resident in New Zealand, not

living overseas). We would then need to consider those people excluded by this definition.

What about permanent residents? What about new migrants and refugees who need support?

2) Individuality

A UBI that would be paid on an individual basis rather than at a household level is accepted

by most basic income proponents. There is a small subset of the population who may be

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To consider the pros and cons of a UBI as a general idea, and for further in-depth analysis of some possible economic effects, please refer to Appendix 4.


uncomfortable with this, namely those who object to women having financial independence

and fear widespread divorce.

3) Conditionality

Whether there would be conditions attached to the receipt of a basic income is an open

question. There is a strain of basic income advocates pushing for a “participation income”,

which would be conditional on either work, caring, or some form of volunteer and

community contribution. This has the advantage of broadening the definition of “work”

beyond paid labour, and respecting the norms of reciprocity. However, the presence of

conditions then automatically introduces the need for much more monitoring and hence

administrative expense.

4) Uniformity

Would a basic income be at the same level for everyone? Most proponents advocate for a

criteria based on age; that is, a child UBI less than an adult UBI, a working-age adult UBI,

and a UBI set slightly higher for the retired. (In fact, we have the latter! Superannuation is a

UBI for people aged 65 and over). Some people propose a slightly lower UBI for young

adults. Another potential policy difficulty in New Zealand is the wildly variable level of

living costs across New Zealand; would we need a higher UBI for Auckland residents?

5) Frequency/Duration

How often would this UBI be paid? Most proponents envisage a weekly payment, to increase

the probability of responsible spending on weekly necessities. It could also be fortnightly or

monthly.

6) Modality

How would the UBI be paid? Options are a weekly transfer into bank accounts, which IRD

already has. In that case, some administrative effort would need to be made to locate the

people that do not currently have bank accounts and somehow “persuade” them to open one.

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Given the lack of stigma associated with a UBI, I imagine this may not be a huge problem

(though the small part of me that identifies as libertarian shudders). Another option would be

a debit card distributed to everyone and topped up automatically every week. Another option

could be a choice of either or both. One potential issue is people who live in isolated

locations without banking services or ATMs.

7) Adequacy

Many UBI proponents advocate for a UBI set at subsistence level (whatever that means).

This is so that all other benefits would be rendered unnecessary. However strictly speaking a

UBI does not need to be set at subsistence level, and could be substantially less (De

Wispelaere and Stirton, 2004).

None of these design dimensions is straightforward, and deciding on each dimension would produce

political conflict. All illusions of a perfectly simple policy promptly dissolve into the “usual

messiness” (Nolan, 2016). De Wispelaere and Stirton (2013) invoke a cautionary tale about the

potential difficulties involved in the implementation and administration of a basic income.

Successful implementation requires matching the design features of a policy with the surrounding

context and administrative environment. Of particular importance here is the fact that administrative

efficiency is not (necessarily) an automatic outcome of a UBI scheme. In fact, any scheme that

significantly reduces administrative burden is unlikely to be politically feasible (De Wispelaere and

Stirton, 2004; p.6). For any UBI scheme, information gathering, monitoring and oversight would still

be crucial administrative tasks.

INTERNATIONAL EXPERIMENTS / EVIDENCE BASE

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Two universal dividend programs funded from oil revenues. These two programs are the only

examples of something like a UBI in existence:

ALASKA PERMANENT FUND: This dividend program has been running since 1982. It gives an

unconditional annual grant to every eligible resident. The amount varies with the stock market, but is

never more than US$2000 (De Wispelaere, 2015; p.33).

IRAN: The Iranian government decided to raise the domestic price of oil in line with the

international market in 2010. The only politically feasible way to do this was to distribute part of the

additional revenues as cash benefits to the population at large (Van Parijs, 2013; p.175).

1960s-1970s United States and Canada

Five experiments were conducted in the US and Canada over this time, when the elimination of

poverty was the stated goal of governments. By the time the results were available, the

administration had moved on. The experiments used quite a range of different amounts and marginal

tax rates, which reduced the statistical reliability of the results (Widerquist, 2013; p.216-219).

Nearly half of the resulting scholarly articles address work incentive effects:

-The Mincome experiment in Manitoba and Dauphin, Canada, showed only a modest reduction in

work effort: 1% for men, 3% for wives, and 5% for single women (Hum and Simpson, 2001; p.80).

