Monthly Archives: February 2016

How to Fund Basic Income in the UK Part 3: Carbon Tax and Dividend

In addition to income tax and a land value tax, a third possible way to fund a basic income or citizen’s dividend is a carbon tax. Environmental group the Citizens Climate Lobby provides this graphic to demonstrate how this could work:

how20carbon20fee20and20dividend20works

The idea would be to impose a tax on carbon at the point of extraction, which would raise prices along the supply chain. However, the revenue collected would be pooled together and redistributed among the population, thus compensating consumers for the increase in prices.

The increase in the prices of carbon-intensive products and services would reflect the true cost of carbon emissions on society and the environment:

For decades now, we’ve been tinkering around the edges of the core issue, which is that we’re not taking responsibility for the true costs of fossil fuels” explains activist Camila Thorndike in an interview with non-profit YES! Magazine. “This is a classic case of market failure. Right now it’s obvious that the costs of climate change are astronomical—in the form of hurricanes and wildfires and lost productivity—yet we still don’t have a price on carbon. Energy prices are basically lies right now because we know that clean energy is the most economical and healthful decision, but it doesn’t pencil out because polluting forms of energy are artificially cheap. We need a price on carbon to ensure that prices reflect honest information.”

Distributing all revenue from the tax to citizens as a dividend ensures that the impact on consumers, particularly on poorer households, would be minimal. At the same time, people would be incentivised to use fewer carbon-intensive products and instead purchase relatively cheaper, cleaner alternatives in order to save money and maximise their profit from the dividend.

The dividend would ensure that consumers do not lose their purchasing power, meaning that the tax wouldn’t harm the economy. A study conducted on behalf of the Citizens Climate Lobby showed that a carbon tax and dividend would actually add 2.8 million jobs to the American economy while reducing carbon emissions 52% below 1990 levels over a period of 20 years.

In the UK, an LSE study concluded that a carbon tax of £20 a tonne would have “little impact” on consumers, raising prices by only 0.9%. However, the authors of the report argue that the impact could be even lower since the carbon tax would “incentivise green behaviour change, drive business innovation, and provide the Treasury with revenues that it could recycle back into the economy”. £20 could therefore be a starting price for carbon that rises over time to encourage innovation and further cuts in emissions as businesses and consumers adjust to the new tax.

Amid criticism that the European Union’s cap-and-trade scheme has failed to achieve the desired results, a carbon tax and dividend could provide a simpler, more effective solution to support the transition to a low-carbon economy. It could also be a great way to introduce the UK to the idea of a universal, unconditional payment to all citizens, similar to a basic income.

See also:

How to Fund Basic Income in the UK

How to Fund Basic Income in the UK Part 2: Land Value Tax

How to Fund Basic Income in the UK Part 4: Sovereign Wealth Funds and Dividends

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How to Fund Basic Income in the UK Part 2: Land Value Tax

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In my last post, I explored how to fund a basic income in the UK using existing welfare spending and various changes to the income tax system. According to my calculations, these changes would result in a basic income of £4550 per person of working age.

I also mentioned a few additional or alternative sources of funding basic income. This post will look at the potential of one of those ideas: a land value tax.

A land value tax (LVT) is a tax on the rental value of a piece of a land, paid by the owner. Essentially, LVT is a form of rent that the owner is willing to pay to occupy a piece of land. It is not a tax on the buildings on a property, rather just on the value of the land itself.

For a brief overview of LVT see Dominic Frisby’s video below:

LVT has several advantages other forms of taxation. For one, it is much harder to avoid, since it is impossible to hide land.

LVT would help to reduce the UK’s level of inequality in terms of land ownership. For example, it has been shown that Scotland has “the most concentrated pattern of private land ownership in the developed world” with just 432 landowners accounting for half of all privately owned land. Also, a study by Country Life magazine reported that 36,000 people own half of Britain’s rural land. LVT would make it less profitable to hold on to land that is not being used, therefore freeing it up for someone who does want to use it.

Furthermore, the value of land is created by everyone in the community. For example, new businesses that provide jobs and services increase the desirability of an area and raise land values, resulting in an unearned windfall for landowners. The presence of residents with money to spend creates demand in an area, further contributing to land values.

Public investment also raises land prices. LVT would enable the government to recapture some of the public money that is spent on infrastructure. In a 2007 blog post, Labour’s now shadow chancellor John McDonnell gave the following example:

…land values in East London have risen due to the Olympics, yet it is the investment of public money that has enabled the Olympics to take place and for land values to rise. A tax on land values will return some of this unearned wealth to the community

Carol Wilcox, secretary of Labour Land Campaign, adds to this in her article “Why a land tax should be at the top of Labour’s agenda”:

By valuing land regularly and collecting the rent, LVT creates a positive cycle of public investment => increased land values => increased LVT revenues => increased public investment.

