For the long term I propose the introduction of a more generous version of the UBI presented and discussed in the third and fourth parts of this series. The fourth and final part also contains all references that appear in this article series.

Under the right circumstances, a generous UBI could enable us to enter an era of universal prosperity and great economic, technological, and cultural flourishing.

Reasons to consider a universal basic income

In industrial countries the wages of the vast majority have been stagnating since the 1980s [Piketty 2014]. What little growth there currently is flows mainly to the wealthy, increasing economic inequality to dangerously high levels that threaten both social cohesion and further economic growth, due to the demand side breaking away. Economic crises threaten the existences of many people. All of these problems may be exacerbated severely by the coming wave of automation which will most likely create a huge level of technological unemployment. Innovative integrative solutions for these problems are sorely needed.

Approach of this article series

There are many ideology driven efforts to promote a universal basic income. While these may be quite convincing to those who share these ideologies, they fail to convince a large majority of the concept.

We cannot allow this to happen, because the concept of a universal basic income has merit beyond narrow ideological arguments, and can profit everyone in one sense or another. That’s why it’s important to leave out ideology as far as possible and choose a more scientific approach that potentially everyone can subscribe to.

The introduction of a radical concept like a universal basic income requires a large supporting alliance getting behind it. Ideological arguments threaten the cohesion of this alliance, so they should be minimized in favour of a more empirical approach: Consider the facts of previous experiments with UBI and promote more and better experimentation.

An important component of political and economic systems consists of the psychological and economic incentives of all participants: What structural forces guide their decisions? How can these societal structures be optimized to create better decisions and subsequently better results?

Part 1: Universal Basic Income

What is a universal basic income?

There are different definitions of a universal basic income. I choose one that allows to analyze the salient structural components of a UBI separately.

A UBI is an income that fulfills the four criteria of:

• Universality: Everyone gets it regardless of how much property they own or what other income sources they have.


• Individuality: It is paid to them individually and directly as money.


• Unconditionality: It is not dependent on meeting certain activity of lifestyle requirements, like a requirement to accept offers to work.


• Sufficiency: It is high enough to cover the basic living expenses and enable people to do productive work.

Why a universal basic income

Next, let’s consider these four criteria individually to see why they make sense:

Universality

This criterion may be the most radical of all: Everyone gets a basic income, whether they are rich or poor, young or old, sick or healthy, employed or unemployed.

But why? First of all, because it’s easy and simple. The complicated, expensive, fallible, and problematic means-testing that is used to test whether somehow has the means to cover their own living expenses without government help becomes obsolete. With a universal basic income nobody will fall through the gaps of the social security system, because everyone is covered under any circumstance. Unnecessary and annoying bureaucracy will fall away.

Another very important point is that getting a basic income independently from other income sources removes the negative incentives for getting work that are present in our current social security systems. Because current social security payments are income dependent, getting a job means that these payments are reduced or stopped entirely. Effectively, this means that income on top of contemporary social security payments are taxed with a rate between 75% and 100%! With the implementation of a universal basic income, this effective tax rate could drop to 0%, or at least to a much more modest level. [Dolan 2014a]

Individuality

Everyone gets the basic income individually as money, not as food stamps, vouchers, free services, or anything else. There is no intermediary between the state who pays the income and recipient of the income other than maybe the bank who processes the payment.

Indirect payments, for example to family fathers who could get the payments for the whole family, could be withheld from the intended recipients. In that case, the income would be ineffective, because it doesn’t reach those who might need it most.

Unconditionality

There is no requirement to work or get a formal education for qualifying for the universal basic income.

Having any conditions apart from age or place of residence on a universal basic income would necessitate a huge bureaucratic apparatus which would have to check whether these conditions are actually met. This would not only represent an unwarranted intrusion into the privacy of everyone, but it would also increase the cost of a UBI significantly and unnecessarily.

If such conditions were in place despite of their cost, they could be wielded as tools of coercion by the state. However, the state already has a sufficient and strictly checked and balanced tool to regulate the behaviour of its citizens: The legal system. If an offense is not sufficiently bad to fine or imprison a person, it cannot be so bad that it warrants the reduction of a guaranteed basic income (which would effectively be a fine that had to be paid regularly).

Sufficiency

The UBI must at least be high enough to cover the most basic living expenses, meaning food, shelter, clothing.

If it doesn’t, then additional social security payments would be required – thus undermining the simplification of the system and other advantages that a UBI would otherwise enable.

Additionally, the UBI must be high enough to enable people productive participation in society – which is what the word work should actually mean. Expressed more concretely, the UBI enables people to do meaningful work, whether in a self-employed manner or in a job working for someone else.

In our current time this requirement means that the UBI should cover the costs of

• reasonable transportation


• an internet connection


• a computer and the electricity for its operation


• at least minimal health care

Without these requirements, people cannot be expected to meaningfully participate in the labour market. So, the UBI needs to provide for these basics (where they are not already provided for by the state in some other way), otherwise the economy would suffer from opportunity costs of potential workers not being able to enter productive jobs, because they are too poor for doing so.

In other words, the UBI should enable people to work for free if they choose to forfeit any kind of luxury. This also means that a minimum wage becomes optional, because no wage is required to sustain the existence and basic productivity of workers. With a sufficient UBI, people would work for achieving their personal goals and wishes, and not for sustaining their existence.

Can it be implemented realistically?

