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Why do neoliberals support a Negative Income Tax?

Summary:
This morning, I spoke at the LSE’s Citizen's Basic Income Day on the neoliberal case for a basic income (or ideally a Negative Income Tax). I’ll be tweaking the presentation for our regular sixth form seminars, but below is an approximation of my remarks (thanks to our former Executive Director Sam Bowman for laying the groundwork):Neoliberals support an efficient welfare state that guarantees a minimum standard of living for every citizen: ensuring that wealth created by globalisation and automation is spread across society. The design of that welfare state should avoid poverty traps created by high and inconsistent marginal tax rates: some people on Universal Credit only keep 20p of every extra £1 they earn (although this is still an improvement on previous marginal effective tax rates

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This morning, I spoke at the LSE’s Citizen's Basic Income Day on the neoliberal case for a basic income (or ideally a Negative Income Tax). I’ll be tweaking the presentation for our regular sixth form seminars, but below is an approximation of my remarks (thanks to our former Executive Director Sam Bowman for laying the groundwork):

Neoliberals support an efficient welfare state that guarantees a minimum standard of living for every citizen: ensuring that wealth created by globalisation and automation is spread across society. The design of that welfare state should avoid poverty traps created by high and inconsistent marginal tax rates: some people on Universal Credit only keep 20p of every extra £1 they earn (although this is still an improvement on previous marginal effective tax rates of up to 95p per £1). It should also be minimally paternalistic, which means as little means-testing as possible and delivery in the form of cash/bank account payments rather than funds that can only be spent on certain goods or services (e.g. housing benefit, food stamps). Finally, it should be a comprehensive overhaul of all benefits (including housing benefit), with the exception of disability benefits.

Following in the footsteps of Milton Friedman, we therefore support a Negative Income Tax (NIT) paid to individuals (including children) with a fairly low, uniform withdrawal rate. The base amount for the NIT should be set high enough to ensure a basic standard of living, with econometricians using experimental data to help determine the exact level of base payment and withdrawal rate.

We plump for a Negative Income Tax over the (very similar) Citizen’s Basic Income (CBI) option, although we would still support the latter if it were the only proposal on the table. While NIT claws back money from higher earners by withdrawing payments as earnings increase, CBI does so through the existing system of taxation (i.e. after the initial lump sum is paid to everyone). The problem with CBI is that giving rich people money then taking it away again through taxation is inefficient: “when the government transfers money, it does so in a leaky bucket.”

A Negative Income Tax could also make it easier to implement other parts of the neoliberal agenda, such as phasing out the minimum wage, introducing a carbon tax, and auctioning off visas. Minimum wage laws aim to guarantee a basic standard of living for those in work, but economic evidence shows that they have disemployment effects and slow down job creation. A Negative Income Tax accomplishes the aim of minimum wage laws without killing jobs and gumming up the labour market, rendering such laws without justification. Carbon taxes—which aim to compensate for externalities generated by pollution—are currently extremely unpopular, but linking revenues to the base NIT level is one way of making them politically palatable. The same link could potentially be established for state revenues from a visa auction system, which would make the well-documented link between immigration and economic prosperity more obvious to people already living in this country.

There are many objections to Negative Income Tax (and Citizen’s Basic Income) from the left and the right. On the left, detractors worry that the system will subsidise employers paying below-subsistence wages, undermine wider socialist struggles, and have negative effects on marginalized groups like disabled people, parents of multiple children, and those with high housing costs.

On the first point, I defer to the Cato Institute’s Ryan Bourne discussing the similar case of tax credits: “employers generally pay people according to the productivity of their work, not some preordained amount to compensate them for a set standard of living.” While the experience of tax credits suggests that wages may drop slightly in the short-run as more people are encouraged to enter the labour market, this effect will quickly dissipate as the supply of labour adjusts accordingly. There’s also the oft-overlooked point that an income floor tends to increase the overall bargaining power of labour!

The claim that NIT/CBI will be used to justify more neoliberal policies at the expense of left-wing ones is partially true. But what this criticism overlooks is that a free market welfare system accomplishes what many on the left desire: poverty alleviation, increased worker bargaining power, and an end to (most) paternalistic means-testing.

Keeping disability benefits separate from the NIT/CBI addresses their potentially higher welfare needs, and targeting payments at individuals (including a rate for children) deals with varying family size. As for those facing high housing costs, it’s important to compare a Negative Income Tax with the failures of housing benefit (which should be abolished). Transition measures are necessary to avoid those receiving housing benefit being left in the lurch, but an equivalent cash payout as part of an NIT/CBI would encourage more efficient allocation of housing stock while stopping rents being hiked up. And of course, the best long-term solution to unaffordable housing is sweeping supply-side reform.

Opposition to Negative Income Tax from the right tends to focus on the purported cost, the potential for widespread idleness, and long-term political risks. It’s vital that cost is viewed in comparison to our current welfare system, and it’s important that those concerned with the overall size of the state remember that its scope also matters. That said, cost remains an open question that can only be decided by detailed analysis of any concrete proposal: like this one for an American system.

Even if it’s fiscally viable, doesn’t paying everyone an unconditional lump sum kill the incentive to work? Well, not really. Our recently released paper Basic Income Around The World looks at the evidence from Basic Income experiments and finds little evidence of workers exiting the labour market or significantly reducing hours worked: most reductions in the famous American and Canadian experiments were for time spent between jobs.

Perhaps the strongest objection I’ve come across from a centre-right perspective is the worry that any NIT/CBI would be ‘bid up’ and rendered harmful by the political process, as parties compete to offer the highest minimum level of income. As the Institute of Economic Affairs’ Steve Davies put it:

Given that, it is for many a racing certainty that it will be bid up by political competition to a damaging level and that there will also be constant and often successful efforts by special interests to create specific add-ons or separate benefits in addition to the UBI, which will lead to the re-creation of much of the existing welfare state but now in addition to a UBI. This will defeat the main point of a UBI for those who want to replace the costly complications of the existing welfare system.

The best answer I have here is that the future of any policy is uncertain, and any NIT/CBI could also be bid up or remain in rough equilibrium. More work needs to be done on the possibility of an independent political body (think of the Low Pay Commission or the Bank of England) taking responsibility for setting the details of such a policy out of the hands of politicians. In the end, the future of our welfare system is in our hands, and a Negative Income Tax should be the long-term goal.

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