BI: Definitions and policy challenges

There is no universal consensus on the precise definition, normative justification or policy objectives of BI. However, the Basic Income Earth Network’s (BIEN)^{Footnote 1} official definition of BI highlights some commonly cited criteria. BIEN defines BI as: ‘a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement’ (BIEN, 2019). The following important caveat regarding BI’s definition was included in a statement adopted by BIEN’s General Assembly in 2016:

BI can be further disaggregated into four basic models. These are: (1) Stakeholder Grants paid as a lump sum to individuals at a particular age; (2) Social Dividends paid to individuals from the proceeds of public ownership and publicly owned wealth funds; (3) UBI that pays the same regular amount to all individuals; and (4) NIT schemes that establish a universal income floor but reduce payment levels as market incomes rise (Reference Ackerman, Alstott and Van ParijsAckerman et al., 2006; BIEN, 2019; Reference MeadeMeade, 1993; Reference MoffattMoffatt, 2004).

Our focus is on UBI and NIT models. The key difference between these models is fiscal churn. To achieve the same net distributional outcomes as the NIT, the UBI model generates substantial fiscal churn as all individuals receive BI through the transfer system and most individuals meet their liability to the government through the tax system (Reference HarveyHarvey, 2006; Reference HonkanenHonkanen, 2014). As Reference Gentilini, Grosh, Gentilini, Grosh and RigoliniGentilini and Grosh (2020) argue, UBI can be considered ‘conditional’ because it is ‘de facto targeted via taxes’ creating a sliding scale of net beneficiaries and net contributors for a given UBI scheme (p. 76). For some advocates, fiscal churn is a price worth paying to achieve the ethical and political goal of formal universality. For others, the NIT model offers a more feasible and efficient means of achieving the same, or at least similar, goals.

Fiscal churn clearly amplifies the fiscal impact of the UBI model, and cost is probably the most commonly cited objection to BI. The fiscal cost of a particular scheme depends on the BI model being implemented and rate at which payments are set (and withdrawn in the case of an NIT). The UBI model would have the largest fiscal impact for a given payment level. NIT models that establish an income floor have much lower gross fiscal impacts for a given BI payment. Here again, the fiscal cost of such NIT schemes would vary considerably based on the rate at which benefits are withdrawn as market incomes increase.

For illustrative purposes, Table 1 provides a summary of some recent research, focusing on the design, payment rates and gross fiscal cost of UBI-style proposals for the UK, US and Australia. The gross cost of the BI schemes in Table 1 falls within a range of 5%–25% of national income. Gross cost establishes the ‘scale of the challenge’ in relation to the policy trade-offs and choices that need to be made in order to achieve revenue neutrality. For example, the most generous Australian scheme (Reference CowanCowan, 2017: 13–14) described in Table 1 would see all Australian adults receiving a payment at around the single Age Pension rate at a gross cost of close to $420 billion annually or over 20% of GDP. Subtracting transfer payments replaced by the UBI reduces this figure to a net cost of $230b. This is still more than the Federal government’s entire social security and welfare budget of $180b. The net cost of Cowan’s less generous schemes is a more modest, though still very substantial, $103b and $107b, respectively (Reference CowanCowan, 2017: 13–14; Reference Kesper, Elvery and SpraggonKesper et al., 2019).^{Footnote 2}

Table 1. Gross cost of pension model BI schemes for Australia, the UK and the US.

BI: Basic Income; GDP: gross domestic product.

Sources: Reference CowanCowan (2017: 13–14), Reference MartinelliMartinelli (2017: 38), Reference PhillipsPhillips (2018), Reference Painter and ThoungPainter and Thoung (2015), Reference Reed and LansleyReed and Lansley (2016), Reference SternStern (2016), Reference YangYang (2019), ABS Cat. 5206001, 2019, Office of National Statistics (ONS, 2020), US Bureau of Economic Analysis (2020).

Note: $ = AUD$

Proposals not only differ in level, between ‘partial’ and ‘full’ BI, but also financing mechanisms and political orientation. For example, in Capitalism and Freedom, Milton Friedman proposed an NIT scheme funded through a cut in welfare spending in the United States by over 50% in the early 1960s (Reference FriedmanFriedman, 1982: 190–196). In contrast, James Tobin’s contemporaneous examination of NIT schemes proposed a net increase in spending of between US$7b and US$50b (see Reference Tobin, Pechman and MieszkowskiTobin et al., 1967: 24).

