COVID and Universal Basic Income – Would often not be an effective tool for reducing income poverty OCDE says

Recent debates of basic income (BI) proposals shine a useful spotlight on the challenges that traditional forms of income support are increasingly facing, and highlight gaps in social provisions that largely depend on income or employment status. A universal “no questions asked” public transfer would be simple and have the advantage that no-one would be left without support. But an unconditional payment to everyone at meaningful but fiscally realistic levels would require tax rises as well as reductions in existing benefits, and would often not be an effective tool for reducing income poverty. Some disadvantaged groups would lose out when existing benefits are replaced by a BI, illustrating the downsides of social protection without any form of targeting at all. Realistically, and in view of the immediate fiscal and distributional consequences of a fully comprehensive BI, reforms towards more universal income support would need to be introduced in stages, requiring a parallel debate on how to finance a more equal sharing of the benefits of economic growth .

What would be a realistic basic income amount?

One budgetary neutral way of implementing a BI for the working-age population and children would be  to  take existing spending on benefits for this age group, and to spread it out equally, as a flat-rate amount. The resulting BI amount would be received by everybody, including high­ income groups, and would be very much lowerthan the poverty line of a single individual. In other words, without any additional taxes, a budget-neutral BI will be very far from eradicating poverty, and a BI set at thepoverty line would be very expensive (Figure 2).

A less ambitious alternative may be to use the levels of guaranteed minimum-income benefits (GMI) in existing social protection system as  a target value for a  Bl.Figure  2 shows that the income provided by GM! is typically well below the poverty line. But in most countries, a BI financed exclusively by replacing existing cashtransfers would fall well short even of these lower GMI amounts.

As a result, a single person  without  any other resources  may be significantly worse off with an expenditure-neutral BI, than under existing benefit provisions. Thosecurrently entitled to additional support to compensate for specific needs or circumstances – such as the costs related to a disability or of renting suitableaccommodation – would lose out even  more from a flat-rate Bl. For a BI reform to be realistic, some targeted cash transfers, for instance disability or  housing benefits,may therefore need to be kept alongside the Bl.

But this would require even greater reductions of BI amounts if expenditures are to be kept at current levels. A BI at socially and politically meaningful levels wouldtherefore likely require additional benefit expenditures,  and  thus  higher  tax  revenues to finance them. By taxing the BI alongside other incomes, its net value would fall, reducing its cost and making it more targeted to lower-income groups, who pay lower tax rates.

A further option for financing a BI is to abolish any existing tax-free allowances. This option is commonly included in BI proposals, as the rationale for allowingindividuals to keep a portion of their income tax-free becomes less convincing when everyone receives a minimum level of income. Moreover, unlike means-tested benefits, a BI does  not get withdrawn when people start earning more. Work incentives would be stronger as a result, and tax-free allowances could be abolished,while still lowering marginal effective tax rates for many low-income earners (typically the group most likely to work more in response to stronger incentives) .

Would a basic income reduce poverty?

Many poor would see income gains if they are not covered by existing social protection or they only receive small amounts of means-tested benefits. But some others, notably those currently in receipt of more generous support, would fall below the poverty line. As shown in Figure 1, benefit recipients do not necessarily live in the lowest-income households. But if they rely exclusively on benefits (e.g., some unemployed and early retirees), they would see very significant income reductions – and would fall into poverty when BI amounts are set below poverty thresholds (as is the case here).

The net effect of gains and losses would be large shifts in the composition of the income-poor, with some people moving above the poverty line (taken here as 50% of median household income), while others would fall below it. Overall poverty rates (and gaps) can in fact increase significantly in countries that currently have tightly targeted systems of income support. The relatively good benefit coverage of income-poor households in France and Finland means that income gains from a BI are also not sufficiently widespread among low-income households to reduce poverty headcounts overall. In Italy, poverty head counts change little overall, as reductions in poverty among those not covered by existing benefits are offset by the greater poverty risks resulting from the large losses of current benefit recipients .

As shown by the simple simulations presented in this note, converting all or most existing income supports into a flat­ rate, “no questions asked” transfer at modest levels would require substantial additional tax revenues. Even then, a BI may result in losses for substantial parts of the population , and would not significantly reduce poverty from existing levels. The large additional tax revenues that would be required, and the sizeable number of people facing large losses, including among “deserving” social groups targeted by existing income support systems, are among the most immediate obstacles to a large-scale BI reform .

Increasing BI rates to levels that avoid large-scale losses would create additional financing challenges. In addition, more generous BI would likely intensify concerns about unintended consequences of a BI, notably the possibility that some people may work significantly less.
In this context, are there intermediate forms of support that would adopt key aspects of a comprehensive BI but avoid some of its drawbacks?

Introducing a BI while leaving important existing benefits (such as early retirement pensions) in place would limit losses among current benefit recipients. But, at unchanged BI levels, such a reform would also cost much more than the scenarios considered in this note and require a determined effort to broaden the revenue base for financing social protection. Lowering BI amounts to levels substantially below GMI standards, while leaving larger parts of existing benefits in place, may be fiscally more realistic and would make existing social protection more universal. But the BI would then no longer provide significant income protection on its own and it would therefore not represent a complete solution to coverage problems arising with current social protection strategies.

Chosen excerpts by Job Market Monitor. Read the whole story @ Basic income as a policy option: Can it add up?