Later analysis has suggested widespread indirect benefits in health and education outcomes.

-Three studies averaging the results from the four US experiments found work reduction efforts of

5%, 7% and 7.9%. This would amount to a reduction of only 4-5 hours per week (Widerquist, 2013;

p.220).

June 2016 Referendum in Switzerland.

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The proposal was voted down (77% voted no and 23% voted yes). There was no specific amount

mentioned in the constitutional article; but proponents had indicated a very generous amount which

would have come to 38% of GDP per capita (Karakas, 2016; p.6). Cost, and a concern about

breaching the norms of productive reciprocity, seem to have been the major reasons for voting no.

A number of experiments with unconditional and conditional cash transfers in developing nations:

INDIA: From 2011-2013, 5850 individuals from Madhya Pradesh received payments for more than

a year. The results were positive, with an increase in small-scale investments, improved nutrition and

health, and improved school attendance and performance. The grants led to more labour and work,

not less (Painter, 2016).

AFRICA: A program in Uganda followed young people who were given grants of more than twice

the typical annual income. Four years later, most had invested the money in education and vocations,

increasing their earnings by 40% or more; an outcome which lasted well beyond the period of the

trial. In Namibia, a two year program reduced poverty, child malnutrition and school dropout rates

by significant amounts. In Kenya, poor rural households responded to cash grants by increasing

spending on food, medical needs and education, which resulted in large increases in psychological

wellbeing (Buccheit, 2016).

Starting 2017:

THE NETHERLANDS: This small European country is showing significant interest in the basic

income idea. This year, nineteen municipalities declared their willingness to initiate a basic income

experiment, and a majority of the parliament in favour of the idea. Four municipalities are currently

in conversation with the Ministry of Social Affairs and Employment, with hopes to experiment with

elements of a basic income within the rubric of the current welfare scheme. Discussions are

continuing, but it looks like the first experiment will begin in Utrecht in 2017, where 250 residents

will be given a flat sum of 960 euros per month over two years (de Roo, 2016).

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FINLAND: Finland’s experiment will study 2000 individuals, aged 25-58, who are currently

recieving unemployment benefits. These individuals will be paid 560 euros per month

unconditionally. The experiment is designed to test whether an unconditional benefit that is not

withdrawn upon starting work will encourage employment to a greater extent than existing benefits

(Coppola, 2016)

ONTARIO: The Ontario state government has earmarked $25 million to establish a pilot project.

Interestingly, many of the calls for this step have come from health professionals. The government

has indicated that it will be designed as a top-up for existing welfare programmes to ensure a

minimum income above the poverty line (Beeby, 2016).

OAKLAND, CALIFORNIA: The UBI idea is generating significant interest from Silicon Valley,

and entrepreneurial communities everywhere. A startup incubator called Y Combinator, founded by

Sam Altman, will pilot a basic income of $1000-$2000 dollars per month (The Economist, 2016).

Although one should remember that the results of experiments cannot be generalised across

jurisdictions and contexts, overall the results are encouraging. Where some small negative labour

market impacts have been observed, these have been counter-balanced by positive social effects. The

positive correlation found between basic income and positive outcomes in health, education and

social inclusion would suggest that it is an idea worth investigating further. The results from the

2017 experiments will be of interest to policy communities worldwide.

SECTION 3: NEW ZEALAND PROPOSALS

MORGAN AND GUTHRIE

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Gareth Morgan and Susan Guthrie published a book in 2011 with a proposal for a Universal Basic

Income. This proposal relied on the implementation of a Comprehensive Capital Gains Tax

(essentially as an asset-based minimum tax), integrated with a flat rate income tax. The CCT would

include all housing, assets and land, and would be based on a minimum rate of return of 6% per

annum. According to these calculations, this would yield $7.2 billion per annum.

The flat rate income tax would be set at 30%. This would fund an adult UBI of $11,000 per year

($211 per week). In this particular scenario, all other MSD and IRD transfers cease (except for

Kiwisaver and Child support). This assumes that MSD’s non-transfer related expenditure will fall by

46%, and the same result for IRD at 39%. This would yield savings of $20 billion per annum.

