GAI

There's a lot to like about a guaranteed annual income. Or, at least, there would be if it were feasible and affordable. I don't think it can be both.

Let's recap. On Friday, Labour released a discussion document on the GAI. The document is much better than I had expected, laying out reasonably the benefits and costs of that kind of a system, with a lighter thumb on the scales than I might have expected.* 

The main problem remains linked to Kevin Milligan's trilemma.

@EmmMacfarlane Again, the impossible trinity: choose two of:

* low phaseout rate
* Big basic benefit
* same cost as current system.

— Kevin Milligan (@kevinmilligan) February 5, 2016

You can't pay a benefit large enough to leave current beneficiaries no worse off without simultaneously blowing out the budget, or running a very sharp phaseout rate. This isn't rocket science. The beneficiaries in most need get lots of different payments from lots of different systems because they have multiple needs. Set a GAI to replace all of them, and you'll leave the worst off worse off, or you wind up paying everybody the amount of money that we currently pay to those being paid the very most.

And so we come to Labour's document. They note the main benefits of shifting to a GAI: getting rid of the very high effective marginal tax rates affecting the working poor where multiple programmes abate simultaneously, getting rid of the stigma of benefit receipt,** and getting rid of the paternalism inherent in the benefits system.

When they get to the costs side, they note that a GAI would be rather expensive and that a GAI sufficient to fully compensate those beneficiaries in the worst circumstances would be on the order of $22,000 per year. Note that total Core Crown revenue is about $72 billion per year. A GAI of $22,000 per person would exhaust total Core Crown revenue when paid to just over three and a quarter million people. There are 4.6 million people in New Zealand. Again, not rocket science.

So how to square the circle? Their options suggest a lower GAI, but with top-ups for those in more severe need. But that's a problem. The benefit of having a GAI - getting rid of paternalism, stigma, high EMTRs - putting need-based top-ups on top of a GAI brings the problems of the current welfare system back.

Libertarians abroad who favour a GAI have good reasons for doing so. They mostly suggest funding it by cleaning up foreign tax systems - abolishing the kinds of exemptions and loopholes that New Zealand doesn't have. Now that's still a bit of a cheat: those changes are worth doing regardless of a GAI and should be evaluated separately. But NZ's tax code doesn't have free lunches baked into it - thankfully.

A GAI then winds up paying a fair bit of money to non-working spouses in high income families and to students while potentially making it harder for current beneficiaries in need to access benefits, if the top-ups follow the form of current hardship grants for beneficiaries. And at a not insignificant hike in tax rates.

Treasury's 2010 analysis remains relevant.

Update: And here's the 2001 McLeod Report:

Universal basic income 6.52 Submissions reiterated the case for a universal basic income (UBI).

6.53 A UBI provides a fixed sum to each citizen. Key attractions of this idea are its simple administration and avoiding EMTRs from abatement. There are also philosophical arguments for a UBI (everyone has a right to a basic income; a basic income reflects a return to collective wealth) and against (people have a right to the fruit of their labour).

6.54 There are three practical problems with all UBI proposals, namely:

• a UBI provides people with money (which gives them purchasing power over goods) without supporting the production of the goods to be purchased with the money;
• income distribution: New Zealand has few high-income people and many low income people. Each dollar taxed off the few people at the top of the distribution has to be divided among many people at the bottom. This, in turn, means either the UBI has to be low or the tax rate to fund it has to be very high; and
• churn: The people in the middle of the income distribution pay half their income in tax and receive the same amount back as UBI. Much of the high tax rates of a UBI scheme is required to take money from middle- and high-income people and give it back to them, worsening their incentives without increasing their net income. This means we get the costs of high tax rates without the benefits.

6.55 A UBI has theoretical attractions, but the high tax rates required to fund it and the incentive effects of the payment make it impractical.

* I would link it, but Chrome really really doesn't want to open Labour's page due to an https issue.

** I'm not entirely convinced this is an unmitigated benefit.