Implementing an insufficient basic income could be easily be done by cutting all current social security payments and using the money that was spent on them to finance a quite modest basic income. But in that case, there would be a lot of people left with an insufficient basic income trying to get by somehow without the possibility to get additional income from social security. This would most likely create more trouble than it’s worth.

Realistically, a sufficient universal basic income cannot be easily achieved right now without increasing some taxes. The real question, therefore, is: What kind of taxes should be used to finance a UBI?

It is reasonable to expect that a UBI would have effects that save government spending, for example due to lower crime rates and overall better health, reducing health care costs. Such effects have been observed in various studies testing a UBI or a related scheme. [Kaufmann 2010, Standing 2013]

However, it would be unreasonable to assume that these savings would make the UBI finance itself completely, so that the necessity to increase taxes would disappear. In the following, I briefly explain a few categories of taxes that can play a major role in financing a UBI.

Land value tax

A land value tax (LVT) is basically a usage fee for land. Its height depends on the unimproved land value only, which is the market value of the land minus the value of the buildings, private property, and improvements on the land.

In some sense, a LVT is an economically optimal and quite untypical tax, because it doesn’t create any economic disincentives for productive activity, but actually creates incentives to use land optimally! Therefore, introducing a LVT also has the potential to increase economic growth.

A LVT is also progressive in the sense that mainly wealthy landlords would pay the tax, while those who don’t own land don’t have to pay that tax.

There’s also the fact that evading a LVT is very difficult, because land cannot be hidden or moved.

A practical issue with a LVT is that it might be a hard political challenge to introduce it.

Consumption taxes

Consumption taxes like the value-added tax incentivize saving money and disincentivize spending it on rather unnecessary products.

Generally, consumption taxes behave regressively, because wealthier individuals typically spend a smaller fraction of their income on consumption, while poorer individuals have to spend a large fraction of their income on necessary living expenses.

With a UBI, this regressive tendency of the consumption tax is reduced, because the basic costs for living are already covered by the UBI.

Consumption taxes can be increased for certain kinds of goods. This makes sense if these goods are problematic in some respects, for example if they cause health issues like addictive drugs. Legalizing certain currently illegal drugs and taxing them highly (unless their users get a medical prescription for them) may make more sense than continuing a costly and ineffective war on drugs.

It would also be possible to tax “luxury goods” very highly in order to introduce some progressive effects to consumption taxes. Unfortunately, the classifications of good into basic goods and luxury goods can be quite problematic in general. It could be argued that with a UBI this classification is not strictly necessary, because the costs for the most basic goods are already covered by the UBI, so that people would spend all additional income on some form of relative “luxury” anyway.

Income taxes

Income taxes are levied on personal income and company profits. Income taxes on personal income encourage companies to replace workers with machines, since machines don’t pay income taxes.

This has led some thinkers [Braus 2014, Winfield 2015] to come up with the idea to introduce a tax on automation, which should be used to finance a UBI. However, an automation tax would require complex measurement and regulation of automation. Furthermore, it would discourage automation and thus slow progress and make the country in which the tax was introduced less competitive.

If the automation encouraging effects of individual income taxation are to be avoided, replacing individual income taxation with consumption taxes, land value taxes, and taxes on company profits would be a viable alternative.

One of the few advantages of income taxes is that they allow for a rather fine-grained control of tax progression. They can be used to regulate income inequality towards optimal levels even when other measures for doing so prove to be insufficient.

Finally, progressive taxation of company profits can also be used to create more innovative markets. Big companies can use economies of scale and therefore have some decisive advantages over smaller competitors. This encourages the emergence of problematic monopolies and oligopolies. Taxing large profits of big companies higher can help to even out the field in order to establish a more competitive and performant market.

Green taxes

Green taxes, also called environmental taxes are taxes on environmental pollutants. They should ideally be paid by the polluters themselves in order to create an incentive to use more environmentally friendly methods.

A relatively often discussed green tax is a tax on CO2 emissions, called a “carbon tax”. It should be paid by the users of fossil fuels. It was recently proposed to use a carbon tax to fund a small universal basic income in the USA [Van Hollen 2015].

Because companies usually pass on the costs of environmental taxes to the consumer, green taxes effectively act as consumption taxes. Green taxes are also rather regressive, in that low income households use a relatively large fraction of their income for fossil fuels [Dinan 2012]. Overall, green taxes behave quite a lot like specific consumption taxes, and they may be beneficial to incentivize the transition to a sustainable economy.

Social dividends

An alternative or complementary way to financing a UBI through taxes is to pay the UBI out of a fund that collects dividends from publicly owned capital, for example national resources or government owned (shares of) corporations.

A most notable example of such a fund is the Alaska Permanent Fund which is financed by oil revenues. It already implements a kind of insufficient UBI for all residents of Alaska, though it is not totally unconditional: People who were convicted for a felony, or were incarcerated for having committed one, don’t get a payment for that year.

Wherever nations own large natural resources, they could use them to finance a significant part of a UBI. Where this is possible, it would be preferable to using income or consumption taxes.

But what about government-owned companies? Considering the fact that most states are highly indebted, the prospect of them buying or creating companies in order support a UBI with their profits seems highly unrealistic, even if that was a politically and economically uncontroversial move to make.

Social dividends, unfortunately, have the drawback that they represent a more volatile income source than tax revenues. Therefore, the UBI fund should ideally have reserves for the case that current revenues from a social dividend are insufficient.