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Universal Basic Income (UBI) and other guaranteed income schemes are shaping as the welfare policies of the future. While there is no single rationale for UBI, the recent surge in mainstream popularity can be attributed to concerns about the deepening levels of income inequality and rapid changes to the labour force as a result of technological advances. Guaranteed income policies are commonly being advocated as solutions to these two issues.

There are some questions surrounding what impact a potential UBI policy would have on the tax system. It can be said that a UBI acts in reverse of the normal understanding of tax: instead of extracting money, the government is providing funds to citizens. Of course, a government would need to be able to fund a UBI, which will most likely be sourced from tax revenue. It has been stated that the introduction of a UBI would not possible without significant changes to government programs and/or the taxation system. Therefore, a UBI may offer the unique opportunity to undertake significant tax and welfare reform that may make both systems more transparent and cost-effective.

What is UBI?

UBI is tax-free subsistence income distributed universally to all citizens. Whilst there is some variation in the pool of recipients amongst suggested policies (some proposals exclude groups such as children and prisoners), a UBI is generally universal in nature and does not discriminate based on personal factors. In essence, a UBI would act in a similar way to most welfare payments less means testing or other qualifying criteria such as age, income or veteran status.

UBI is not a new concept in Australia with similar proposals being raised by mainstream politicians as early as the 1920s and as late as the 1980s before being pushed to the fringes. With the re-emergence of UBI as a legitimate mainstream policy, it is pertinent to understand the concept of UBI and its implications, particularly the effects on the existing tax and welfare structures.

Potential benefits

The two main bases for UBI advocacy are wealth inequality and the impact of technology.

The effects of wealth inequality are well documented. Among other things, individuals in lower socio-economic brackets typically have worse health — both physical and mental — and perform worse in schooling, which typically results in individuals and their future generations being ‘trapped’ in that economic bracket. The impacts of technology on the labour force are concerning as there is no clear indication of the rate of automation or what lies beyond total automation. Since 2000, automation has had a significant impact on the labour force severely impacting routine intensive occupations such as manufacturing. This has forced a shift of labour supply to other occupations less susceptible to automation, typically service based occupations. This has resulted in a ‘hollowing out’ of the routine-based labour market, which is typically a middle-income bracket resulting in a diminishing middle class and a swelling lower class.

UBI is argued to offer solution for both issues, which is achieved through the replacement and transformation of traditional welfare systems. The primary issue with traditional systems is complexity, which may result in individuals ‘falling through the cracks’ or distorting the work incentive structure due to eligibility rules. As a UBI is universal, there would not be any risk of the needy being unserved. Additionally, as a UBI is not subject to eligibility rules, working would no longer be disincentivised by the loss of the welfare or the experience of the ‘welfare cliff’ when working.

Whilst a UBI may increase total welfare costs, this may be offset to a large degree both directly and indirectly. For example, administrative costs may be reduced as a result of system simplification. Additional savings may also arise from other areas such as healthcare and productivity as a result of the effects of a UBI. The UBI may even act as its own form of economic stimulus as citizens would have more disposable income as expenditure on their basic needs would be met by the UBI.

Outside of the economic empowerment and safety, UBI offers several other benefits. Trial programs in India, Kenya and Finland showed positive impacts on health and labour participation with the most significant impacts occurring within traditionally disadvantaged classes such as women and the disabled. Participants demonstrated improved psychological health, and lowered spending on ‘temptation goods’ such as alcohol and tobacco with increases in spending on education and business ventures.

The various experiments firmly support the content that UBI has a positive effect on quality of life. Several criticisms of UBI such as the policy disincentivising work or resulting in increased spending have been largely disproved. As a result, UBI shapes well as a welfare policy for the future. The issues that do remain are how to fund the UBI and what effects the UBI will have on existing structures and systems.

Impacts on the Tax System

As noted, the introduction of a UBI would not be possible without significant changes to the welfare and taxation systems. This presents a unique opportunity to undertake root and branch reform. Reform can be made in two areas: tax law and tax administration.

Foremost, a UBI can simplify the tax system. Whilst complex and nuanced tax laws are necessary in some circumstances to deal with the diverse pool of tax filers, the current system appears to be too complex in general. High levels of tax complexity result in the taxation system being less transparent and being seen as unfair. In such circumstances, compliance may be lowered as a result of a failure to see a benefit in complying. The introduction of a UBI offers an opportunity to simultaneously incentivise tax compliance and simplify the tax system.

The presence of a UBI and the ‘free money’ it promises provides an incentive for compliance, which when coupled with a simpler system may result in an increased compliance response. Such a phenomenon occurred in the 2008-09 tax year where the Australian Taxation Office (ATO) experienced an increase in tax return lodgements following the introduction of Tax Bonus for Working Australians Act (No 2) 2009 (Cth) (Bonus Act). Among other things, the Bonus Act required an individual to lodge their tax return for the 2008-09 year to be eligible to receive a tax bonus payment. In the case of the Bonus Act, the increased compliance occurred even with the already complex tax law. It is therefore not radical to suggest that a UBI in conjunction with a tax return lodgement condition would lead to increased tax system participation.

There are several suggestions on how to reduce tax complexity. The most relevant to a UBI are perhaps elimination of the tax-free threshold and the elimination or reduction in number of deductions — against income and capital — and offsets. The elimination or reduction of offsets and deductions may also assist in the funding of the UBI due to reduced tax expenditure. If a UBI is introduced, the tax-free threshold would arguably be redundant as the UBI would instead effectively be providing the previously ‘protected’ income. Similarly, tax offsets, such as those available to low income earners, could also be eliminated. If the threshold and offsets are eliminated, it would be pertinent to review the current tax brackets to prevent effective tax rate type issues arising.

The availability of too many deductions can increase the compliance burden and add to system complexity. Deductions are also a significant source of tax expenditure, which is made up of legitimate, exploitative and inadvertent claims. Whilst removal or reduction of available deductions would simplify the system and prevent exploitation of the tax return system, the process could be met with significant disproval and increase feelings of unfairness towards the tax system. An alternative method would be to instead roll the currently available deductions into a single standard deductable amount. This would be preferable to a sudden total elimination of deductions and could also be used as a transitionary measure toward the total elimination of deduction.

UBI is promising, but careful consideration required

Trends in automation have created an uncertain future for vast segments of the labour force. Coupled with deepening levels of wealth and income inequality, it seems a perfect storm for UBI is brewing.

While the rapid advancement of technology does bode positively for a post-work future, this is not an immediate future. In the meantime, UBI shapes well as a both an immediate panacea for the issues created by automation and wealth inequality as well as a transitory policy for the promised post-work and scarcity future. A UBI is however not a policy that can be blindly implemented. Implementation must be carefully considered taking account of existing systems and structures.

Further Reading

Bayliss, M 2020, ‘Universal Basic Income: The Potential Impact on the Australian Tax System’, Journal of Australian Taxation, vol. 21, pp. 66-83.

This article has 2 comments

  1. Reyna De Bellerose

    This is a fantastic article Miles, fantastic work.

  2. I believe this is a must for a fair society. However it needs a tax system to go with it that cannot be cheated. The best system I am aware of to raise taxes to fund this form of social justice would be a single flat tax system, with no deductions or exemptions, on all fund transfers between different individuals, companies and entities having bank accounts. Cash withdrawals and deposits would be taxed and the amount of cash that could be held would need to be limited to a small amount. of course ever getting such a radical change is negligible because the wealthy would be paying allot more tax.

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