Does basic income solve anything? Grasp the arguments for and against

Society and working life are changing at an incredible pace today. Sitra Megatrends 2016 is one publication, among others, that introduces the idea that humankind will change more in the next 30 years than in the past 300. This can already be seen as changes in the nature of work and the disappearance of professions. In the future, many companies will not need a large number of employees to produce large profits. One example is Instagram, which had only 12 employees when it was sold to Facebook in 2012 for USD 1 billion. In comparison, the 20th-century photography giant Kodak employed more than 140,000 people at its peak. This example is indicative of the potential change that digitalisation is capable of bringing about.[i]

Even if the boldest predictions about the impacts of digitalisation on the labour market do not come true, polarisation and uncertainty in the labour market is likely to increase in the future.

Many people feel that basic income is the best long-term option for dealing with change caused by technological development.

Many people feel that basic income is the best long-term option for dealing with change caused by technological development. Basic income is considered a flexible way of guaranteeing a minimum income for people in a situation where demand for everyone’s work is not sufficient, income comes from many sources, and social security’s rigid classification of people as employed or unemployed is no longer appropriate. Other reasons used to justify basic income include the need to simplify the social security system, plug loopholes and dismantle disincentives.

Basic income is defined as an income paid personally to all members of society on a regular basis without conditions or means testing. Further income can be earned without losing basic income. Several models for implementing basic income have been proposed, focusing on how to finance the system and other details. However, the models still require development in order to realise the expectations set for basic income.

Many of the models take increased earnings into account when taxing income. Although the benefit is, as a general rule, the same amount for everyone, steps can be added, for example, based on the recipient’s age or some other criterion. Various means-tested components of social assistance can be retained alongside basic income. In addition to basic income, the term ‘citizen’s wage’ has also been used in Finnish discussions. At times, this has referred to income without a work requirement and at other times, to income that requires some sort of service to society. Terms like citizen’s income, participation income and negative income tax have also made part of the discussion.

Finland’s basic income experiment focuses on facilitating employment

Even during the early stages of industrialisation, social reformists proposed that dividends on the income from common property be distributed on a regular basis or as a lump sum. In particular, land and natural resources were considered to be such common property. Similar ideas have also been proposed today, especially in reaction to increases in the wealth gap that may be caused by digitalisation. Some people believe that income taxes are not the only legitimate way of financing basic income, because all wealth is ultimately the result of collective activities. Thus, financing for basic income should be arranged in another manner, for example, by taxing property or capital and the income from them, or even by some sort of robot tax. However, most basic income models link income taxation and basic income, possibly supplemented by other financing.

Many countries are already planning basic income experiments.

Basic income and the ideas surrounding it have been discussed as a way of reforming social security for several decades. In recent years, this debate has been activating in different parts of Europe and North America and also in some so-called ‘poorer’ countries. Many countries are already planning basic income experiments. Several Dutch cities want to launch their own basic income experiments. Canada too, is also preparing an experiment, while a private capital investment company in the United States plans to implement its own basic income project.

The first basic income experiment in Finland was launched at the beginning of 2017 and will last two years. Its target group are labour market subsidy or basic unemployment allowance recipients between the ages of 25 and 58. Two thousand people from this group have been selected at random for the trial. The tax authority is not involved in the first experiment, so the taxation model for the participants is the same as for other Finns. The tax-exempt basic income in the experiment is EUR 560 per month, and it will replace basic daily allowance of the same amount. Any other social security benefits will remain unchanged. If an unemployed person participating in the experiment finds employment, he or she will not lose the basic income and the sum will not be reduced. In practice, this is the feature that is most beneficial to participants and will potentially improve the incentive to work. The primary aim of the experiment is to determine whether participants are more likely to find employment than other unemployed people. It is part of the government programme of Finland’s current government and separate legislation has been passed for the experiment.

The Finnish basic income discussion: support across party lines, disagreement on the goals

The terms ‘negative income tax’ and ‘citizen’s wage’ were first postulated in the 1970s, but the discussion became more regular during the 1980s. Political discussion also addressed the idea of a basic income system, which would harmonise income transfers and guarantee a statutory minimum income regardless of a person’s life situation. Starting in the mid-1990s, the term ‘basic income’ gradually established itself. Although interest has varied, the idea has never completely disappeared from public discussion. The discussion usually peaked prior to parliamentary elections in years when basic income was part of party platforms (1987, 1994, 1996-1998, 2006-2007). The latest and highest peak in discussion occurred prior to the 2015 elections, a result of the planned implementation of a basic income experiment by the government now in power.

Although this interest has crossed party lines, there are many differences concerning the objective of basic income and the best model for it.

The political parties in Finland have shown varying levels of interest in a citizen’s wage and basic income. Although this interest has crossed party lines, there are many differences concerning the objective of basic income and the best model for it. Along with political parties, many interest groups, experts and opinion formers have taken part in the discussion.