Australia’s system of income support has been described by Ingles as ‘not too far removed from a NIT or [Guaranteed Minimum Income] GMI scheme, albeit of the categorical (and conditional) type’ that is ‘characterised by poor design, excessive complexity, and unwanted overlaps with the tax system and other income transfers’ (Reference InglesIngles, 2000: 1). Since at least the First Report of the Henderson Poverty Review in 1975, there have been numerous efforts to explore the costs and benefits of reforming Australia’s transfer system based on NIT/GMI and UBI models. In Australia, and internationally, social scientists are increasingly using microsimulation techniques to estimate the fiscal impact and static distributional effects of different BI scenarios (see Reference ArthurArthur, 2016; Reference Dawkins, Johnson and ScutellaDawkins et al., 1998; Reference InglesIngles, 2000; Reference Ingles, Phillips and StewartIngles et al., 2019; Reference MartinelliMartinelli, 2017). We aim to contribute to this literature by modelling an affluence-tested BI for Australia. Our approach sits between an NIT and UBI model, as the payment is reduced with income, but some payment would be received by a large majority of people including most net contributors.

This discussion highlights the complexities of designing any real-world BI (see Reference MartinelliMartinelli, 2019; Reference StandingStanding, 2017). Putting dynamic effects to one side, Reference MartinelliMartinelli (2019) argues that ‘BI advocates face an irreconcilable trilemma in policy design, between a) affordability/controlling cost, b) adequacy/meeting need, and c) securing the advantages of a radically simplified welfare system’ (p. 3). The ‘three horns’ of Reference MartinelliMartinelli’s (2019) trilemma underscore the difficult policy trade-offs that must be considered in relation to any BI proposal (p. 20). Here, we are concerned with identifying the nature and scale of these trade-offs, taking current policy settings as a starting point, to assess the possibilities and implications of moving towards universalism.

Targeting within universalism

Policy scholars emphasise the challenges of incorporating BI into existing policy structures as much as technical feasibility. These approaches build on broader welfare state scholarship, which emphasises political contestation and institutional path dependence (Reference PiersonPierson, 1998). Influenced by power resource theory, many argue labour movement strength helps explain the development of welfare state institutions, which in turn shape overall levels of economic inequality (see Reference Esping-AndersenEsping-Andersen, 1999). The most egalitarian welfare states, in Scandinavia, provide generous and extensive forms of social insurance, partly built around union-managed funds and union membership. In contrast, the liberal countries of the Anglosphere tend to have residual social policies, which provide greater space for market provision and only modest, flat-rate benefits. Flat-rate benefit systems are often means-tested and stigmatising. More recently, conditionality has been most extensive in the same liberal countries, where surveillance and penalties for non-compliance attach to flat-rate benefit schemes (see Reference PeckPeck, 2001).

Punitive forms of workfare reflect a divisive political dynamic, where welfare recipients are marginalised, undermining efforts to ensure payments are adequate. Earlier work by Reference Korpi and PalmeKorpi and Palme (1998) described a similar dynamic as a ‘paradox of redistribution’. Targeting, they argued, undermined political support for the welfare state because many citizens did not see themselves as beneficiaries. Instead efforts to focus social spending only on the poor produced less redistribution than more universal models of social insurance. Without political support, overall social spending was lower, reducing the aggregate redistributive effect. Thus, while social spending in the liberal welfare states is more redistributive per dollar, reflecting the targeting of benefits, aggregate social spending is lower than in Scandinavia (OECD, 2019a: 261, 259), and liberal regimes achieve much less redistribution overall than their Scandinavian counterparts (Reference Ortiz-Ospina and RoserOrtiz-Ospina and Roser, 2016).

Recent efforts to revisit the paradox of redistribution thesis have produced varied results. While many broadly confirm the thesis (Reference LefèbvreLefèbvre, 2007; Reference McKnightMcKnight, 2015), others have found contrary evidence (Reference Brady and BosticBrady and Bostic, 2015; Reference Marx, Salanauskaite and VerbistMarx et al., 2013). One influential explanation of these contrary findings is that social policy itself has changed over time, as targeting has been combined with efforts to reduce poverty traps. Focusing on the comparison of child benefits Reference Van Lancker and Van MechelenVan Lancker and Van Mechelen (2015) argue that an emerging model of ‘targeting within universalism’ may achieve the greatest redistribution. This describes schemes where the poorest receive the greatest benefit while a broad section of society is able to access payments, ensuring programmes enjoy public support and are viewed as inclusive.

Some Australian social benefit systems are usefully understood through the logic of ‘targeting within universalism’, reflecting elements of an NIT approach. Developing from the late 19th century, Australian benefit schemes have long adopted a model of flat-rate payments funded through general revenue. While consistent with liberal welfare traditions, the Australian welfare state potentially differed in substance. Reference CastlesFrancis Castles (1985) argued the structure of benefits proved inclusive of the vast majority of workers when combined with commitments to full employment and wage arbitration. Australia’s ‘wage earner’ model, he argued, achieved equity by reducing the initial inequality of market incomes, rather than redistribution through social spending.

