First Steps Towards a Basic Income

  • Loek Groot

Abstract

In this chapter the first steps are presented that transforms conditional social security in a gradual way into unconditional social security. The problem social policy makers face in fighting unemployment is that the social minimum must be kept at a reasonable level, large scale unemployment (especially at the lower end of the labour market) must be reduced, under the restriction that whatever policy measures are taken, there must remain sufficient (overall) incentives to work. Advocates of a BI assert that if we want to maintain the social minimum at a reasonable level, and at the same time want to reduce large scale unemployment at the lower end of the labour market (through gradually abolishing minimum wages and strenthening monetary incentives to work by eliminating the poverty trap), we inevitably move towards a BI-type scheme. I will therefore concentrate on what are probably the two most important adverse side-effects of the present welfare state: firstly, the poverty trap and secondly, unemployment at the bottom end of the labour market due to binding minimum wages. Removing both may be valuable in itself, but also brings the present system closer to that of a BI system.

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References

  1. 1.
    A previous version of this chapter was published in De Economist, 1997, 145 (2), 203–227 under the title ‘An Alternative Route to a Basic Income: The Transition from Conditional to Unconditional Social Security’.Google Scholar
  2. 2.
    See Whynes (1993).Google Scholar
  3. 3.
    In the following sections I argue for a very gradual route of implementation where the basic features of conditional social security are maintained during the first two phases.Google Scholar
  4. 4.
    When unemployment and disability rates are high, together with high unemployment benefits and disability payments, gross-of-tax labour costs (net wages plus taxes including social security contributions) will also be high. For the employer it is rational to hire more workers as long as their marginal productivity is at least as high as the gross-of-tax labour costs. As more people become unemployed or disabled, labour costs will rise due to the higher taxes which are needed to finance the higher social security outlays. But higher labour costs will lead to more lay-offs. The productivity of marginal workers will no longer be high enough to outweigh the higher labour costs. This results in a downward spiral during economic downturns and an upward spiral during economic upturns.Google Scholar
  5. 5.
    See e.g. Heij et al. (1993), WRR (1985) and Centraal Planbureau (1992).Google Scholar
  6. 6.
    With a BI, the income effect on labour supply is negative for those with low labour income or no labour income at all. The sign of the substitution effect is more difficult to predict for this group. Women with a working partner face the same marginal tax rate as their partners as tax liabilities depend on family income. But the implementation of a BI will also raise the (marginal) tax rate. If the marginal tax rate for women is more or less equal in both regimes, the substitution effect will be close to zero.Google Scholar
  7. 7.
    Highly stylized graphs are used to characterize both systems. Admittedly, welfare arrangements in the real world are much more complicated, but as long as welfare states incorporate minimum wages and maintain a social minimum the basic idea of an alternative route towards a BI is valid.Google Scholar
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    For illustrative purposes it is assumed that for all variants the government works with a balanced budget. Whether the budget balances or not cannot be seen from the figures, as they do not show how many people are located at the different points.Google Scholar
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    If the reduction in the withdrawal rate to less than 100% is not self-financing, the tax rate must increase which will cause an increase in the gross minimum wage, given the level of the net minimum wage.Google Scholar
  10. 11.
    Consider two countries with equal average tax rates (0.35) and equal tax allowances (500), but different average incomes (2000 or 4000). If both countries decide to raise the tax allowance to 1000, the new tax rate according to (7) in the low-income country will increase to 0.525 and in the high-income country to 0.41.Google Scholar
  11. 12.
    A claw-back BI regime is a two-tier regime which has two tax rates. The high rate (t h ) in the first income bracket is such that the maximum amount of taxes paid over this bracket equals the BI (G): t h y d = G. All gross earnings above yd are taxed at the lower tax rate t l This means that one pays the high tax rate as long as one receives more in the form of a BI than one pays in the form of taxes. The surcharge is the difference between the high and the low tax rate (t h - t l). A two-tier BI regime is sometimes put forward in order to reduce the disincentives of a high marginal tax rate for high-income earners.Google Scholar
  12. 13.
    One possibility left is to lower M accompanied by an increase in f (given S = fM) in order to keep the social minimum at the same level. But this possibility will bring the net income of a full-time minimum wage worker very close to a full-time welfare recipient. This may reduce their monetary incentives to (find) work and it will reintroduce the poverty trap.Google Scholar
  13. 14.
    One can think of an intermediary step between the schemes depicted in Charts 5 and 6. Instead of introducing a partial BI to all adults it is possible to discharge social security recipients of their duty to search for work or to accept work. If one can prove that (family) income is below the social minimum, one can claim a social security benefit. This amounts to a state-supported right to be idle.Google Scholar
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    Given the level of S, a higher partial BI will lower the minimum wage and the tax allowance at the same time.Google Scholar
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    Dependent on the levels of G and the net (total) income of a minimum wage worker the withdrawal rate can be higher or lower than the tax rate. Suppose we can find a partial BI for which the withdrawal rate equals the tax rate. The line SHC will then be a straight line and further increases in the partial BI can be made which means that the net income of a full-time minimum wage worker will lie on the line SH.Google Scholar
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    That is, we know what the balancing budget tax rate is in a full BI regime.Google Scholar
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    See the Journal of Income Distribution 4 (2), 1994/1995 for a theoretical discussion and empirical estimates of equivalence scales. For a BI we ideally should have data on equivalence scales for different families or households for all expenses on commodities which belong to a package which is classified as the social minimum.Google Scholar
  18. 19.
    For simplicity I assume that there are only one and two-person households.Google Scholar
  19. 20.
    At present, income tax liabilities are dependent on family income. If one gives all adults the same individual BI b, one can still get the same result brought about by a differential BI regime by means of taxing two-person households’ family income between (2b - fb) at a 100% tax rate. The advantage is that one can make use of information already available at the tax authorities.Google Scholar

Copyright information

© Springer Science+Business Media New York 2004

Authors and Affiliations

  • Loek Groot
    • 1
  1. 1.University of AmsterdamThe Netherlands

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