Basically unaffordable: The Economist gets its sums wrong on Basic Income

An article in The Economist last week condemned Basic Income as being “prohibitively expensive”; but the criticism  makes some very basic mistakes.

In 1970 James Tobin, an economist, produced a simple formula for calculating their cost. Suppose the government needs to levy tax of 25% of national income to fund public services such as education, policing and infrastructure. Paying for a basic income worth 10% of the average income requires average taxes to rise by ten percentage points, to 35%. A basic income worth 20% of the average income requires average taxes to be 20 percentage points higher, at 45%, and so on. Eradicating relative poverty, defined as income beneath 60% of the median, would require tax rates approaching 85%.

Tobin’s calculation is based on national income. The figure of 35% comes from adding 10% in Basic Income to 25% for public services.  The article’s key mistake comes from confusing national income with average income.  In the first place, almost discussions of average income refer to the median, not the mean.  The median average income accounts for  less than the mean average,  because people in the top half of the income distribution get more income share than the bottom half.   In the UK,  the population median income is £404 pw; the population mean income is £504.  60% of the median share distributed to everyone would be 48% of all personal income, not 60%.

This in turn is less than GNI because GNI is not held exclusively by individuals – a good quarter is corporate.  48% of personal income is 36% of GNI.  Add that figure to the basic 25% tax and we get to 51% of national income, not 85%.  The three figures in the Economist article should not be 35%, 45% and 85%, but 31%, 37% and 51%.

These are very broadly rounded figures, but I don’t think there’s much point in trying to refine them more closely at this stage: the actual cost would depend on the design of the benefit. Costs should be offset against social security reductions (which is one of the key reservations to make about Basic Income schemes) and the abolition of tax allowances.

I’m not an advocate of Basic Income; the apparent simplicity of the scheme is liable to be undermined in practice by the terrifying complexity of people’s daily lives. If we’re looking for a Basic Income to be an element in people’s income packages, however, the problem is not the cost.

Further note, 18th May 2017.  I’ve just been reading Basic Income, by Phillipe van Parijs and Yannick Vanderborght, published 2017 by Harvard University Press.  They do suggest, several times, an indicative level of basic set at 25% of GDP, and that would be indeed be open to the objection that Tobin raises. 

One comment

  1. Neil Moffatt

    Economic/political systems are essentially non-linear and complex. No trivial pre-calculation can therefore have a hope. What is the prediction, for example, of how many would simply stop working? As it happens, where UBI has been trialled, far less than expected. Poverty rises, crime drops, illness drops, and the economy can rise. But you cannot predetermine such matters with any reliable level of accuracy in non-linear systems. To learn more about this topic, “The Systems view of life” book can inform. It is brilliantly written, albeit long and somewhat academic.

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