Funding a Universal Basic Income through Income Tax

A couple of years ago a friend gifted me a copy of Rutger Bregman’s “Utopia for Realists”. It ended up close to the top of my “to read” list and got read not long afterwards. Utopia for Realists makes a series of very clear and well reasoned arguments for a number of policy interventions that result in a better society. That one of the core premises is that a better society is an equitable one is one that should appeal to all Liberal Democrats – it’s very in keeping with the vision in the preamble of “no one shall be enslaved by poverty, ignorance or conformity”.

One of proposed policy interventions is that of a universal basic income. After reading Bregman’s arguments, I’m convinced of the moral argument for introducing a universal basic income, but have come short of a compelling argument of how to fund it. I’m keen to explore different ideas, and to that end I’ve built a small web tool that provides a simple model based on funding UBI via income tax. What I’ve come to the conclusion of is that funding a UBI is hard. Like many models, this one comes with a number of assumptions, and these are:

  • National Insurance and income tax are combined in a single measure on income tax.
  • The effect on tax bands and income tax takings is linear (i.e., people will not be paid less just because the taxes go up). The same is not true of taxes like corporation tax, which is why that is not adjustable.
  • I’ve not taken into account the possible stimulus of lifting people out of poverty, which may result in more VAT and more corporate tax being raised as people spend more.
  • Income tax raised on the top 1% is probably underestimated, as ONS only provide median rather than mean income figures.
  • A UBI will not be able to replace any specific disability or carer’s allowances, so they will continue to need funding.
  • There are significant geographic differences to the cost of living across the country, which makes it hard to determine what is a fair “basic” amount. Housing costs make the biggest proportion of this, so housing allowances are left in the welfare budget alongside UBI. In reality, housing in the UK currently has many issues and the housing allowance is not the best way to tackle this, but I’ve not considered that in this model.

The only way I’ve come up with to make the books balance is by having what seem to be punitively high tax bands (this is a mixture of actually covering the cost, as well as the fact that combining income tax and National Insurance into one tax band increases the tax rates). However, when evaluating the “take home” pay differences, it is possible to make most people better off.

You can enter your own numbers into the calculator and then share the link in the address bar to show your model with other people, and I’d encourage you to do that. This is my stab at it.

* Chris Northwood is a Lib Dem campaigner and future council candidate in Manchester

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  • Lewis Miller 8th Jun '20 - 10:50am

    There are other tax measures we could put in place beyong income tax. Land Value Taxation has a long history in the party and for good reason. It highlights that you can tax unproductive uses and generate productive revenues from it. Taxes on Carbon and other Pigouvian taxes have a similar effect. While I support those being used to replace council tax and business rates, it shows that there can be two sides to this coin: making spending And taxation more effective.

  • Andy Hinton 8th Jun '20 - 11:26am

    An interesting exercise, and I appreciate the difficulties in broadening the model, but I rather suspect that by forcing the entire burden of costing to come from income tax, you are rather forcing the resulting tax hikes to be punitive. Which is not to say that funding UBI is easy, but I’m not sure it needs to be as hard as this makes it look.

  • Andy Hinton 8th Jun '20 - 11:41am

    Also, by assuming that UBI replaces the state pension, this heavily nudges you to try to set the UBI level at the same level as a state pension so that pensioners don’t lose out. We should be clear that it is perfectly possible to introduce a lower UBI, and subtract that amount from the state pension (but keep paying the state pension), so that the overall effect on pensioners is neutral.

  • Simon McGrath 8th Jun '20 - 12:44pm

    Chris – thanks for this -its surpsiring how many supporters of UBI refuse to engage in discussions about the cost.
    One point though – unifying NI and Income tax would on its own be a very large tax rise for just the sort of people who vote for us in places like Kingston and Richmond

  • Chris Northwood 8th Jun '20 - 12:48pm

    @Simon: integrating NI/IT was a bit of a cheat to make it easier to model, but in theory that by itself doesn’t change the tax rates, but it does stop disguising the true tax rate and being transparent on it that has a bigger perceived figure. I tried to take this into account by doing the take home before/after comparison for a holistic comparison than just comparing tax rates.

  • John Marriott 8th Jun '20 - 1:00pm

    No. Raise Income Tax to pay for services, not giving some people money they don’t need. Think again!

  • I agree with John Marriott. Do we really need to set up a whole new complicated system to give money to Billionaires, millionaires and others who don’t need it ? On top of which, in the real world, it will probably be extremely unpopular and be held up as yet another example of the Lib Dems losing their marbles.

    For goodness sake, get real. Yes, implement the Alston Report, tackle inequality, restore benefit cuts…… but not with this.

  • Currently, we give money to the needy. Let us call the amount of taxpayers’ money required “the benefit pot.”

