Would the policy’s own success make funding it through income tax impossible?
Whenever I give talks about Basic Income, I am often asked similar questions, chief among them “How would we pay for it?” This is an important question when it comes to implementing Basic Income, but not so much when advocating for it: if people collectively demand a Basic Income, then a means of funding it will necessarily be found. However, whenever I am asked this question I like to explain the alternative ways that a Basic Income could be funded, including that many economists working in the Basic Income sphere favour the policy being funded through the income tax system.
This is when things start to get interesting, as I am soon greeted by a follow-up question: if Basic Income means more people stop working, then surely this will mean less people will be paying income tax? So, the logic of the question follows, a Basic Income scheme would soon run out of funding as more and more people stop working and less and less people pay income tax.
This question reared its head again recently when I came across this article from over in Canada. Although the author appears to not fully grasp what exactly a Basic Income is (the policy he is describing sounds much more like a Minimum Income Guarantee), he does once again raise the interesting question that has been asked at several of the talks I have given.
He states: “Moral hazard may lead both recipients and those whose income is just above the eligibility level to work less, and the resulting drop in tax revenues would increase costs.”
A Basic Income would not necessarily diminish income tax returns
Is he right? By allowing people to work less, would a Basic Income reduce the amount of income tax collected, thereby stymieing its main potential source of funding?
I put this question to Dr Malcolm Torry, who is a Visiting Senior Fellow at the London School of Economics and Director of the Citizen’s Basic Income Trust. Dr Torry has written several books on Basic Income – particularly on how we might go about implementing the policy – so knows better than anyone the potential impact of Basic Income on income tax revenues.
In his response, Dr Torry fittingly referred to Canada’s Mincome experiment in the 1970s, which, although again not a Basic Income experiment (it was a household-based means-tested benefit without a work test) provides us with an idea of how people’s working patterns change when they are provided with such a payment.
What was interesting about the Mincome experiment, Dr Torry suggested, was “how little change occurred in employment market behaviour.” The changes that did take place were not to overall employment levels, but more subtle and nuanced. Men took longer to find work between jobs, which was “arguably a good thing, as the secure household income level enabled them to find the right job rather than just any old job.” Women with children, meanwhile, on average reduced their employment hours slightly while young adults stayed longer in education and entered employment later. Otherwise, “there was no change in employment market behaviour.”
Again, this evidence is from just one experiment, and not a Basic Income experiment at that, so we don’t know whether a Basic Income would cause people to work less or not. However, there are several ways that things might play out if a Basic Income scheme were to be implemented.
First of all, having an unconditional payment whether they were working or not means that people who are currently on means-tested benefits would no longer have their benefits taken away from them when they start working. This means they are no longer financially penalised for working, so would be more likely to enter the job market, not leave it. Conversely, there may be those who, provided with the additional security of a Basic Income, may instead decide to drop out of work for some time. However, Dr Torry believes that the impact of this second group on the overall numbers would be small, so Basic Income set at a relatively low level would increase the number of people working, not reduce it. This may start to change if the amount of Basic Income that people were given were to be set at a higher level than this.
This in effect would create an upside-down U-shaped curve on a graph: as you increase the amount of Basic Income people receive, the total number of hours worked by the population would start to climb as people stop being penalised for entering the labour market, to a point where they can rise no further. As you increase the level of Basic Income beyond this point, the number of hours worked would then fall as people use the Basic Income to spend more time on other things rather than work.
So if we are funding Basic Income through income tax then the best way to maximise revenues is to increase the Basic Income so that we hit the top of that upside-down U-shape, and then no further. Of course, we may lose some of the potential benefits of Basic Income if we restrict ourselves to this, but if we want a self-sustaining Basic Income then that looks like our best bet: employment is maximised and thus so are income tax revenues.
So, in summary, when I’m confronted by the conundrum of how to fund Basic Income through income tax when Basic Income would allow people to work less and therefore pay less tax, I have a clear response: if set at the right level, then Basic Income would in fact increase the number of people in work, thus maximising the amount of income tax revenue collected. If we were to raise the amount of Basic Income that people receive above this level, then we may need to look into alternative sources of funding.
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Jon commentates on the ways culture and politics interact.