Winston Churchill was also a supporter of LVT. The policy was included in the 1909/1910 People’s Budget that he championed along with Chancellor David Lloyd George. Unfortunately, the budget was rejected by the House of Lords, due to the fact that many of the lords were landowners.

“Roads are made, streets are made, railway services are improved… water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still… To not one of these improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced.”

Winston Churchill

LVT would encourage the more efficient use of urban land and encourage more compact cities, as Frank de Jong from Earthsharing Canada demonstrates in this brilliant video:

It is often argued that a problem with basic income is that landlords would simply increase rents to absorb the extra money given to people. This is similar to the idea that housing benefit does not help renters, rather only benefits the property owner.

An article on progress.org about Finland’s plans to implement basic income describes this:

By decreasing the current transfer payments and providing all persons with a guaranteed income, the basic income would at first increase land rent even more, as people could afford to bid higher for housing, and tax-free enterprise would bid more for commercial land. If the basic income is not paid from land rent, much of that income will be captured by landowners.

The article argues that increasing other taxes to pay for a basic income would stifle economic activity and suggests land value tax as the way forward:

Higher value-added and income taxes would impose a greater burden on labor and enterprise, when the unemployment rate of Finland is already ten percent…

The way to implement basic income without stifling employment and growth is to tap a source that does not flee, shrink, or hide when paid. That source is land rent.”

In the case of the UK, one potential barrier to using LVT to fund a basic income, besides convincing the public of the necessity of either, is that many LVT supporters would want to replace other existing taxes first before considering funding a basic income. In the UK there seem to be three main taxes that are candidates for replacement: stamp duty, council tax and business rates.

Firstly, stamp duty has been criticised as having “a strong claim to be Britain’s worst tax”. LVT supporter Joe Sarling explains the problem with it:

Stamp duty… is a levy placed upon the buyer through the transaction and not the seller (who has arguably benefited from uplift in values without their own development). We shouldn’t want to discourage transactions – a higher number of transactions will mean households can move freely and make most efficient use of the stock available.

Council tax is viewed as a regressive tax, based on outdated property valuations from the 1990s.George Monbiot has written about the inadequacies of council tax in the Guardian:

The most expensive flat in that favourite central London haunt of the international super-rich, One Hyde Park, cost £135m. The owner pays £1,369 in council tax, or 0.001% of its value. Last year the Independent revealed that the Sultan of Brunei pays only £32 a month more for his pleasure dome in Kensington Palace Gardens than some of the poorest people in the same London borough.

According to Andy Wightman’s report “A Land Value Tax for England”, if LVT were implemented 83% of English households would pay less than they currently do in council tax.

Lastly, business rates have been described as being the “single biggest threat to the survival of retail businesses on the high street”. Business rates are defined here as “a tax levied on non-residential properties, including shops, offices, warehouses and factories. Firms pay a proportion of the officially estimated market rent (‘rateable value’) of properties they occupy”. Abolishing or reducing business rates would likely encourage economic activity and potentially see Britain’s high streets flourish.

In “A Land Value Tax for England”, Andy Wightman discusses the perverse incentives created by business rates:

Another effect of business rates in practice arises from the treatment of unused or undeveloped land, on which business rates are levied at reduced or zero rates. This provides a clear and perverse incentive to use land inefficiently. Indeed, this has led to a rash of garish press headlines about property-owners demolishing property in order to avoid business rates… If empty or unused property is taxed at a lower rate than property being used, then a tax disincentive to use it is created. An LVT avoids these problems.

Current figures show that these three taxes generate £62 billion in revenue.

It is difficult to determine how high the LVT would need to be to cover these taxes since there are no accurate valuations of land values. However, in various reports (A Land Value Tax for England, A Land Value Tax for Scotland and A Land Value Tax for Northern Ireland), Andy Wightman has estimated a total rental value of £125.1 billion (likely an underestimate considering this excludes Wales and only includes residential land in Northern Ireland).

Wightman’s reports use figures from the 2011/12 financial year to calculate the amount that would need to be raised by LVT to replace council tax, business rates and stamp duty. Together, revenue from council tax and business rates in England has risen by approximately 8% since then. If we assume that land values have risen at the same rate then we can calculate a rental value of £135.045 billion for land in the UK.

Therefore, to replace the £62 billion raised from these taxes, an LVT of 45.91% on rental values would be required.