    Then we decided to give everyone some money, whether needy or wealthy. If we take it out the same pot, the payment to the needy will go down. If we pay everyone the same as previously, the pot will need to be increased, perhaps very substantially.

    This raises a number of questions. Why should we give money to people who don’t need it? Why increase the load on taxpayers for no good reason? Surely all of this will deter or reduce any future increases in benefits?

    This looks like loony ideology at the expense of common sense. I’ve not yet seen a convincing argument that it has any point at all. Please, can someone explain?

  • Harry Samuels 8th Jun '20 - 2:53pm

    Good webtool here. Important to remember however that UBI proposals are always accompanied by proposals to tax that money *back* from those who don’t need it at the end of the year. Costs are cut very significantly by that, which UBI opponents seem to forget. Eg many people on this thread calling it “giving money to billionaires” – well, no, because it would be taxed away. Meanwhile people who fall on tough times won’t need to wait weeks to apply for universal credit or whatever other pre-assessed, bureaucratic benefit is on offer.

  • Giving money away which is then taxed back doesn’t make it better, merely more complicated and crazy. It seems a lot of bother compared with simply speeding up paying of benefits when they are required.

    So there is no benefit?

  • Julian Tisi 8th Jun '20 - 5:26pm

    I absolutely love the title of that book “Utopia for realists”. Reading the introduction online it’s certainly one I’ll try to get round to reading. I’ve always thought that part of our party’s USP was that it was good for those who thought of themselves as both utopian – having a vision of and a desire for a better society – and realist – grounded in the reality of how to get there. To make an over-crude generalisation, many on the left are the former but not the latter while many on the right are the opposite.

    On paying for UBI I admire the work you’ve done to provide a model. As others have said, the numbers are eye-wateringly big. If we had that sort of money is it really the best we could do to improve lives?

  • David Wilkinson 8th Jun '20 - 5:46pm

    I’m no expert, but am all for fairness and simplicity in the welfare system. I agree with Peter that giving rich people money then taxing it back is unnecessarily complex. How about Negative Income Tax, where you do those calculations before the money is given/taken away..?

  • Laurence Cox 8th Jun '20 - 7:32pm

    I think that i would be worried about setting the UBI at such a high level. After all, people already work full-time for less than the Real Living Wage. If you are going to pay that much for them not to work, there is a real danger either that many jobs will not be done at all or the cost to employers will rise strongly and this will then be passed on to consumers as inflation. This level of UBI seems to be far higher than the proposals by the Citizens Basic Income Trust or the Green Party. The latter’s proposal for the 2019 General Election was £89/week for adults with additional income payments for such groups as single parents, those with disabilities etc. If you set the basic income level high enough to remove the need for these additional payments then it does make the system much more expensive to run.

    Looking at your model, which I did find useful, I am doubtful that the welfare bill after Basic Income would be as low as £71.4 billion. According to the ONS figures the total spend back in 2016/17 was £264 billion and even if you exclude pensions (£111 billion), unemployment benefits (£2bn), and family benefits, income support and tax credits (£46 billion), that still leaves £105 billion. Can you clarify where your welfare figure comes from.

    Lastly, your model does not consider the additional costs faced by families with children (the Green Party Basic Income manifesto proposal adds £70 per week for each of the first two children and £50 per week for each subsequent child for family incomes below £50k with this benefit phased out for higher incomes).

  • Peter Martin 8th Jun '20 - 8:41pm

    @ Chris Northwood,

    You’re suggesting that anyone who earns over £29000, which isn’t a huge amount of money, should be made worse off to pay for a UBI. The Lib Dems draw their support disproportionately from social groupings A and B. That’s why Lib Dems now do much better in Richmond than Rochdale. They’ll be earning lots more than £30k pa. They aren’t going to like this at all!

    On the other end of the scale anyone can pick up £10 pa by just filling in the UBI forms. To double that, legitimately, they’ll have to find a job paying £20k pa of which they’ll effectively keep only half. They’ll be paying tax at 50%. That’s not much of an incentive. Why would they bother? It would make more sense to get another job off the books and pay no tax at all.

    One of the better coalition policies was to have a relatively high income threshold which reduced the incentive to resort to the black economy. A UBI at this level changes all that. On the other hand a UBI at a lower level doesn’t do what advocates of a UBI want it to do ie take the lower paid out of poverty. So the answer has to lie in ensuring everyone has a job which pays a living wage and drop the silly idea of a UBI.

    That way you’ll keep your well heeled voters in Twickenham happy too!

  • Peter Martin 9th Jun '20 - 9:19am

    @ Wayne Chadburn,

    “….. a future where automation will make millions of jobs disappear”

    So, in this future, will Lib Dems all be sitting at home living on their UBIs and not doing much at all apart from playing video games and watching TV?

    Except, that is, when they are writing to their MPs saying how the NHS and the Agricultural industries can’t manage without workers from the EU and therefore we need to rejoin?

