The price of freedom. Can we afford an unconditonal basic income?

This blog has previously scrutinised the case for a universal basic income and how it might play out in practice. But in a sense these are subsidiary to a more fundamental issue– namely how could a basic income be financed? An unconditional income for everyone might be theoretically desirable, a sympathetic sceptic would object, but what’s the point in speculating about how it could work when the astronomical costs of implementing it render such speculations idle fantasy? In any event, through austerity, society is furiously paddling in the opposite direction.

Firstly, it should be remembered that a basic income would likely save lots of money in certain areas. It would mean the abolition of many social security benefits and the end of the current obsession with checking up on people’s work seeking activities. No job diaries, no Work Programme, no Work Capability Assessment. There wouldn’t be any ‘benefit cheats’ under a basic income, because if the money comes without conditions, it’s impossible to cheat.

In addition, there would be less direct savings, too. I think a basic income would quickly produce a healthier society, both physically and mentally. The space, choices and ‘de-pressurisation’ it would afford, would lead to a smaller financial burden on public health services and fewer drug prescriptions. If the current neo-liberal capitalist society is, in essence, a social problem generating machine (and one which rudely lumbers society with endless disturbances to deal with), basic income is a problem reducer. Fewer problems, less expense.

But, even if all this is borne in mind, a universal basic income would seem, on the surface, to be monumentally expensive. In 2009, the economist Harry Shutt estimated, based on figures from the UK Citizen’s Income Trust, that the cost of a basic income in Britain was equivalent to an income tax rate of 57% or “around double the current basic rate of tax and national insurance”. The economics editor of the UK’s Channel 4 News, Paul Mason, believes, on a rudimentary calculation, that a subsistence level basic income of £6,000 a year would cost £290 billion. This contrasts with a current UK ‘welfare bill’ of £167 billion or 23% of government spending (memo to the British public: nearly half this amount goes on pensions). Mason factors in the benefits of a basic income: no tax relief needed for those on low or moderate incomes and lower health spending, but concedes that a “fiscal gap would be closed through raising tax – so this is not a cheap or easy solution”.

And while there are other kinds of taxes that can be utilised – a land value tax or a financial transactions tax for example – closing this fiscal gap invariably centres on one suspect, income tax.

And in the Mason case, we are talking about an income floor type of basic income. Wouldn’t the more generous kind of basic income, US$30,000 or £20,000 per person, be decisively beyond the bounds of affordability?

But it’s interesting that if you put the question of financing the basic income to the people that have thought most deeply about it, the Swiss group, Generation Basic Income, they come up with a very different solution. And Generation Basic Income aren’t proponents of a half-hearted basic income either. They advocate what might be called, ‘basic income max’ –  an annual rate of around £21,000 for every adult and half that amount for children. They will be taking that proposal into a referendum on the issue in Switzerland in 2016.

One of Generation Basic Income’s spokesmen, Enno Schmidt, is adamant that a universal basic income should not be funded out of income tax. “Whoever wants to fund basic income with income tax, has not understood it,” he says.*

Schmidt’s argument is that a basic income funded from increased income tax would be passed on in prices of goods, thus producing an endless demand for a greater basic income and generating spiralling inflation. Moreover, funding a basic income through income tax will reinforce the impression of those with well-paying jobs subsidising those without this income. “The people who earn money with their work will say: we work and pay our labouriously earned money to others who are lazy,” Schmidt argues.

His answer is that a basic income should be granted through an annual tax-free allowance and funded through a consumption tax, the equivalent, I guess, of VAT in the UK or the sales tax in the US. A consumption tax, incorporating the financing of the basic income, would, Schmidt estimates, need to be set at around 50% of prices. This is obviously much higher than it is at present – VAT is currently 20%, in the UK, for example.

Schmidt believes that, with the introduction of a ‘basic income max’ for everybody of £20k annually, prices, including wages, would fall dramatically. But with the introduction of the basic income consumption tax, prices would rise again to their original level. “Prices remain with this tax as high as they were for the consumer,” he says.

His argument is that consumption tax is a fair way of funding the basic income because how much a person contributes is determined by how much they ‘take’ in consumption. “The consumption tax is not unjust,” he says. “Whoever buys a lot, pays a lot for basic income elsewhere,” he says. Whoever takes a lot of performance from others for their benefit, contributes greatly to the basic income.”

I can certainly see the immense problems that ensue from trying to fund basic income from income tax. Over and above everything, this method involves paying for basic income in mammoth tax rises, before the benefits of unconditional income can be seen. They have to be taken on faith.

The consumption tax method of funding basic income is new and, I confess, I don’t understand all its ramifications. Two issues do immediately spring to mind, however. One is that consumption taxes are, nowadays, regressive – everyone, the billionaire and the homeless person, pays them at the same rate. In the past, (in the UK in pre-EU days for example), luxury items had a larger tax rate attached to them. Should a consumption tax for a basic income have graduated rates for more expensive goods?

The other question that arises is whether this kind of arrangement would lead to an enforced frugality? Because many people would deny themselves consumption, and thus paying the accompanying tax, if that’s where it would mostly be applied. Would a basic income, ironically, put basic goods out of the reach of most people? It’s important to remember that basic income would not, automatically, redistribute income. There would still be immensely rich people on the basis of their wage income and ownership of assets. Huge inequality could remain.

Ultimately, I’m not convinced that a universal basic income is possible without tapping the immense wealth that exists at the summit of society, held by corporations and a tiny minority of individuals. The charity Oxfam has famously estimated that a mere 85 people control as much wealth as half the population of the world. And the situation is rapidly getting worse. Oxfam says that the wealthy have captured opportunities from the poor and middle classes, skewing the political and economic system in their favour.

Real progress will not arise through tax redistribution, through increasing tax on the wealthy, as the clamour for a basic income tacitly acknowledges. It has to go deeper than that. "If change is ever to occur," asserts Gar Alperovitz in his 2002 book, America Beyond Capitalism, "an assault must ultimately be made on the underlying relationships that have produced the inequality in the first place - especially those involving control and ownership of the nation's wealth."

One of the earliest advocates of a basic income, the French thinker, Andre Gorz, thought an unconditional income would enable people to refuse work because it would bring about "the pooling of socially produced wealth". I still think we need to concentrate on the difficult part, the socialist part, which is how to produce the pooling.

*From correspondence with the author

Here is Part One

And Part Two