Alternatives to Basic Income

A natural event, international or local conflict, or economic downturn may result in a rapid increase in unemployment, including unemployment for those who thought they had secure employment and would never be unemployed.

• There will be a surge in demand for welfare services, and insufficient staff will be available to handle the surge. 
• The current welfare system can be modified to reduce the impact on individuals, to overcome problems with the demand for services, and to make it a fairer system.
• Possible changes to the current system can include:
  • allowing online registration for jobseeker support, previously known as the unemployment benefit; 
  • eliminating the standdown period before people are eligible for payments;
  • eliminating or reducing periodic interviews; and
  • reducing the abatement rate.
• These changes will make the system more humane and a little more efficient, but the system will retain its complexity and high administration costs.
  • All the changes suggested make the welfare system more like a Basic Income.
  • If the standdown period and thresholds are removed and the abatement rate is reduced significantly, the results will be almost the same as are achieved with a Basic Income, but the administration costs will remain much higher.
• The alternative to modifying the current welfare system, a Basic Income coupled with a suitable tax regime, offers a more efficient system that targets money to those most in need with near-zero administration costs. 

A Negative Income Tax can be used to target money to those most in need and achieve the same objectives as a Basic Income. See Frequently Asked Questions (FAQ) for more details on a Negative Income Tax.

• However, a negative income tax is a complex system that is difficult to set up and implement and costly to administer, and offers no advantages over a Basic Income.
• Basic Income is more efficient than a negative income tax as it achieves the same objectives, is simple, and is inexpensive to set up and administer.
• Basic Income is, consequently, a more efficient system. 

The proposal is to pay a Basic Income at several different rates depending on other income.

• The rationale for doing this is to lower the total cost of the scheme by paying those with higher incomes less while avoiding any changes to the income tax scheme.
• Paying at different rates breaches the standard definition of a Basic Income, which requires that a Basic Income be paid at the same rate to all.
  • Paying a Basic Income at different rates breaches the principle of universality and should not be called a Basic Income.
• The decision to pay at different rates is often based on the mistaken belief that the tax rates cannot or should not be changed, or that an ideal tax is a flat tax, when a Basic Income is introduced.
  • Tax rates can and should be chosen to achieve broad targeting of Basic Income payments toward those on lower incomes.
  • A two or three-stage progressive tax may be the best way to achieve this, not a proportional (flat) tax.
• It is more efficient to pay everyone the same amount and progressively increase the tax rate as income rises.
• Paying at different rates requires advanced knowledge of the applicable rates and possible large-scale annual reconciliation after the event if a person’s annual income is not correctly determined in advance.
• It is more efficient, avoiding administration costs, to pay everyone at the same rate and use a suitable tax system to reduce the net income. increase for those with higher incomes.
• Paying those with higher incomes less can lead to political opposition to the scheme from those who receive less.
  • It is better to pay all at the same rate and tax it back with a well-designed income tax scheme.

Paying a Basic Income at a single payment rate to all and then taxing it back with a suitable tax system can be achieved with lower administrative cost than attempting to determine a person’s annual income in advance to set their payment rate, because of the mistaken belief that tax rates cannot be varied.

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Some governments have used one-off payments to all citizens to promote well-being and stimulate economic growth during or following an economic slump.

• To be fair to all citizens, governments need to make equal payments to all citizens.
  • Ideally, this should include children with either an amount equal to the adult amount or a lesser amount, which is paid to the caregivers of each child.
• While this may work to a limited extent, one-off payments are often spent very quickly, resulting in a temporary boost or blip in the economy but leaving those people most in need still struggling to meet everyday needs shortly afterwards.
• Businesses can benefit in the short term from the short-term boost in expenditure, but can then be left struggling again afterwards.
• Experience has shown that rather than providing a lump sum, it is better to divide the money and provide it as a modest Basic Income over time. This encourages those who receive it to budget and spend their money carefully.  

Helicopter money is a term used to describe the distribution of money by the government when needed to boost the economy during an economic downturn.

• This may include one-off payments to citizens as described above, single or multiple payments to essential industries or companies when such payments are thought to be necessary, and may also include low-cost or interest-free loans to companies.
• Helicopter money is often criticised as an inefficient way of distributing money and is open to corruption. Governments must somehow determine where the money should go, and often, those industries that make the most noise will get the most money.
• Businesses receiving money are not necessarily the most efficient businesses or those that should survive an economic downturn.
• While one-off payments can work to a limited extent, they are often spent very quickly, resulting in a temporary boost or blip in the economy but leaving the organisations that receive the money in need and still struggling shortly afterwards.
• Rather than providing money to businesses, it is better to provide money as a Basic Income.
  • Those who receive the Basic Income will budget and spend their money carefully, and this will ensure the survival of those businesses that are needed and those that are the most efficient.

Tax cuts are often touted as a way to boost an economy, but they are a poor alternative when compared to a Basic Income.