If an LVT could be successfully implemented at this rate to replace these taxes, then it could eventually be increased to fund a dividend awarded to all citizens. In an interview in 1885, Henry George, the economist credited with popularising the idea of land value taxation, stated “I hold that land belongs equally to all, that land values arise from the presence of all, and should be shared among all.” If land belongs equally to all, then it seems only fair that all citizens should see a return from land values in the form of a citizens’ dividend.

Any additional revenue that is used to fund a citizens’ dividend could be divided among the UK population and added to the basic income of around £4550 that I calculated in my previous post (alternatively, of course, it could be used to reduce the proportion of the basic income raised through income tax). However, the rate of LVT would need to be significantly higher than 45.91% to achieve a meaningful amount.

For example, an additional 4.09% to bring the LVT up to 50% would generate just over £5.5 billion, equating to a dividend of only £85.63 per person. As this is an annual amount, this is clearly not very significant.

However, if the rate could be raised to 100% of the rental value, the potential revenue could rise to over £73 billion or approximately £1,130 for every person in the UK.

An alternative to a dividend is the idea of a “basic rental income” to replace housing benefits, as proposed by think tank the RSA. This is explained in their fascinating report “Creative citizen, creative state”:

The third option which the RSA proposes for further exploration is the introduction of a ‘Basic Rental Income’. The Basic Rental Income would not be income-contingent and therefore does not have the same disincentive or perverse incentive (e.g. family break-up) effects as housing benefit and council tax credit. A Basic Rental Income based upon local market conditions (and this would vary from year to year) would be granted to every individual who rented rather than owned a property…

A Basic Rental Income would have cost implications. The source of funding for additional cost should be those who have gained the most from increases in housing equity…

The introduction of a land value tax or similar to fund any shortfall in the Basic Rental Income is therefore justified on the basis of gains received by a few from the institutions of society and its collective action failures rather than through the individual’s endeavour.

This “basic rental income” would represent a transfer of wealth from landowners to renters. Some 10 million households rent privately or are in social housing in the UK. If current spending on housing benefit (nearly £26.4 billion) were added to an LVT of 50% to 100% on land rents, a potential basic rental income of between around £3,190 and £9,940 could be provided to each of these households.

The introduction of LVT would result in improved productivity and increased economic activity brought about by abolishing the other taxes and the gradual redistribution of wealth from landowners to the rest of the population. This in turn would increase land values. Therefore, even if the LVT used to fund a citizens’ dividend or a basic rental income was set at a low level, it could grow as a nominal amount over time.

A land value tax to reduce other less progressive taxes ought to be implemented to increase prosperity and revive Britain’s high streets. Once that is achieved, the potential for a citizens’ dividend or basic rental income funded by land rents should certainly be explored.

See also:

How to Fund Basic Income in the UK

How to Fund Basic Income in the UK Part 3: Carbon Tax and Dividend

How to Fund Basic Income in the UK Part 4: Sovereign Wealth Funds and Dividends

How to Fund Basic Income in the UK

In December last year, Business Insider UK published an article titled “Here’s how much we’d all get if the UK dumped its welfare state and introduced a universal basic income scheme instead”.

The article explored the idea of replacing the entire welfare state with an unconditional universal basic income (UBI) by dividing the current welfare budget of £251 billion among the whole UK population of 64.5 million people. The result was an annual basic income of £3,891 per person.

However, numerous essential elements and complexities of a basic income scheme as well as several options to increase the level of the UBI were completely overlooked by the author.

I believe that a UBI of around £4550 per person is possible, even while retaining some necessary parts of the current welfare budget. In this post I will attempt to explain how this can be done.

Firstly, I will look at the types of existing welfare that should be retained:

Disability benefits

The government currently spends slightly over £37.5 billion on “Incapacity, disability & injury benefits”. People with disabilities clearly require additional support and it would be grossly unfair to simply take the budget targeted to their needs and divide it among the rest of the population. I will therefore deduct this amount from the overall welfare budget and keep it separate from the UBI.

Housing benefit

Housing benefit is another area of the welfare budget that is probably best dealt with separately. Current spending on housing benefit amounts to just under £26.4 billion. This amount will also be deducted from the initial budget for UBI.

Pensions

The government includes state and public sector pensions in its welfare budget. I believe that the idea of a basic income won’t get anywhere if it upsets pensioners by taking their state pensions and dividing them up among the rest of the population.

Therefore, the over £104.4 billion that the government spends on pensions will be retained and deducted from the overall budget that is to be converted into UBI.

Deducting these amounts from the initial budget of £251bn leaves us with £82.635 billion to share among the population. However, now that pensioners are excluded, the number of people receiving the UBI can be reduced to 52,188,000.

