Simple Arithmetic Shows Why Basic Income Schemes Cannot Work

John Kay

Swiss voters decided in a referendum on June 5 whether to introduce a “basic income”. In proposed reforms to the social welfare system, all residents would be entitled to a guaranteed income of SFr30,000 ($30,275) a year from the state — unconditionally.

The concept of basic income has been discussed for decades. It has attractions for people at both ends of the political spectrum. For the left, it offers a simple and comprehensive answer to concerns about poverty and inequality. For those on the right, the plan discharges social obligation with minimum intrusion into personal affairs.

The renewed popularity of this idea is part of the general revulsion against mainstream politics that is sweeping the west. Bernie Sanders, a candidate for the Democratic presidential nomination, has expressed sympathy for basic income while stopping short of endorsement. Yanis Varoufakis, the former finance minister of Greece, is a proponent. The scheme gains credibility from loose association with Brazil’s widely praised, but wholly different, bolsa família, which transfers cash to poor families with children in return for a commitment to keep their offspring in school.

Yet simple arithmetic shows why these schemes cannot work. Decide what proportion of average income per head would be appropriate for basic income. Thirty per cent seems mean; perhaps 50 per cent is more reasonable?

The figure you write down is the share of national income that would be absorbed by public expenditure on basic income. The Swiss government reckoned spending on social welfare would approximately double.

To see the average tax rate implied, add the share of national income taken by other public sector activities — education, health, defence and transport. Either the basic income is impossibly low, or the expenditure on it is impossibly high.

Most advocates of basic income prefer to keep the argument at the level of general principle rather than engage in the grubby practicalities of numbers. The Swiss proponents explain that basic income “arises from a general fundamental democratic right, the Right to Life”.

But even they temper ideals with realism. Obviously children would receive less. Sadly this does not help with the basic maths: even 50 per cent of average earnings for children is insufficient for their support and the same is true for the elderly.

The Swiss supporters of the referendum solve this dilemma by saying that you are not entitled to basic income if you already receive SFr2,500 a month from an employer. Not only does this dramatically reduce costs but it would also have social consequences about which proponents wax lyrical: “Wages in the private sector would be liberated from securing the livelihood of the employee.”

Perhaps the writers do understand the radicalism of this proposal. There could be no low-paid or part-time positions. Few work as refuse collector or shelf stacker for the love of the job. So such employment must pay more than the guaranteed basic income. Higher unemployment and radical redistribution of income would follow.

Back in the real world, there are two ways to assess household needs for welfare. Contingent benefits target causes of poverty — old age, unemployment, disability, large or broken families. But it is costly and inappropriate to subsidise Warren Buffett, Rupert Murdoch and the Queen just because they are elderly. Income-related benefits address poverty more directly but diminish incentives to work.

Social welfare systems everywhere make use of both types of information — contingent and income-related — to balance cost and effectiveness. That is why they are, inevitably, complex.

This post originally appeared on the author’s blog.