This table shows the likely redistributive effect:

Gross wages Tax paid on wages: 30%

UBI Net direct contribution to the state ($)

Net direct contribution to the state (% of gross wages)

20,000 6000 11,000 -5000 -25%40,000 12,000 11,000 1000 3%60,000 18,000 11,000 7000 12%80,000 24,000 11,000 13,000 16%100,000 30,000 11,000 19,000 19%120,000 36,000 11,000 25,000 21%140,000 42,000 11,000 31,000 22%

Table sourced from Morgan and Guthrie, 2013; p.221

The table is useful because it shows that, while a flat tax may seem counter-intuitive at first, when

combined with a UBI the effect is progressive. Because there are no gradations in the tax scale, there

would no longer be any incentive to shelter wealth (as there is with our current system). No matter

how much you have, it is taxed the same. And everyone receives the same UBI. The equity and

social cohesion implications of such a regime could be quite substantial. Without getting too caught

up with a specific number (because the level of a UBI and the tax rate could both be different), this

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point, that a Flat-Tax UBI regime is more progressive than our current system, is important to

remember.

However, this particular proposal has a number of drawbacks that have led me to conclude it is

undesirable and probably unrealistic.

It makes some groups of people worse off than they are currently. Specifically, retirees,

single parents, and people with disabilities. This is simply unacceptable on equity grounds.

A UBI that abolishes all other benefits would be extremely problematic, as you can see in the

table below, helpfully provided by Fletcher. The amount of variation in people’s needs

depending on family structure, number of children, place of residence and any number of

other costs means that supplementary benefits would be a necessity even if the UBI amount

was more than $200.

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Table sourced from Fletcher, 2016

RANKIN

Keith Rankin, an economist working at Unitec in Auckland, has been writing about a Universal basic

Income since 1991. Rankin sees the tax system and the benefit system as one fiscal system, and

argues that seeing these systems as an integrated whole is a necessary precondition to any UBI.

Viewed in this way, all taxpayers are beneficiaries (since a tax cut or tax exemption can be seen as a

benefit). He emphasises the concept of “public equity”, whereby all crown revenue is seen as

publicly sourced income. Taxation would be seen as a flat-rate royalty paid by producers for the use

of public domain resources (Rankin, 1997; p.7). With a tax rate of 33%, 33% of GDP is claimed as

public revenue. This “relabelling exercise” is the first step.

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Pie chart sourced from Rankin, 2016a – page 6

Current tax scale:

Income Tax Rate Effective tax rate First $14,000 10.5% 10.5%Next $34,000 17.5% 10.5-15.5%Next $22,000 30% 15.5-20%$70,000 and over 33% 20-33%

Currently, thanks to tax graduations, a person grossing $70,000 would pay $14,020 in tax, and

effective rate of 20 percent. If a person paid 33% tax on all of their income, they would pay $23,100.

The difference between these two amounts of tax is $9080 ($175 per week). This amount would

become the maximum public equity benefit (2016a; p.2-3).

Proposed alternative tax scale:

Income Tax Rate

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$0-$9,370 0%$9,371-$48,000 17.5%$48,001 and over 33%

Table sourced from Rankin, 2016a – page 2

The next step is to apply the principle of horizontal equity to ensure that all people receive $175 per

week from the Public Equity Fund (2016a; p.7). Every adult resident becomes subject to this formula

(2016a; p.8):

Disposable Income = 67% of Gross Earnings + $175 + Other Benefit

For a beautiful illustration of how this could look, see the graph below.

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Sourced from Rankin, 2011- page 6

As you can see, social assistance in the form of

supplementary benefits would remain. This represents the principle of horizontal equity (treating

people the same) as a foundation, with supplementary benefits embodying the principle of vertical

equity (treating different people differently) on top of that. This way, no present beneficiary is

worse-off than before. People without any private income and classed as beneficiaries would regard

the first $175 of their benefit as a Crown dividend and the remaining part as a transfer payment

(2016 c; p.38-42).

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Because the letters are a little confusing, here is a summary: The yellow area is private income. The pink area is the public equity benefit. The blue area is for transfers/supplementary benefits. Yellow + Pink + Blue = disposable income. The grey area is tax. Grey + Pink + Blue is all public revenue.


