Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Keywords: Income, Citizens, Economic policy, Europe
Abstract This paper is adapted, with an added Preface, from an explanatory paper published by the Citizens's Income Trust, London. It argues for the creation of a citizen's income, which is defined as “an unconditional, automatic and non-withdrawable payment to each individual as a right of citizenship”. The argument is framed largely from a British perspective, but is of equal relevance to other Western European states, and perhaps has a special relevance to the countries of Central and Eastern Europe which are in the process of rapid economic and social change. To them, it offers a workable, and socially just, alternative to market fundamentalism.
The idea of a Citizen's Income (CI) – and unconditional payment to each individual as a right of citizenship – seems initially radical and unprecedented. This is why it is still resisted by most mainstream politicians, who fear (among other things) that it would undermine the work ethic. Yet, there is a contrary argument that the present economic and social climate is increasingly convincing, and around which economic reformers and conservatives can coalesce. A CI can be said to encourage work because it increases the range of options available to the individual, creating a basis of stability in which self-employment and part-time work are more attractive and secure options. It would also address many feminist concerns, offering greater flexibility to the mothers – and fathers – of young children, and introducing a de facto payment for voluntary and “unwaged” work, recognising its economic and social value.
A CI would provide a powerful mechanism for changing the culture of work, because it would force employers to be more flexible and responsive to the needs of their work force, and greatly reduce the level of tolerance for exploitative or discriminatory employers. In addition to this, the provision of CI would remove several layers of welfare bureaucracy, reducing expensive complexities and freeing welfare claimants from humiliating paperwork and that degrading legacy of the Poor Law, the “means test”. And CI is not, in fact, without precedent, as the success of Child Benefit in the Britain has shown.
CI is not a new idea, but has bubbled uneasily beneath the surface of political debate. At a time of growing crisis in the pensions industry alongside accelerated economic change, it might point us toward a new approach to welfare and work. Indeed, the idea of CI might enable us to square the circle: to slice through the bureaucratic apparatus of welfare whilst defending, and extending, the Welfare State.
What is a CI?
A CI is an unconditional, automatic and non-withdrawable payment to each individual as a right of citizenship.
(A CI is sometimes called a Basic Income (BI), a Universal Grant, or a Universal Benefit.)
What is the problem with the social security system we have?
If someone who is on means-tested Income Support or Job-Seeker's Allowance enters employment, fairly soon their benefit is withdrawn pound for pound (apart from a small disregard), and, as their income rises, they lose Housing Benefit and Council Tax Benefit and they start to pay Income Tax and National Insurance Contributions.
Something similar happens to someone in low paid work who is receiving tax credits: as their earned income rises, tax credits fall, income tax is paid, National Insurance Contributions are paid, Housing Benefit is lost ...
The “unemployment trap” and the “poverty trap”, as these traps are called, discourage people from entering employment and from seeking to increase their earned incomes. The problem is compounded by the complexity of the system and the resulting uncertainty over how much net income someone will have if they enter or change their employment and have to pay travel and other expenses. This situation is bad for them, for their families, for their communities, and for the economy.
The “savings trap” applies especially to retirement pensioners. The present Minimum Income Guarantee for pensioners means that, unless someone has a retirement income already above the guaranteed level, it is not worth saving for retirement. (The new pension tax credit will go some way toward solving this problem, but still the full benefit of savings will not be realised.)
Does anyone have a CI already?
Yes. In this country, Child Benefit is a CI for children: it is unconditional and non-withdrawable. It provides a small but important secure income for all families with children, and its administrative costs are small.
Residents of Alaska receive a CI, and pensioners in Holland receive a Citizen's Pension.
Would a CI for adults help?
Yes. Because the CI is not withdrawn as earnings rise, a large CI would mean that net income would rise steadily for the poorest families as earned income rises, and a small CI would mean that for those families still on means-tested benefits net income would rise more rapidly than it does now.
For Britain's many flexible workers, a CI would provide a measure of security on which they could build. Part-time work and self-employment would become more attractive, allowing people to develop more flexible patterns of working more consistent with their own and their children's or other dependents' needs. Thus, consistently high levels of employment can be expected.
A CI would help people to undertake higher education, training, or retraining by providing a small, secure income. A universal Citizen's Pension would encourage people to save for their retirement because it wouldn't be withdrawn from people with personal pensions or other investments. Above all, a CI would help to tackle poverty by providing an income on which people with low earnings potential could build through paid work and savings. Rather than destroying the work ethic, as our present system does, a CI would help to lift people out of the various traps outlined above and would encourage them to earn a living.
How would a CI be paid for?
Work undertaken by economists has already demonstrated that a small CI could be introduced on a cost neutral basis by reducing income tax allowances, means-tested benefits, National Insurance benefits and tax credits. A larger CI would require a higher marginal rate of tax (though net incomes of earnings and CI would still be greater than before for everyone below or slightly above median earnings). It would be for a government to decide how high a CI to pay and thus, whether tax rates would need to be raised.
It is important to remember that the introduction of a realistic level of CI would be accompanied by substantial savings to be made in the huge administration costs associated with means-tested benefits. These include the costs of policing applicants. Even more important, by taking more people out of the various poverty traps and allowing people on low incomes to get back into work, and/or work more hours, or receive a higher salary without being penalised, tax revenues would increase substantially.
Would a CI redistribute income?
Yes. Research on the effects of a small cost-neutral CI shows that those earning the least would gain, and that those with the highest earnings would lose slightly.
But it is not the redistributive effects that will have the greatest impact on the incomes of many of the poorest families: it will be their increased ability to raise their net income as earned income rises. It will also eliminate the deep poverty of many who are entitled to means-tested benefits but do not claim them.
How big should a CI be?
In an ideal world, every citizen would receive an income sufficient to cover all their basic needs (a “full” CI). This is unlikely to be feasible in the near future as it would require higher tax rates (though interestingly, the Republic of Ireland is seriously discussing a CI of £70 per week for adults and £30 per week for children, to be paid for with a combined tax rate of 47 percent on all income).
Even if it were thought desirable to implement a full CI, it would be wise to start with a smaller one so that labour market behavioural changes could occur slowly enough for the labour market to adapt and for behavioural and market changes to be evaluated. A CI of about £30 per week for each adult and £15 per week for each child could be paid for by reducing tax allowances, tax credits and benefits and without raising tax rates.
This paper was adapted from an explanatory paper published by the Citizen's Income Trust, London.
Aidan RankinNew European, London, UK