• Tax cuts, no matter how well-intentioned, always give away more of what would have been government tax revenue to the wealthy.
• As the wealthy do not need the money for immediate needs, they accumulate the money and this slows the velocity of money and reduces government revenue, leading to deficits and calls to tighten government expenditure, which will lead to further economic decline and hardship for those most in need.
• Tax cuts can be counterproductive. For more information on tax cuts, see the page on Tax and Basic Income to see how tax cuts will always benefit those on the highest incomes the most. 
• In contrast to tax cuts, during an economic crisis, a Basic Income directs more money toward those most in need than to others, and those in need will spend it immediately on essentials.
  • This relieves hardship for the needy while boosting local businesses and economies, increasing the velocity of money, and boosting government tax revenues. For further discussion on the Velocity of Money, see the Frequently Asked Questions page.

Following an economic downturn, an economy is boosted more rapidly and more efficiently by a Basic Income than by infrastructure expenditure.

• Infrastructure projects and similar government spending can help an economy recover when money is spent on projects that are needed and can be economically justified, showing a positive return.
• However, as more money will always trickle up than down (see the Frequently Asked Questions, FAQ), the velocity of money will slow. What money trickles down will be slow to reach most of those in need.
• A significant portion of the money will go to the construction companies and their owners or to those who do not need additional income, and a significant portion will go to overseas parent companies and investors, taking money away from local economies.
• Money spent on infrastructure projects that cannot be economically justified, either before or after the economic downturn, is equivalent to throwing money away or just giving it to the wealthy, the only ones who will benefit. The result is an overall decrease in living standards.
• A Basic Income is much more efficient at targeting government expenditure to those most in need than infrastructure projects
  • When spent by those who receive the Basic Income, the money spent will support and boost local businesses. This will generate tax revenue that may be used by governments to pay the Basic Income and support cost-justifiable infrastructure projects.
  • Spending money as a Basic Income tends to boost the velocity of money, returning higher levels of tax to the government than expenditure on infrastructure projects. 

This has previously been tried during an economic slump with poor results.

• With quantitative easing, governments channelled money to the banking system in the hope that the money would be passed on as loans to businesses to provoke economic growth.
  • This did not happen. Banks continued with their reluctance to lend money during the downturn while paying their executives even larger bonuses for little or no additional work, and companies remained reluctant to increase their debt when the future was uncertain.
• A more efficient way to promote economic growth than quantitative easing is for governments to distribute money to those most in need through a Basic Income scheme.
  • People who receive Basic Income payments will spend it on goods and services, promoting local businesses and enhancing government tax revenue.  

Reducing interest rates is often suggested as a means to boost the economy.

• This may work when interest rates are high, when there is no pandemic, and the business outlook is good.
• The downside to reducing interest rates is that mortgage rates fall, and people will then borrow more to buy houses. When the supply of housing is low, house prices will rise significantly. While this may be an advantage for those who already own homes, rising house prices will severely disadvantage those seeking to buy their first homes and higher house prices will also push up rental charges. People, such as retired people, who rely on interest earned on deposits will be disadvantaged. These trends will negate the overall gains made by reducing interest rates, disadvantage a large section of society and increase inequalities in society.
• When interest rates are already low, further reductions in interest rates must be small and unlikely to have any impact. During a pandemic, or while the future is uncertain, businesses will not borrow money regardless of interest rates.
• Some countries have gone further and charged negative interest. The theory is that this will encourage people to spend money rather than save money and boost the economy that way. This again is counterproductive. Saving money is discouraged with long-term undesirable impacts on the economy. 
• Overall, providing a Basic Income to all citizens works much better than reducing interest rates or negative interest rates. 

Other proposals to support small businesses include reducing tax rates, offering tax refunds, and refunding the GST paid by small businesses.

• Again, this is an inefficient way of targeting money to where it is really needed, to those on low incomes and those who have lost employment.
• Tax relief for businesses will result in reduced tax revenue for governments, requiring governments to borrow more.
• The tax relief or refunds will help support some businesses, but others that do not need support may also receive the tax relief or refunds.
• Paying money as a Basic Income to all citizens is a more efficient means of distributing money than tax relief for businesses, and this will support small businesses when the people who receive the money spend it.

Because some students are unable to work during a lockdown, or may have difficulty finding paid work during an economic downturn, increasing student loan limits is suggested as a way of helping these students.

Small businesses can be particularly hard hit during an economic downturn, and particularly so during a lockdown.

• Governments could subsidise businesses directly, but this can prove inefficient as governments may be subsidising inefficient businesses that are likely to fail when the subsidies end.
• Governments may subsidise inefficient businesses while also providing much-needed welfare to people at the same time.
• It is a better alternative to provide people with a Basic Income so they can spend it and support businesses that way.  

Subsidising businesses by supporting them with cash grants or helping them pay wages has been used during past sudden economic downturns. Here are some points to consider.

• Some form of subsidy may be needed to ensure that businesses survive a sudden economic downturn, such as a lockdown during a pandemic. This will ensure that people have employment or income during and after a sudden economic event.
• These subsidies might be either distributed to all as a Basic Income or paid to businesses as subsidies.
• Care needs to be taken with direct wage subsidies paid to businesses, as not all businesses are impacted equally, and some may not require any assistance.
• Some firms may use the subsidies to increase their profits or to benefit a few while passing on little, if any of the subsidy, to the people that the subsidy was intended to help.
• Such issues make implementing and regulating business subsidies difficult.
• Having a Basic Income scheme in place before an event or implementing one during the event is a very efficient way of ensuring that the basic needs of all people are met.