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A note to supporters of Universal Basic Income: it isn't working

Many organisations (from both the left and right) have lauded the concept of introducing a universal basic income (UBI). However, a recent trial in Finland has been pulled early and, far from producing some of the variety of benefits subscribed to this system, it is suggested that the introduction of UBI would require an increase in income tax by nearly 30%, increase income inequality and raise Finland's poverty rate from 11.4% to 14.1%.

This should stand as a warning. Even though some are arguing for this case with the best of intentions in mind, there are significant problems with the concept of - effectively - another form of 'free' money.

The trial in Finland has been stopped early and, although the government there won't publish the full results for another year, its unwillingness to see out the two year trial to the end doesn't exactly suggest success.

Notwithstanding this, some have suggested ways to make UBI work. Take a paper, written by Anthony Painter, Jamie Cook and Jake Thorold for the Royal Society for the Arts, which argues that the UK should establish a Universal Benefit Opportunity Fund (UBOF) that would 'reimagine how society supports people to live meaningful, contributory lives'. The premise of their idea is simple, they say: 

' every citizen under the age of 55 with a £5,000 opportunity dividend for up to two years, taken at a time of their choosing over the course of a decade. The fund would initially last for ten years, with dependent children also eligible for the payment in the year a parent, or both, were receiving it.'

They claim this will 'create a strong platform of freedom and security through which people can build a better life for themselves and their communities.'

Sounds wonderful. After all, who doesn't want that? Well, it doesn't sound quite as wonderful when you realise how it would be paid for. The authors suggest a number of ways to fund this project:

1. Wealth Tax

2. Sovereign Wealth Fund

3 Introduce levies on companies

4. More taxes - this time on the transfer of data assets.

Even the Finnish example wasn't looking to increase the taxes of those within their country to such an extent as the RSA is proposing. In terms of a wealth tax, the paper cites the National Institute for Economic and Social Research and its assessment that a tax of 1.2 percent on net assets over £700,000 per year would generate £43bn annually for the Exchequer. The authors, however, are quick to concede that there would be real concerns on capital flight - i.e. decreasing the tax base and requiring increased taxes from those that are left having to pick up the bill. 

But no problem - the authors have a solution: borrow. The creation of a Sovereign Wealth Fund sounds fantastic - if completely unrealistic. Unlike William Pitt the Younger's Sinking Fund, which put the budget surplus into a separate account in order to pay off the national debt with 'the miracle of compound interest', this would be all about spending. This RSA paper argues that by borrowing around £200bn the government could establish a fund, completely ignorant of the fact that the UK debt is still increasing and stands at a record 1.79 trillion of on-book debt. Although the deficit has come down to an 11 year low (pre-financial crisis levels), the reliance on borrowing at 'historically low-interest rates' is also ill-founded - as interest rates will soon rise worldwide and we already have enough debt (both public and private) to be worried about as it is. The idea of borrowing more to satisfy the desires of today - to be paid by the children of tomorrow - may sound like a dream to the RSA, but it would be a reckless one.

Another way to pay for UBI in the UK, apparently, would be to levy a 'scrip tax' - something the IPPR's Matthew Lawrence mooted in 2014. This is something that amounts to the government take over of company equity and is, in other words, part-nationalisation. This is completely at odds with any classical liberal view of economics and/or politics. The assumption made by the authors (and, indeed, by Lawrence) is that the government is given (undeserved) equity for FTSE 350 companies. In fact, this would prove to be a disincentive to float on that index (ie companies would go elsewhere - if float at all) and have an unintended consequence of stifling the ability for growing companies to call on new sources of private capital. 

The final idea of these authors on taxing the transfer of data assets may seem to have more legs in a world where both Parliament and people are being made increasingly aware (and becoming increasingly concerned) about how their data is being handled. Possibly with this in mind, the authors propose that government 'consider exploring the introduction of some form of tax on the usage of public data or the transfer of data assets to tech platforms and others.' Wonderful, if these companies acted in a bubble. As has already been established in multiple Select Committee hearings, Facebook, Google and Amazon (all mentioned in the RSA report) have taxable entities elsewhere and, as a result, minimise the taxes taken from relatively high tax jurisdictions like the UK. What these companies already do with tax, they will do with a proposed 'data tax'. Further, if government was to increasingly play around with what information consumers could transfer to companies of their choice - and place taxes on those transfers - then more and more companies will locate their data elsewhere (ensuring that the UK receive none of the data or the tax). This could lead to unintended consequences such as the relocation of tech companies in the Fintech arena and reduce the UK's appeal for any entrepreneur looking to grow in the space.  

With this last point about the UK losing tax revenue - because of this desire to increase the amount charged - it confirms that UBI and this idea of a UBOF is an inverse Laffer Curve. The Laffer Curve is the supposed relationship between economic activity and the rate of taxation which suggests that there is an optimum tax rate which maximizes tax revenue. When tax is at 100%, revenues should be 0%. This is because no one will work for free. At some points during a reduction of the prevailing tax rate, revenue would increase and - depending on the economy in question - there is an optimum point where governments can gain the maximum revenue and taxpayers can keep the maximum amount of their money. Instead of recognising this, the RSA paper argues for the government to create situations where tax rates will be raised. With the Laffer Curve in mind, this may well lead to a reduction in income for the government and (most probably) higher rates for taxpayers.

These ideas put forward by the RSA, far from helping people, would have unintended consequences. Indeed, they will more than likely lead to levels of failure beyond what the OECD is suggesting in Finland.

Notwithstanding this, on UBI in general, if you provide people with 100% of what they require to live, then they have no incentive to work. Even if government reduces the rate to what they think is less than what people require to live on, then some people may actually reduce their consumption to fit. We have seen this elsewhere within benefits systems of old. In effect, it becomes a practice driven by government and, in extreme circumstances, becomes a form of government rationing - which is distinctly anti-individual freedom and, in circumstances where the entire population receives this sum could lead to decreases in productivity (something the UK has an issue with regardless), not to mention increases in inflation.  

Despite this, some groups and newspapers like the Guardian counter that UBI would increase individual freedom in the gig economy. Well, let's wait and see what the other trials in Scotland and elsewhere produce, however, so far what has been put forward is a stark warning that the basic concept does not work in practice and attempts to make it work (such as proposed by the RSA) are unworkable.  

All views expressed in contributions by named authors are their own and may not reflect the views of The Freedom Association.

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