  • @ Peter Martin. Not your best performance, Peter, and hardly likely to get you man of the match.

  • Katharine Pindar 9th Jun '20 - 10:50am

    The first aim of Liberal Democrats should surely be to lift the 14 million people in relative poverty in this country out of poverty, by such means as removing the benefit cap, paying adequate rates of benefit to those who need them, and as Peter says trying to ensure that everyone who can work has a job paying a living wage. Only when that has been achieved, IMO, should a universal basic income be seriously considered for the future.

  • Peter Martin 9th Jun '20 - 1:38pm

    @ Wayne,

    I’m guessing you’ve never had late teenage children on your hands who’ve been through a typical phase of not wanting to get out of bed in the morning. I’m quite pleased I was able to say to them that they’d better get themselves moving and off to work/uni because no-one was going to pay them for lying in bed.

    I really wouldn’t have wanted them to be able to reply that the Lib Dems were going to give them £10k pa for doing just that!

  • Harry Samuels 9th Jun '20 - 1:44pm

    Unfortunately, a negative income tax does not provide an adequate safety net. Imagine a person who earns £50,000 a year on tax assessment day, so above any hypothetical NIT threshold. This means he gets no NIT payments from the state. If, a week later, he loses his job, his income is reduced to £0. But because his income was already assessed, he still doesn’t get any payments. So he’ll have to apply and wait weeks to be assessed again, leading to the same problem we have with universal credit: a long waiting time before getting the payments you need to survive. With UBI, there is no such trouble, because you just fall back on the payments everyone gets.

  • Nick Shcherban 9th Jun '20 - 2:57pm

    Funding a Universal Basic Income through Income Tax
    By Chris Northwood | Mon 8th June 2020 – 10:45 am

    Dear Chris Northwood

    You are on the exact right track: discussing how to pay for UBI should now be the focus. We are past debating the pros and cons.

    This is exactly was my intent in the article I wrote for this same publication:
    How to make a just society – Justice Capitalism then UBI

    Our estimate of the cost is the same but I subtract 25% of the over 18 citizens that will have UBI clawed back at tax time as Harry Samuels correctly explains.

    Here is my estimate for the UK:
    52,403,344 adults over 18 * 0.75 who would qualify for UBI
    39,302,508 adults Times $24,000usd (i.e. 19,000 pounds / year i.e 1,600 pounds / month = ~ 365 pounds/week)14,088
    = 943 Billion usd /year ( 746 Billion pounds)( compared to UK GDP 2,855 Trillion usd = 33%)

    Follow my logic with this Canadian estimate:
    30,366,622 adults over 18 Times $24,000/person
    = 728,798,928,000 ie $728.8 Billion annual potential cost
    But many taxpayers will have it clawed back because of their higher income to qualify
    There are 13,884,890 Tax Fillers in Canada, 60% of which pay income taxes PLUS estimate half of the fifth decile will get to keep part of the UBI and pay back the rest 1,388,465
    Total Adults that could receive UBI is 30,366,622 – (13,884,890 * 0.6) + (13,884,890 * 0.05) = 22,729,932(75% of adults over 18) people Times $24,000 =
    $545,518,368,000 =
    $545 Billion Total Annual Cost of UBI (75% of potential UBI cost)($386usd Billion} Compared to Canada GDP $1.74usd Trillion (in USD, 22% of Canada’s GDP)

  • @ Joseph Bourke
    “This article introduces a bit of common sense to UBI discussions The BIG misunderstanding about the cost of Universal Basic Income
    “The cost of a Universal Basic Income (UBI) is often greatly exaggerated, because people are tempted to think the cost of UBI is the size of the grant multiplied by the size of the population.”

    Thank you for that, Joseph.

    I think the trouble with nearly all discussion of UBI is that it looks for its funding by somehow squeezing it out of the world as it is now (in normal , not Covid times) without annoying the well off. I suggest we begin with a blank sheet, and do the reverse:

    1. Decide on a UBI at current levels of Income and Prices.
    2. Award it to every resident adult.
    3. Consider how much will remain of the of the currently expected National Income and allow that to distribute itself more or less as it does now.
    4. If the answer to 3 is unsatisfactory, adjust things — principally Income Tax — to ameliorate the distribution. The UBI will itself be subject to Income Tax.
    5. Learn to live with it, and enjoy it, surrounded by a happier
    6. Never call it UBI: let it be known as the National Income Dividend

    You would have to start small, compromising with the world as it (normally) is. That is because the altered distribution of the National Income would skew all markets, changing Demand and consequently Employment. The rich deserve two or three years to adjust their lifestyles!

    This is very condensed, so I’ll try get it accepted below, at a little more length.

