Can we afford a universal basic income? Open-minded and informed debate is urgent

16 Oct 2022

The net costs of a universal basic income (UBI) are lower and the financing options are much more extensive than UBI sceptics typically acknowledge. Needed now is open-minded scrutiny and informed debate about the various routes forward and their social, economic and political implications.

Many people believe that a UBI scheme would be unaffordable. But before issuing such verdicts we have to be clear about the scheme’s scope and design, and we have to consider all viable financing options.

A UBI can be phased in by limiting eligibility initially (eg starting with adults earning less than a specific amount), then steadily relaxing access; and by progressively increasing the amount (starting with a small amount that increases along a schedule). Each configuration yields different cost estimates.

Several proposals are circulating. The Department of Social Development has floated the idea of a basic income payment to age groups it considers to be at greatest risk and then gradually broadening coverage over three to five years. That proposal was shot down, reportedly by the national treasury. Gaining traction, though, are proposals to prolong and then convert the Covid-19 social relief of distress grant into a basic income payment, with eligibility gradually widening.

Calculations done in 2021 show that if paid to all adults aged 18 to 59 years, the gross cost of UBI would be R255-billion per year if set at the food poverty line (R624 per month), and R364-billion if set at the lower-bound poverty line (R890 per month).

But the actual (net) cost would be lower. Full (100%) uptake is improbable; cash grant experiences suggest 60-80% uptake is much more likely. At 60%, a R624 monthly UBI payment would cost about R153-billion per year; at 80%, it would run to about R204-billion. The net cost of larger UBI payments would decrease in similar fashion.

Portions of the payment could also be clawed back, stepwise, from higher-income earners through the tax system. The net cost shrinks further once the UBI’s stimulative effect on consumption, growth and tax revenue kicks in. All this reduces the net cost of a UBI.

UBI skeptics are fond of focusing on three or four financing options – increasing public debt, hiking personal income taxes, cutting government spending, and raising value-added tax – that are bound to rile or spark ridicule. Some then embroider those assumptions into modelled claims that a UBI would encumber growth and job creation. Leaving aside the built-in biases of those exercises, they ignore numerous sensible financing options.

A range of possible finance sources

The Institute for Economic Justice, for example, has identified 18 possible financing sources, which together could yield well in excess of the net UBI costs cited above.

They include a social security tax, a resource rent tax, reducing wasteful or irregular state expenditure, a wealth tax, doing away with retirement fund contributions and medical tax credits for high-income earners, increasing the dividends tax, an estate duty tax (for large estates), a tax on financial transactions, a currency transactions tax, raising the carbon tax, rationalising corporate tax breaks, and a higher value-added tax on luxury items.

Countries around the world already use some of these methods, and a rich literature exists on those debates and experiences (some of it summarized here). Many of these options are necessary sources of redistribution irrespective of whether or not a UBI is introduced.

For example, medical tax credits and retirement fund contributions for high-income earners deepen inequality and systematically transfer income upwards. The current lack of a progressive inheritance tax also helps sustain economic inequality across generations. The surfeit of unproductive corporate subsidies and tax breaks also requires rigorous review.

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Some see VAT as a way to recoup part of the UBI cost. But the net effect would be to “tax back” a portion of UBI payments from the individuals who need them the most, making this a regressive option. It matters where we find the funds.

Wealth taxes are widely used (though not in South Africa) and hold both fiscal and moral appeal. The wealthiest 10% of South Africans own more than 90% of total private wealth. Many of them reduce their tax liabilities by converting income into illiquid assets, such as real estate, stocks and other investments. A wealth tax would narrow that evasive option. If levied against the richest 1%, it could raise more than R140-billion, according to one estimate.

Notably, many of the UBI financing options circulating currently neglect taxes on capital and focus instead on individuals.

The economist Yanis Varoufakis has proposed that a portion of the returns to capital be channeled into a social wealth fund from which everyone is paid a dividend. Such a tax would acknowledge the reality that wealth is created collectively, but is then “privatised” as the ostensible product of individualised risk, enterprise and toil.

Corporate taxes don’t address that reality. They reimburse the state (very partially, in most instances) for the infrastructure and services it provides or finances (including education, security, healthcare, transport, research and development, and more).

There are several ways to bring capital into such a fund, including a legislated requirement that a percentage of capital stock (shares) from initial public offerings be channeled into the fund. A one-off tax on the market capitalisation of publicly traded companies, and a mergers and acquisitions tax are additional options, as are financial transaction taxes and resource rent taxes.

Resource rent taxes (or “windfall taxes”) are gaining favour amid rocketing petroleum and gas prices. They redistribute a portion of the excess profits that companies reap (eg due to supply disruptions or sudden spikes in demand), but have no hand in “creating”. China, India, Italy and Spain already have such a tax and Belgium, France, Germany and Finland have announced they’ll follow suit.

A tax on financial transactions (sometimes called a “Robin Hood tax”) can be levied on the transfer of ownership of designated financial assets (stocks and equities, bonds, international currencies, and derivatives and securities). It can temper financial market speculation by raising the costs for speculators, and it can be a substantial source of additional government revenues. Even a very low tax rate can yield impressive revenues: the 0.1% tax applied on stock trading in Hong Kong has raised up to 1.3–2.1% of GDP in some years.

A carbon tax is both an attractive funding source (in the short- to medium-term) and an incentive to reduce CO2 emissions. South Africa introduced a carbon tax in 2019, but at excessively low rates and with extensive exemptions. Current rates are a mere 1%–8% of the US$40 cost per tonne that would be compatible with the goals of the Paris Agreement.

A strong case also exists for a land-value tax, a highly progressive revenue option that is oddly neglected. Different from a property tax (which taxes the value of the built structures on an area of land), it would be applied against the value of real estate minus the structures built on it. It’s difficult to evade (the tax base is literally immovable) and it may promote more efficient use of land (since the tax is levied irrespective of whether and how the land is used). Subsistence farmers and low-income households would be excluded.

In sum, the net costs of a UBI are lower and the financing options are much more extensive than UBI sceptics typically acknowledge. Needed now is open-minded scrutiny and informed debate about the various routes forward and their social, economic and political implications.

The number-crunching is crucial. But the misery, humiliation and trauma arising from our social crisis don’t show up on balance sheets.

They’re inestimable, yet horrifyingly real. Almost one in four South Africans experienced moderate to severe food insecurity in 2020; mental wellbeing is among the lowest in the world; rates of intimate partner violence are among the highest.

Can a society so deeply mired in crisis afford not to introduce a UBI? DM/MC

This is the fifth in a series of articles by Hein Marais exploring Universal Basic Income. Read Part One here; Part Two here; Part Three here; Part 4 here. The final article in this series asks how we might frame a UBI – as a “grant”, “right”, or “social dividend” – and the implications of the choice.

Hein Marais is the author of In the Balance: The Case for a Universal Basic Income in South Africa and Beyond, published by Witwatersrand University Press. The book is available wherever books are sold and as an open access download.

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A range of possible finance sources