Means testing vs UBI

UBI stands for:

• Universal
• Basic
• Income

The idea is pretty simple - it's a benefit$^*$ that is given to everyone (hence Universal) and provides enough to live on (hence Basic Income).  It's very much en vogue with economists at the moment but it tends to be received badly by voters.  "Why should millionaires get benefits?" they ask.  In this post I'll explain why I think they should!

Imagine a country in which benefits are means tested, so that a citizen with no income receives £10K, but loses 50p of it for each extra £1 of income up to £20K.  After that they receive no benefits and start to pay tax.  The tax rate is a smooth curve that starts at zero, grows to 25% of a £40K income, 30% of a 50K income, and 40% of a 100K income.  That sounds fair.

In the country next door there's a flat 50% tax rate on all income, and a £10K universal basic income.  Taxing people with barely any income at the same rate as higher earners and giving millionaires benefits seems grossly unfair.  But here's the surprise: the net amount paid to or by the state is exactly the same as in the means tested scenario!

So why bother with UBI if the numbers come out the same?  Here's a few reasons

1. The complexity of proving eligibility for benefits disappears.  And you can get rid of the nasty job of judging that eligibility.  This saves poor people time and stress and saves the state money.
2. The complexity of determining the tax you should pay disappears.  This saves middle class people time and stress, and also saves them the money they'd have to spend on tax accountants.
3. The stigma of claiming benefits disappears because everyone gets paid the UBI.
4. In a real life means tested benefits system the line representing benefits paid vs income is not perfectly straight - there are precipitous falls when benefits are lost.  This means that with real life means tested benefits the effective incremental tax rate is highest for those moving into low paid work from unemployment.
5. In a real life means tested benefits system there is a significant delay between applying for a benefit and getting it.  This creates a huge disincentive to starting a job because if it doesn't work out you can lose your benefits and it can take a very long time to get them back.
6. A very large number of people are trapped in jobs that they do not believe serve any purpose - beyond paying their bills.  These jobs may be good for GDP but not for wellbeing (i.e. the thing GDP is supposed to measure).  If UBI provides some of these workers enough security to quit their jobs and divert their energy towards something more rewarding that has to be a good thing!

 Here's an illustration:

Rita earns 40K, Sue, 20K, and Bob 10K.  In a variable tax and benefit system Bob earns less than the threshold for paying tax, but is eligible for benefits.  He has to pootle down to Social Security, spend hours filling out forms (probably with some help from a friend or a trained state employee) and collect 5K per year, subject to frequent degrading and demoralizing checks.  He has to show that he wants to work full time, but must not actually succeed.  Sue is in a low paid full time job.  She's not paying any tax, but has to demonstrate that she is not required to by applying for tax credits, a cumbersome process that requires effort at both ends.  Rita is an above average earner and pays 25% of her income as tax.

In a UBI system Rita, Sue (and Bob too), pay 50p on every pound they earn.  This system is so simple that it can be paid at source by their employers (PAYE) and is completely transparent to them.  They also all get the same UBI benefit of 10K per year.

The two systems are arithmetically the same, but the UBI system is so much nicer to the humans!

FOOTNOTES

(*) You can call it a Digital Dividend if you want to make it sound less like a benefit and more like a return paid down on an tech investment made by previous generations!