The conditions of Castles’ ‘wage earner’ welfare model, however, have transformed considerably since the 1980s. Wage arbitration has been substantially unwound, and increasingly acts as a safety net for the low paid. The breakdown of Keynesian institutions internationally, combined with liberalisation of policy settings within Australia, coincided internationally with the effective end of government commitments to full employment as an achievable policy goal in favour of greater emphasis on inflation targeting (Reference BeggsBeggs, 2015; Reference Langmore and QuigginLangmore and Quiggin, 1994). Labour market liberalisation, in particular, has eroded the standard employment contract, coinciding with declines in union density. Social payments now sit alongside pervasive insecurities, despite decades of unbroken economic expansion and, until 2012, sustained increases in real wages (Reference Bryan and RaffertyBryan and Rafferty, 2018; Reference StanfordStanford, 2019; Reference Wilson and EbertWilson and Ebert, 2013).

Alongside labour market liberalisation, benefits have also changed. Changes followed a similar technical model of liberalisation. Almost all social payments are now means-tested; however, means-tests have become less strict, allowing beneficiaries to remain eligible for some payment while earning some market income. In addition, new forms of conditionality were introduced for many payments, reflecting the advance of workfare. Elsewhere, Reference Spies-ButcherSpies-Butcher (2020) has argued that while these reforms involved similar technical changes across benefit systems, two distinct policy logics emerged.

Some payments, like age pensions and family payments, facilitated the combination of market and social incomes much more readily, by allowing recipients to earn some ‘free’ income without impacting benefit levels, or by reducing the rate at which benefits are withdrawn as market income rises. While these payments remain means-tested, there are few other forms of conditionality, they are received by a majority of the potential recipient population and enjoy broad public support. For example, the majority of families with children are eligible for the main family support payment, Family Tax Benefit Part A, although the highest payments are received by the lowest income families, and many middle-income families receive very small payments.

We call this type of payment structure ‘affluence testing’ (see Reference Wilson, Spies-Butcher and StebbingWilson et al., 2013: 633), as income-testing is primarily used to limit access by the better off. Alternatively, other payments, like the unemployment benefit, have become increasingly conditional, are the focus of divisive media coverage and political campaigns and have failed to increase^{Footnote 3} in line with wages or other payments, like the age pension.

Affluence testing potentially aids universalism while also advancing competition by focusing attention on economic incentives. Analytically this is expressed through a focus on Effective Marginal Tax Rates (EMTRs), which incorporate changes in income received at the margin from additional market income by combining the effects of income tax scales and benefit withdrawal rates. By combining the effects of tax and welfare systems, EMTRs provide an analytic lens to examine the incentive and distributional impacts of change across both policy domains. This analytic choice also has political implications because systems of taxation and social spending have come to embody different administrative approaches and normative commitments.

Analysing the tax and welfare systems through the lens of EMTRs, we argue, highlights a tension between liberal and paternalist modes of liberalisation. Paternalist reforms to workfare treat market income and social income differently, managed through different bureaucracies, with strong forms of surveillance and conditionality applied to social income. These differences reflect a politics of ‘deservingness’ based on a construction of welfare ‘dependence’ (see Reference Fraser and GordonFraser and Gordon, 1994) as undesirable and caused by character and cultural flaws that require behavioural interventions (Reference MestanMestan, 2014). Alternatively, EMTRs identify monetary incentive structures, reflecting a neoclassical economic assumption that all individuals are instrumentally rational.

A focus on incentive structures can also be found in Reference Friedman and BunzelMilton Friedman’s (1968) well-known proposal for a NIT, which is sometimes understood as a form of BI. Friedman’s model takes the logic of EMTRs as its organising principle, by applying a flat ‘EMTR’ that is structured entirely as a benefit withdrawal rate for low- and middle-income earners until no entitlement remains and then taxing income above this threshold at the same marginal rate. Friedman’s proposal envisaged funding the NIT through the abolition of other social programmes, effectively replacing in-kind provision with cash. Similar ‘flat tax’ BI models have also been proposed by free market advocates in Australia (Reference HumphreysHumphreys, 2005). In practice, affluence testing involves a series of smaller policy changes in this direction, although with greater overlap between social payment recipients and income taxpayers, and it is funded by expanding social spending rather than contracting other forms of social provision.

Following this argument, we suggest a series of principles that would represent an affluence-tested model of BI that conceptually integrates tax rates and benefit withdrawal rates,^{Footnote 4} which in principle is identical in distributional and incentives terms to an equivalent NIT model or a full BI funded through income tax. In developing an affluence-tested model of BI, we adopt four principles (also see Reference Spies-Butcher, Henderson, Klein, Mays and DunlopSpies-Butcher and Henderson, 2019) that reflect the logic of integrating tax and welfare systems via EMTRs and acknowledge existing institutional arrangements as the starting point for reform. They are as follows:

1. 1. EMTRs should only increase with income (progressivity of incentives);^{Footnote 5}

2. 2. High-income earners should receive no net benefit from moves towards universalism (fiscal efficiency);

3. 3. No below median income earner should be left worse off (i.e. have a lower net income for any given market income) (equity);

4. 4. The current tax scale should be largely taken as given (path dependency).