Adapted from WWG, 2011 – page 9

Again it is important not to get too fixated on the figure of $175 per week. The income tax rate and

the size of the public equity dividend could both be different; this example merely illustrates how it

could work. These figures are not even taking into account any potential increases in tax revenue

from a broadened base.

It has the advantage of being unconditional and affordable. It would not be a fiscal revolution; in fact

our current tax system could easily morph into a flatter one, and universal principles have been a part

of our social welfare for a long time. In traditional terms this system would amount to a tax cut for

some people (Rankin 2016 b). In a technical sense, the change is not large or overwhelmingly

difficult.

Conceptually however, it is currently difficult for most people to get their heads around, and would

amount to a big change in thinking for politicians and public servants (and everybody) (Rankin, 2016

b). In the current mindset, all income is seen as private. Taxes are seen as private income that is

appropriated by the state (Rankin, 2011; p.1). Tax cuts are seen as putting more private money in

people’s pockets while benefits are seen as transferring private money from one pocket to another

(Rankin, 1997; p.4).

27


SECTION 4: ANALYSIS

According to Rankin, the main barrier to reform is not the cost of reform, but mid-twentieth

century ways of thinking about income taxes and benefits as disconnected parts of the fiscal

system (Rankin, 1997; p.3). I am inclined to agree with his assessment. Big changes to how

people think take a very long time, so a UBI would likely take a very long time also.

Rankin’s most recent writings emphasise moving away from the term “universal basic

income”, because it has become implicitly associated with high taxes and political

impossibility. He also hopes that treating a basic income as a rational exercise in tax-benefit

reform could de-politicise it. I admire his optimism, but disagree. In an ideal rational world,

that would be the case; but not this one. Sure, changing the name might have the effect of

dissociating it from the Labour Party temporarily. However, the distribution of income is

something that I cannot imagine being considered apolitical.

De Wispelaere (2015) makes a salient point about UBI being a policy in search of a

constituency. To claim that because it would be universal it would have a large constituency

is too simplistic, because some people will be net winners and some people net losers. The

net losers would be the wealthy people. Currently our taxation and political systems are set

up to the advantage of said people. Hence, substantial political difficulty.

In addition, any constituency may be smaller than you might initially think. While

harmonising the tax and welfare systems would be an improvement generally, a large number

of recipients end up as well off financially as they were before. And despite all the flaws of

the current system, it has the advantage of familiarity (pp.68-69).

There is a substantial obstacle to overcome with the cost-benefit calculation. The financial

costs of a UBI policy would be readily apparent, whereas the costs (both economic and

28


social) in our current system are mainly hidden. Conversely, the benefits of this policy would

likely be indirect, dispersed and difficult to measure.

The fact that the unconditional nature of a UBI challenges the norms of productive

reciprocity is a significant cultural and conceptual obstacle to overcome.

A UBI policy would require a very broad base of support, in order to assure the sustainability

of the policy beyond one parliamentary term. Such a coalition of forces is impossible for me

to imagine in 2016

Equitable reform of the tax system and the possible implementation of a UBI go hand in hand

(Mays et al, 2016; p.5). New forms and levels of taxation are inevitable if a UBI is to work.

Of course, taxes have changed before and can again; but it’s not exactly easy.

It seems to me that if this were to happen, the road ahead consists of getting our

administrative “ducks in a row”.

The status quo always has more pull with policymakers and political institutions than changes

do, generally for good reason. Institutional inertia is another potential obstacle I could see

arising, if the policy substantially changed the way that MSD and IRD operate.

In short, people do not generally enjoy change, because it makes them feel uncomfortable. However,

in my opinion the constellation of situations that are emerging give some reason to see a UBI as

more possible than impossible. As a wise woman once told me: “Never say forever and never say

never”. New Zealand, a tiny country relatively physically isolated from it’s neighbours, and with a

proud history of progressive and universal social policy, would be the perfect first country to do it.

CONCLUSION:29


A UBI policy is worth considering because it has the potential to contribute to the general

government goals of social equity, human flourishing, and effective institutions. A basic income

could help to respond to the ill-fit that has developed between existing welfare programmes and

changing economic realities (Forget et al, 2016; p.17). It would also appear that economic security

and flexibility are two things that people in the future are going to want. A basic income could

provide those things by allowing people to move more easily between work, training and other

responsibilities as personal and employment circumstances change. We have seen that a basic

income cannot substitute for a well-designed welfare system; but it can become a foundation for one.