  • My idea, then, is this: that a UBI should be introduced by the next Government, as the National Income Dividend. I believe that the GDP should be supplanted by the National Income as the lodestar by which we steer our UK, centred as it is more on households than on Business, more on well-being than on toys — and perhaps more on the Environment too.

    The Chancellor of the Exchequer should begin his or her Budget Speech by announcing that the ONS has reported that the previous Year’s National Income was £X billion; and that HMG intends that Y% of that amount is to be distributed equally in monthly instalments for the year now beginning, to every resident adult, as an inalienable entitlement.

    What would remain– or in the event emerge as — the remainder of the NI would be distributed in ways more traditional, perhaps, but ways that saw to it that Household Disposable Incomes varied over a much smaller range than they do now, while still allowing the nation’s Joneses to rule their particular roosts (though with less ostentation, the margins being smaller). Most of that shaping would be done by Income Taxes, I suppose, and by major changes (reductions or abolitions) in ‘Benefits’.

    The N.I.D. payment would be part of each individual’s total Taxable Income; and everybody getting it would pay some Income Tax on it, so that every adult resident could look every other in the eye, as a proud fellow Taxpayer in a commonwealth, and no longer a mere hapless supplicant before a grudging State or nation. It would also spare thousands of public servants the dismal work of saying No to the needy.

    This NID would have to start small, of course, since the realignment of Disposable Incomes would realign Demands and consequently Employment.

    Is this all Nonsense, Professor ?

  • Peter Martin 9th Jun '20 - 5:34pm

    @ Roger Lake,

    “I believe that the GDP should be supplanted by the National Income..”

    Can you define what you mean by National Income?

    Is it the same as Gross National Income which is GDP plus incomes earned by foreign residents, minus income earned in the domestic economy by nonresidents ?

    If so, why would you want to exclude the latter?

  • Peter Martin, thanks for asking. The Gross and Net of it are details on the edge, so to speak, as I see it. I cite the ‘GDP’, because that is all we hear about. If it weren’t so much its own word, now, I’ld simply have said the Domestic Product. There’s still the matter of Gross and Net, too, which I’ve again ignored, as relatively unimportant, size-wise, compared with what I’ll here call the ‘basic’ idea.

    So, slightly crudely, the National Income is the same value as the Domestic Product. The Baker makes bread and sells it, for cash. The cash is his income and so part of the National Income ; and the price is the value of the bread, and part therefore of the National Product. They’re the same value, viewed and totalled from different perspectives. I’ve forgotten to mention the distinction between National and Domestic, but again it’s unimportant, I consider, in considering the Big Idea I’m trying to convey.

    So the important thing is Product vs Income. Every bit of each is a bit of the other: coin-in-the-till confirms and equals a loaf in someone’s larder. So all I’m suggesting is that the Chancellor knows how things were last year, and assumes they’ll be much the same in the coming year. He doesn’t want anyone sleeping on the street or starving. So she or he dishes out the same basic readies to everyone, as a dependable income; and THEN allows the natural way of the world to take over, and we all scramble for what we can get of that remaining and largest lump of the N.I.

    That’s a pretty crude description of what I’m trying to suggest, and there’ll be plenty of scope left over for debate and adjustment: that will be where Economics slides gracefully into Politics. I’ve blamed all on the notional Chancellor, but in the end it’s HMG; or The Nation. Shall the Dividend be more or less than it was last year or Parliament? That is the question. And it’s a moral one, not a financial one, I believe.

    I hope this has worked, and not simply, horribly, proposed a total nonsense!

  • Nick Shcherban 10th Jun '20 - 12:46am

    Dear Roger Lake
    “Never call it UBI: let it be known as the National Income Dividend”

    Instead of Universal, I felt Unconditional was better i.e no strings attached
    Then I thought #UBD – Unconditional Basic Dividend as income suggests work where in many cases there will not be any actual work done.
    My opinion now is that the “Citizens Dividend” is the best name. Balances humanity and finance.

  • Peter Martin 10th Jun '20 - 8:08am

    @ Roger Lake,

    If you Google {Gross National Income UK} you’ll see a figure of about $3.02 trillion as opposed to $2.85 trillion for GDP. 2018 figures. There’s not a lot of difference. This is not surprising as they are closely related. So unless there’s a particular technical reason for choosing GNI you may as well stick to GDP. GDP is fairly straightforward and is the one most used and so is the one people are most familiar with.

    However you do it, you still have the problem of getting your cut. If I pay someone to mow my lawn the transaction counts to both GNI and GDP. So how is that going to provide a dividend? However you dress it up anything you take out is going to be a tax. So why not call it a transaction tax?

    On a more fundamental point it strikes me that Lib Dems are only concerned about what every receives as an income. But the economy can only provide real incomes from everyone who makes real contributions. The contribution side is totally ignored except for some vague notion that everyone will use their time productively. Some will but many won’t.

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