The first of these principles amounts to a significant relaxation of current means-testing arrangements, but it is broadly consistent with the underlying principles of current policy structures. The second reflects existing policy norms that prioritise public spending based on need. The third principle requires that those already on benefits are not left worse off. And the final principle allows us to build a model that is analytically separate to the financing measures introduced to fund it.

Designing an affluence-tested BI proposal

Taken by themselves, these principles under-determine a specific BI proposal. To facilitate microsimulation modelling, we develop specific payment structures presented in Tables 2 and 3. We are conscious that any specific model is unlikely to constitute a real-world policy prescription. Instead, our aim is to better understand the fiscal and distributional dynamics of moves towards a BI structured according to our four principles, which we argue reflect the logic of affluence testing built into aspects of Australia’s existing social policy architecture.

Table 2. Affluence-tested Basic Income payment Model 1, Newstart.

Source: Authors’ calculations.

1. This Column differs from the marginal tax rate by taking account of a tax offset, which provides a rebate for some taxpayers (earning between $19,543 and $48,000), and then unwinding the rebate for those earning over $90,000. The initial rebate effectively reduces the tax paid per additional dollar earned, while unwinding the rebate effectively increases the amount of tax paid per dollar earned. Structured as a rebate, however, these impacts are not recorded in the headline tax rates.

Note: $ = AUD$

Table 3. Affluence-tested Basic Income payment Model 2, Newstart +$75pw.

Source: Authors’ calculations.

Note: $ = AUD$

We model two versions of BI. Our analysis is based on payment and tax systems prior to the changes made in response to COVID-19. Table 2 describes the tax and benefit structure of our affluence-tested BI Model 1 with a base payment rate approximately equivalent to Newstart (the main unemployment benefit in 2018, now renamed JobSeeker). This echoes our fourth principle, applied to benefit levels.

Table 3 describes the tax and benefit structure of our affluence-tested BI Model 2 with a base payment set at approximately $75pw above Newstart,^{Footnote 6} reflecting the campaign to ‘raise the rate’, which has now gained broad stakeholder consensus, although not permanent policy change (Raise the Rate, 2019).

Withdrawal rates for our models were derived by taking tax rates and benefit levels as given and withdrawing benefits to approximately zero for incomes above $180,000 (the top marginal income tax threshold).^{Footnote 7}We note that one implication of this method is that the higher base payment in Table 3 is part-funded by higher EMTRs (tighter targeting) compared to Table 2. This trade-off is common to a number of recent tax and transfer system changes such as part funding an increase to the base pension rate via an increase in the withdrawal rate under the Rudd Labor Government (Reference YeendYeend, 2009), suggesting our model follows an existing institutional logic.

Changes to the tax system applied retrospectively to the 2017/2018 tax year complicate our models by creating tax offsets. Offsets are logically equivalent to a reduction in the marginal income tax rate (a tax cut) for low- and middle-income earners. However, the offset itself is income tested. Withdrawing the offset for higher income earners is logically identical to an increase in marginal income tax rates (a tax rise). These effects are reported in each Table under the column ‘Effective tax rate including tax offset’.^{Footnote 8}

We note that a number of other benefits are paid at a higher rate than Newstart or Newstart plus $75. We follow other BI scholarship and modelling^{Footnote 9} in retaining these more generous categorical benefits on the basis that their respective payment levels reflect non universal needs, such as parenting or disability. We therefore assume supplements for those on higher payments so that no current beneficiary is left worse off as a consequence of introducing BI.^{Footnote 10}

While reliable distributional estimates require BI proposals be net fiscally neutral, our aim here is to explore potential benefit structures, not to propose specific financing mechanisms. We note there are a wide range of potential options for financing BI schemes through the tax system. Some, such as the elimination of existing tax concessions, are strongly progressive, others, such as an increase in consumption taxes, are regressive (for alternative financing options based that include wealth taxation, see Reference Ingles, Phillips and StewartIngles et al., 2019). In practice, trade-offs between policy objectives, expenditure requirements and levels of tax resistance would likely necessitate a combination of financing measures for any BI scheme.

While the optimal tax mix is not our concern here, any real-world change is very likely to require proposed funding to be at least proportionate overall, reflecting a ‘compensation politics’ observed in previous Australian tax reforms (Reference Wilson, Spies-Butcher and StebbingWilson et al., 2013: 633). For the purposes of estimating distributional impacts of our fiscally neutral Models 1 and 2, we simulate a proportionate tax increase by increasing marginal tax rates evenly across the entire income distribution sufficiently to ensure fiscal neutrality.^{Footnote 11}