This results in an annual UBI of just £1586.01 per person.

However, now that we’ve considered the parts of the welfare state that would be retained, we can begin to explore some possible savings and sources of additional revenue that can be used to enlarge the budget for a basic income:

Prisoners

I believe that prisoners should probably be excluded from receiving a basic income. Payments of UBI would be stopped for the duration of their prison sentence and would resume upon their release. According to the latest figures, the prison population of the UK is 85,641.

Assuming this figure stays fairly constant, this would mean the portion of the population receiving UBI can be further lowered to 52,102,359 people.

Additional revenue from efficiency savings

Since UBI would replace most of the existing complex welfare system, consisting of job seekers allowance, working tax credits, Universal Credit and other means-tested benefits, it would be much simpler and cheaper to administer than the current system. Basic income would significantly reduce the level of bureaucracy associated with means-tested benefits.

For example, the complexity of Universal Credit requires a sophisticated computer system with a budget of at least £637m. In 2013 the government wrote off £34 million worth of work on the IT project. All of this would be avoided with basic income.

For these reasons, when the Green Party included UBI in its detailed proposal before the 2015 general election, it assumed administrative savings of £8 billion.

UBI instead of student grants

Rather than administering means-tested grants to students from low-income families, it could be much simpler to give all students a basic income to help them pay for living costs during further education.

An article on the BBC website explains the present situation:

“Currently, students from families with annual incomes of £25,000 or less get the full grant of £3,387 a year. More than half a million students in England receive a maintenance grant from the taxpayer, worth in total £1.57bn a year.”

This money is spent by the Department for Business and is not included in the welfare budge so it can be added to the total welfare budget to be administered as UBI.

Withdrawal of the personal tax allowance

Like most UBI proposals, the Green Party’s plans also included abolishing the personal tax allowance. This is the level of income that someone can earn before they start paying income tax. Currently, this is set at £10,600 and the benefits of it start to be withdrawn when someone’s income exceeds £100,000.

Looking at the government’s estimated income tax figures for 2015-16, we can see roughly the number of tax payers who would be affected by removing this allowance.

In 2015-16, the basic rate of tax (20% on income between £10,600 and £42,385) will be paid by an estimated 24 million people. Abolishing the personal tax allowance and introducing a tax rate of 20% on this group’s first £10,600 of income would mean that anyone earning at least £10,600 would pay an extra £2120 in income tax. This would bring in approximately £50.88 billion.

This doesn’t include anyone whose earnings are below the personal tax allowance threshold. The additional revenue from taxing this group’s income at a rate of 20% has been estimated at around £6.8 billion.

Things get more complicated when we look at the next tax bracket (the higher rate of 40% paid on income between £42,385 and £150,000), since the portion of people with incomes over £100,000 already start to lose the benefit of the personal allowance, with those on incomes of £121,200 having lost the full benefit.

However, if we guess that at least 60% of the 4.65 million people in this bracket are earning less than £100,000, it is possible to estimate a further £5.9 billion in additional revenue.

National Insurance

At the moment, no National Insurance contributions are paid on income below £112 per week. In its UBI proposal the Green Party proposed bringing in extra revenue by scrapping the thresholds for National Insurance contributions:

“- Removing the primary threshold for National Insurance contributions. HMRC estimates that this would raise £21.6 billion in 2013–14. Uprating for inflation to 2015 adds about 4%, so say £22 billion. – Removing the secondary threshold for National Insurance contributions. HMRC says this contributes £25.7 billion in 2013–14, so we assume £26 billion for 2015.”

Their changes to National Insurance would mean that anyone earning £10,600 (the level of the personal tax allowance) would pay an additional £699 in NI contributions.

Using the figures for 2013-14, we have a total of £47.3 billion extra revenue from abolishing the NI thresholds.

Quick summary

Taking a quick look at the amounts that we have deducted and added to the original budget so far, we get the following:

Initial budget £251,000,000,000
Disability benefits -£37,537,000,000
Housing benefit -£26,386,000,000
Pensions -£104,442,000,000
Efficiency savings +£8,000,000,000
Abolition of student grants +£1,570,000,000
National insurance +£47,300,000,000
Abolition of personal tax allowance +£63,594,800,000
 
Total £203,099,800,000

This isn’t the final amount though, as there are still other adjustments that can be made to increase the figure:£203,099,800,000 / 52,102,359 = £3898.09 per person.If we divide this figure by the total population minus pensioners (as pensions are kept separate here) and prisoners we get an annual UBI of:

£203,099,800,000 / 52,102,359 = £3898.09 per person.

