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Surprising case for basic income
Samuel Brittan Financial Times 21/04/06

Many people who have struggled with the complexities of income tax and state social services must have wondered whether there might be a simpler way: net off the benefits against the tax bill and have a single financial transaction. Properly designed, this reform could combine redistribution with greater freedom for both rich and poor to spend their resources in their own way.

Recent supporters of such reform have stretched all the way from Professor Milton Friedman to Dutch social democrats. It has certainly occurred to many politicians, only to be crushed by the combined forces of the revenue departments and the social service bureaucracies.

Reform plans come in two guises. There is the simple negative income tax which becomes positive once a certain threshold is reached; and there is basic income paid to all and gradually offset by tax as "original income" from work rises. On the whole basic income appeals to the left and negative income tax to the right. But analytically they are similar.

Support has now come from what might seem a surprising source: the US policy analyst Charles Murray (In Our Hands, American Enterprise Institute). Mr Murray regards himself as a libertarian but of a socially conservative kind. In his ideal world all welfare benefits would end. His cash transfer plan is therefore second-best in his eyes. A subsidiary motive is to find some common ground with "social democrats", as he is one of those worried by the widening ideological chasm in the US.

His starting point is that in spite of well over $1,000bn(€810bn)a year spent on welfare services of all kinds, poverty in the US is still rampant. He comes out for an unconditional basic income of $10,000 a year for every American over 21. I was originally attracted to basic income as a way of divorcing capitalism from the puritan ethic and allowing young people or creative artists to opt out from the rat race. Mr Murray on the other hand finds numerous, ingenious arguments whereby an unconditional payment of this kind might help restore the work ethic and traditional values. Clearly, different people will react differently.

To finance his scheme Mr Murray would go the whole hog and remove all social security payments including Medicare and state pensions for the old, as well as numerous payments and rebates for special interest groups. He realises that this cannot be done overnight but his purpose is to outline a destination rather than work out the detailed route.

The novel feature of his plan is that the withdrawal tax to offset the cost of basic income would only start to bite at $25,000 of annual earnings. There would thus be a wide band in which people could move into work without offsetting the basic payment.

His arithmetic is crucially dependent on two arguments. The first is that citizens could obtain good healthcare for much less than official estimates of the cost of federal Medicare. One snag in private insurance is the limit on claims. But another, and even more important one, as I know to my cost, is the list of exclusions which cover nearly all the ailments from which the applicant has previously suffered. Mr Murray would make such conditions illegal. In his view this would make private insurance a valid option for everyone and he would make it compulsory to devote $3,000 of the basic income to such insurance.

The other crucial assumption is that voluntary private pension investment by citizens would provide a much more attractive pension than the pay-as-you-go government variety.

He uses a cautious real rate of return on invested funds of 4 per cent compounded annually. A move to basic income, even if more expensive than Mr Murray hopes, would be easier in the US than Europe where there is a prevalence of government- provided services in kind. Few of the European advocates of basic income have had the courage or rashness to want to abolish health services and state education completely.

A detailed estimate by Anne Miller for the UK Citizen's Income Trust envisages an adult "citizen's income" of nearly £5,000 (€7,200) a year with more for pensioners and less for children. This is not a free lunch. All personal tax allowances would go, as would most cash benefits. The citizen's income could be financed by a 33 per cent personal tax rate, equivalent to the present 22 per cent standard rate plus 11 per cent national insurance contribution.

Obviously this is not going to happen very soon. A place to start in the UK might be the indexed basic state pension recommended by the Turner report. Lord Turner himself envisages the eventual shift of this pension from a contribution-related basis to "a universal residency" one.

There is too often a conflict between the advocates of regular cash payments such as basic income and those who believe in asset-based redistribution, such as that pioneered in the "baby bonds" of Gordon Brown, the chancellor of the exchequer. Rather than have a civil war between these factions I would make progress on whatever front seems possible.

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