The challenges are extremely large and difficult. We have the challenges involved in the design; the

political challenges; the reciprocity challenge; the cost-benefit challenge, and the institutional

challenge. In short, it is realistically extremely unlikely in the near future. In a sense, universal basic

income is solution in search of agreeable conditions. However, I leave you with two certainties:

1) our current tax and welfare systems are not sustainable, equitable or efficient

2) the values and assumptions underpinning our social policy will continue to be reviewed

30


POLICY RECOMMENDATIONS

• A comprehensive review of our tax and welfare systems as an integrated whole, with a view

toward evaluating people’s needs in the 21st century.

• Anything that simplifies and integrates the tax and welfare systems is a good start

• Some form of equal payment for all children (effectively a child UBI) might be considered as

a first step to introducing the principles of universality and unconditionality.

• Commit to a pilot programme to investigate the effects within a New Zealand context. There

is a need for robust data collection capable of testing the plethora of potential benefits (Forget

et al, 2016; p.8).

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Haywood, L. (2014) “Unconditional Basic Income: An Economic Perspective” Department of Public Economics, DIW Berlin pp.1-7

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Karakas, C. (2016) “Basic income: Arguments, evidence, prospects” European Parliamentary Research Service URL: http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/586679/EPRS_BRI(2016)586679_EN.pdf

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Mays, J., Marston, G., and Tomlinson, J. (2016) “Neoliberal Frontiers and Economic Insecurity: Is Basic Income a Solution?” in Mays, J., Marston, G., and Tomlinson, J. (Eds) Basic Income in Australia and New Zealand: Perspectives from the Neoliberal Frontier Palgrave MacMillan pp.1-29

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APPENDICES

APPENDIX 1: History of Social Welfare in New Zealand

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http://igps.victoria.ac.nz/WelfareWorkingGroup/Downloads/Final%20Report/WWG-Final-Recommendations-Report-22-February-2011.pdf


A Brief and Simplified History of Social Welfare in New Zealand

Adapted from Mackenzie, 2016

The 1938 Social Security Act dramatically extended the welfare state. It’s broad purpose was

to “safeguard the people of New Zealand…and to provide other benefits as may be necessary

to maintain and promote the health and general welfare of the community”. The goal was to

end poverty and ensure a reasonable standard of living for all. At the same time, a

commitment to full (male) employment was identified as a cornerstone of social security

provision, as was access to housing, education and health services (O’Brien et al, 2010; p.30).

The 1972 Royal Commission on Social Security was established to examine the principles

upon which the social security system was based. It defined the aim of social security as

sustaining life and health, and ensuring beneficiaries enjoyed a sense of belonging and

participation in the community (Cheyne et al, 2008; p.48).

The 1988 Royal Commission on Social Policy provided a wide ranging examination of the

basic values of New Zealanders and the principles underpinning public policy, right in the

midst of vast public sector changes accompanying the neoliberal turn. Their terms of

reference included: dignity and self-determination for individuals, families and communities;

maintenance of a standard of living sufficient to ensure that everybody can belong and

participate in their community; genuine opportunity for all people to develop their potential;

and a fair distribution of wealth and resources (Cheyne et al, 2008; p.49). It also concluded

the benefit levels should not be eroded. Many of its ideas continue to inform contemporary

debate on social policy.

36


1991 The budget of that year represented a rejection of the above principles and objectives, to

be replaced with a heavy reliance on encouraging independence from the state. Reform of

welfare under the rubric “Welfare that Works” defined the underlying principles of reform as:

-Fairness defined as providing assistance where needs are genuine, and where those who are

in a position to look after themselves are encouraged to do so.

-Building opportunities is defined as encouraging individuals to take control over their own

lives.

-The role of government is to provide incentives for those people who can work to work

(Cheyne et al, 2008; p.50). The Universal Family Benefit was also abolished at this time.

Rates of adult unemployment benefits were reduced by 7-10 percent. For young people

between 20-24 years of age, the rate was reduced by 24% (Mackenzie, 2016). This reduction

was the most significant in history and contributed to growing poverty in the 1990s (O’Brien

2010; p.33)

In 2007, the wording of the Social Security Amendment Act 2007 was changed to explicitly

situated work as the first arm of welfare. Since 2008, a variety of reforms have introduced

and increased sanctions for failing to meet work obligations, as well as more stringent

requirements generally.