This isn’t the final amount though, as there are still other adjustments that can be made to increase the figure:

Reduced amount for children

Next we can set a lower rate of UBI for children. The previously calculated amount of £3898.09 can be treated as the average rate of UBI for children and adults. If we decide to set the annual UBI for children at, say, £3000 then the difference can be added to the adult UBI.

The Business Insider article gave a figure of 15 million children in the UK so I will use that number too. Consequently, a child UBI of £3000 means that nearly £13.5 billion can be added to the budget for the adult UBI, giving an adult UBI of £4261.18 per year.

Taxing away the UBI of people with sufficient income

A common criticism of basic income is that it gives money to people who are already wealthy (“welfare for the rich”). In his article “The Water Room Analogy”, basic income advocate Scott Santens explains that, for the sake of efficiency, it actually does make sense to give a basic income to even the richest people.

However, a crucial point is that their basic income should be paid back in the form of tax so that they aren’t net beneficiaries of a UBI. The tax system would need to be designed so that a special marginal rate kicks in at a certain point so that the UBI is gradually paid back as a person’s income rises beyond a certain level.

This is necessary to ensure that the UBI can be as targeted towards people with low incomes as possible.

For example, we might decide that anyone with an earned income of over £20,000 no longer really needs the full amount of the UBI anymore. Such people could be taxed an extra 10p on every pound they earn over £20,000 until they have paid back the full amount of the UBI.

So:

Someone earning £30,000 would pay back an extra £1000 of whatever basic income they receive. Someone earning £40,000 would pay back an extra £2000 of their UBI and someone earning £50,000 would pay back £3000, etc.

As soon as someone’s income becomes high enough to have paid back their UBI, any further income they earn would be taxed at the usual rate. At what point this occurs would of course depend on the level of the basic income.

If we assume that the people in the highest income tax bracket (income over £150,000) will always be able to pay the UBI back in tax, no matter what level it is set at, then they can be excluded from the calculations as they effectively don’t receive a basic income.

In 2015/16 an estimated 322,000 people will be in this bracket. This means the number of working-age adults receiving UBI can be lowered to 36,780,359, saving around £1.37 billion.

Next, we can look at people paying the higher rate of tax (income between £42,385 and £150,000). Everyone in this tax bracket earns at least £42,385 and would pay an extra 10% tax on all income above £20,000 until their UBI is paid back.

Since they have already paid an additional £2120 (due to the loss of their personal tax allowance) and an extra £699 in National Insurance, they now only have £1,479.48 of their UBI to pay back. This will already be achieved by the time their income reaches £34,794.80.

Everybody in this tax bracket paying back the rest of their UBI would bring in around an extra £6.88 billion.

Finally, anyone currently paying the basic rate of tax (£10,600 to £42,385) and earning above £20,000 will start paying the additional 10% tax rate.

There are likely to be 24 million people in this tax bracket in 2015/16. We can make a conservative guess that 3 million of those will earn £20,000 or more, paying perhaps an average of £800 of their UBI back because of the extra 10% tax. This would, at the very least, bring in £2.4 billion that can be ploughed straight back into the basic income budget.

Conclusion

These last changes to the tax system would result in a final annual adult UBI of £4550.78, or £87.52 per week.

In addition to this, there would be a child UBI of £3000, and the current budgets for housing benefit, state pensions and disability benefits would remain untouched.

This would mean that, for example, a family of 2 adults with 2 children would receive a basic income of just over £15,000 between them, as well as any housing benefit or disability benefits that they may be entitled to.

Many will say that this level of UBI is still insufficient as it not enough to comfortably live on. However, for the person with mental health problems who has had their benefits sanctioned, the person about to be evicted from their home, the worker on an unstable zero-hours contract, the self-employed tradesman whose income fluctuates wildly from month-to-month, or the single-mother who is too ashamed to admit to her daughter that she claims benefits, an unconditional £87 a week could offer a real lifeline and greater dignity.

For anyone who feels that the amount calculated here is not enough, there are other additional/alternative sources of revenue that can be examined such as a land value tax, carbon tax or an Alaskan-style dividend that is linked to a nationalised industry.

The main point, however, is that an annual basic income of at least £4500 per person can easily be funded on the basis of existing welfare spending and adjustments to the current tax system. It’s just a question of there being the political will to do so.

See also:

How to Fund Basic Income in the UK Part 2: Land Value Tax

How to Fund Basic Income in the UK Part 3: Carbon Tax and Dividend

How to Fund Basic Income in the UK Part 4: Sovereign Wealth Funds and Dividends