Employment has been shown to have a significant and positive effect on wellbeing. This fact is not

being disputed. However, when it displaces the wider goal of social and psychological wellbeing, I

think that is problematic. Neither can it be assumed that all paid jobs necessarily have positive

effects. The quality of employment matters; as do the wages and support services available.

At the same time, unpaid jobs such as caring, volunteering and community work have very little

monetary reward yet are crucial to the functioning of our society and contribute to wider wellbeing.

The current framework completely discounts all of these considerations.

Our approach toward incentivising beneficiaries into the workforce is punitive. Behind this approach

are assumptions that the unemployed are lazy and are in their position as a result of personal choice.

I would question both the punitive approach and the assumptions behind it. Given wider changes in

the labour market and the fact that a certain amount of unemployment is a structural reality, does it

make sense to stigmatise all beneficiaries for not obtaining employment? Some people face

significant obstacles to obtaining employment and a more productive approach may be to help them

obtain the skills they need. International research is proving that punitive approaches are ineffective,

and most countries are moving toward a social investment framework with an explicit focus on

reducing inequalities and poverty. Other research shows that the majority of beneficiaries want to

37


work, and will work whenever there are jobs available (O’Brien, 2013; p.16). A 1992 study by Dean

and Taylor-Gooby found that beneficiairies value paid work and place a high importance on it

because of the social and cultural values and self esteem associated with having a job (Cheyne et al,

2008; p.85).

APPENDIX 2: Benefit AdequacyBenefit levels have not been adequate since before 1991, when they were slashed significantly.

Fletcher analysed the level of financial assistance in New Zealand in comparison to other OECD

countries. Our financial assistance to those with no earnings is 33% of the average wage in the case

of a single person; 54% for a sole parent with two children; 52% for a couple, and 58% for a couple

with children. He found that New Zealand is less generous than the majority of OECD countries. In

comparison to Australia, the UK and Ireland (other countries without an earnings-related insurance

scheme), we are considerably less generous than the UK and Ireland (2015; p.14, 21). Recent

research by Perry (2016) backs up this conclusion. He found that the bulk of families and individuals

in recipet of a core benefit had incomes in the bottom decile. Data from 2014 shows a higher

proportion of beneficiaries in the bottom income decile compared with previous years (63% rather

than 50%) (p.24).

The graph below illustrates that beneficiaries have not shared in New Zealand’s economic growth

since 1991.

Sourced from Perry, 2016 – page 53

38


APPENDIX 3 : An example of targeting

Take, for example, the issue of child poverty. The statistics tell us that a high proportion of sole

parent families have incomes in the lower end of the income distribution, and that these families

have the highest income poverty rates of all household types (Perry, 2016; p.151). OECD data backs

this up and shows that this is an international trend.

Sourced from Kidd, 2012 – page 3

So you may be tempted to target the most resources at single parent households in a well-meaning

attempt to address this. However, targeting by definition leads to segmentation and differentiation

among different groups of people. When you define who is in, you also leave people out. In this case,

targeting to single parent households would leave out two-parent families. The poverty rate for two-

parent families is much lower at 15%, yet 47% of all poor children come from these families. As an

absolute number, there are more poor individuals from two-parent households than from sole-parent

households (Perry. 2016; p.151).

39


Sourced from Perry, 2016 – page 33

Something like this has already happened; for example, the Working for Families tax credit package

targeted increased family assistance to working adults with children. It was effective at this

objective; it halved child poverty rates for those in working families between 2004 (24%) and 2007

(12%). Yet it left behind all the children in beneficiary families (the poverty rate for these children is

75%). It served to increase the gap between working and non-working households (the “deserving”

and “undeserving”) and entrench the poverty of the latter group. Meanwhile, administering WFF

takes up a disproportionate amount of the IRD’s budget, and families on incomes over $48,000

might face effective marginal tax rates of between 50 and 60 percent (St. John, 2015; .p.3)

APPENDIX 4: Pros and Cons Table

The following table provides a very generalised snapshot of major arguments supporting and

criticising the idea of a UBI. The evidence base for all of these assertions is still slim (to see the

evidence base, refer to International Experiments). Any projected effects of a basic income would be

heavily dependent on specific design.

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PROS CONS

SOCIAL Reduce the level of stigma associated with receiving a benefit

Enhance social cohesion

Improved outcomes in health, education and community wellbeing

Increased security for people as we move into the “future of work”

Could provide a foundation to smooth working life transitions

ECONOMIC 1. More productive labour market

2. Encourage more entrepreneurship and innovation

3. More efficient, equitable and sustainable tax and welfare systems

4. Address poverty traps

5. Contribute to addressing poverty and income inequality

6. Enhances the bargaining position of labour

7. Values unpaid labour

8. Cost 9. Encourages the free

rider problem 10. May have a

detrimental effect on work incentives and diminish labour supply

11. People won’t manage the money well: the alcohol and cigarettes argument

12. Diminishes the distinction between deserving and undeserving poor

13. Unfair to give money to those who already have it

Support and objections to the idea come from all sides of the political spectrum, all for different and

sometimes contradictory reasons. Many people may assume that left-leaning persons would like the

41


idea and right-leaning persons would dislike it, but that is far too simplistic and often not the case. In

fact, many right-leaning libertarians like the idea while some traditional labour unionists dislike that

it contravenes the norms of productive reciprocity.

I will now offer further explanation and analysis of the economic arguments above.

1. This argument is advanced according to the logic that people will be able to upskill and work

in jobs that are intrinsically rewarding for them, rather than choosing a job based on a desire

not to starve. This may result in employees who are happier and therefore more productive. \

2. This is why the idea of a UBI is gaining so much traction in Silicon Valley and other

entrepreneurial communities. According to this argument, a weekly payment allows someone

to live while they work on their business idea, thereby “de-risking” entrepreneurship and

encouraging more people to innovate.

3. This depends on the specific design. However a general goal is to simplify and integrate these

systems.

4. Since a UBI would not abate once a job is accepted, this is true. According to proponents a

UBI incentivises contribution. However, if supplementary benefits still exist then some form

of abatement for those will too.

5. This depends on the design. It may contribute, but the degree of contribution is still uncertain.

6. I am aware that many people would have placed this argument in the “Cons” column!

However, the argument goes that a UBI would give workers the power to say “no” to work,

since they have enough money to live on without the job. Some people predict that wage

levels may fall for intrinsically attractive jobs and rise for less attractive jobs (Haywood,

2014; p.4). Of course, this depends on the UBI level.

7. A UBI could be conceived of as a kind of reward for unpaid work. However if a UBI is

unconditional, then one does not necessarily have anything to do with the other.

8. A meaningful answer to the question of affordability can only be given if the amount to be

given is specified, as well as which benefits it would replace (Van Parijs, 2004; p.18).

9. Perhaps. Perhaps not. If there are a lot of free riders out there, they are already accessing the

welfare system; so there is no reason to suppose this problem would be any worse, at least not

before specifying the UBI level.

10. This seems to be of most interest at the moment! Again, the likely impact depends on the

specific design. Most experiments so far point to a slight decline in labour force participation,

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particularly for people with children. This is not necessarily a bad thing. This argument also

assumes a simplistic equation of more money = less work, whereas real life is more

complicated than that. It ignores the fact that most people work for reasons other than money.

According to a survey taken before the Swiss referendum, only 2% of Swiss people think a

basic income would stop them working themselves; but about a third think it would impact

negatively on the work ethic of others (The Economist, 2016) There is no reason to suppose

mass early retirement. From a political perspective however, there is reason to suppose that

many people will fear it.

11. An argument born of prejudice, and not borne out in the results of experiments so far.

12. This argument is true. Many proponents do not see this as a negative outcome, preferring to

assume that all people are deserving of a portion of public funds. To my mind this is really

one of the biggest challenges that a UBI policy would face. Both proponents and critics agree

that a UBI would change the norms of productive reciprocity under which we all operate.

These norms dictate that if you are given something, you must do something to give back.

From the very beginning of our modern welfare system in 1938, welfare has been means-

tested and entailed a work search requirement. In fact it goes back a few centuries to the Poor

Laws in England in the 18th century. These norms are deeply entrenched.

13. Please refer to section 2 and appendix 4, where this argument is examined in depth.

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Basic Income Policy Analysis Kate McNab