The understanding of the nature of the citizen’s wage and basic income has varied over the years. In the 1980s, a citizen’s wage was seen as a potential solution to the decrease in industrial work caused by technological development. Automation was expected to radically reduce the need for human work. A citizen’s wage was primarily considered as a way to reduce the supply of work to meet the reduced demand and provide a decent income for people without employment. A citizen’s wage was seen as a means of sharing work more equally and shifting some people to various non-profit work in the ‘softer’ sector of society (households, associations or local communities). People often called for a complete redefinition of the concept of work.

Discussion of the citizen’s wage decreased during the recession in the early 1990s and revived again after the worst years of recession had passed. At the same time, the term ‘basic income’ gradually became more common and replaced the citizen’s wage term. Record unemployment levels throughout the latter half of the 1990s ensured that interest in basic income remained high. However, understanding of basic income changed after the recession. This was associated with a more general change in social policy discussion that provided more space for policy actions related to labour supply factors and activation of the unemployed. In contrast to the discussion of the citizen’s wage in the 1980s, basic income was considered a way to encourage people to also accept casual and low-wage work rather than only full employment. People believed that expanding the service sector could compensate for the loss of industrial jobs if employment costs were reduced, collective agreements became more flexible and social security changed and moved in a more encouraging direction. Basic income was seen as a way of dismantling social security disincentives so that working would always increase net income. Basic income would be a fairly low base wage serving as a foundation for building income from several sources.

As employment rates improved in the early 2000s, discussion of basic income decreased. The discussion revived in response to a motion to improve the rights of temporary workers made by the precariat movement in 2006. Activists demanded a basic income that would safeguard a decent income and improve the bargaining position of low-income earners on the labour market. Basic income was widely debated in newspaper columns in 2006-2007, with the Green Party highlighting the basic income theme prior to the parliamentary elections. Attention now focused mainly on changes in work and uncertainty of income. The traditional social security system, with its disincentives and complicated rules, was seen as a poor match for post-industrial labour market needs. Basic income was presented as an investment focusing on work and entrepreneurship, which would make it possible to pursue a new kind of full employment (made up of temporary jobs). The latest debate has revolved around digitalisation and the basic income experiment planned by Juha Sipilä’s government.

Other factors behind the new international basic income discussion include the view that the current phase of robotisation and digitalisation threatens to destroy more jobs than technology development can produce in other areas. The new working life that is now evolving will also require a new kind of social security. Basic income is considered an important part or at least a significant option for this new system.

The arguments related to basic income in a nutshell

The arguments for and against basic income are rarely based on scientific evidence. No results have been measured because basic income has never been properly tested in practice. Various operators also have a different focus regarding what they see as the most important benefits or threats of basic income. A list of the arguments presented by key defenders and opponents of basic income is presented below.

For:

Basic income would

eliminate social security disincentives
simplify and clarify the system
make casual work more profitable
eliminate the problem of falling through the cracks of social security
reduce poverty
support people’s own life choices
enable flexible transition between different life situations
improve the opportunities for low-income earners to negotiate their terms of work
eliminate the humiliating and controlling features of social security
make it possible to adjust working time and work methods according to personal life situation and interests
make it possible to turn down unsatisfactory work
support opportunities for small entrepreneurship and self-employment and for the kind of creative work and activity that does not provide a high level of monetary compensation but which it rewarding as such
reduce exclusion by providing opportunities for meaningful activity also outside the scope of paid employment
free up time that social work professionals and labour authorities spend on paper work for helping customers

Against:

Basic income would

be either too expensive to implement (high basic income) or insufficient to replace means-tested social security (low basic income)
weaken work incentives and provide the opportunity to live off others
also distribute money to those who do not need it
reinforce part-time jobs and weaken collective agreements
require excessively high marginal taxes and thus weaken work incentives
polarise society into those who can live off work and those who are not able to do so
leave people who need help to manage on their own and promote the exclusion of young people
not take individual needs into account if a flat sum was paid to everyone
weaken the position of women on the labour market, because women would be more likely than men to stay home and care for children when on basic income

A flat general income has also been considered a more equal way of providing social security to people in different life situations.

The aim of basic income is to influence labour market activities and social policy principles and practices. Although different operators want to achieve different things with basic income, common targets include clarifying support system bureaucracy, eliminating the “disincentives” associated with combining social security and work, preventing people from falling through the cracks of social security, reducing poverty, and enabling flexible transition between different life situations. Automatically granting the same minimum income security to everyone has been considered a way to reduce the red tape associated with granting benefits and facilitate the employment of benefit recipients because all income would no longer have to be reported to the authorities. In addition, basic income has been seen as a way to provide income security for those who, despite a low income, are not entitled to benefits for one reason or another, or who have been unable or unwilling to apply for benefits to which they are entitled. A flat general income has also been considered a more equal way of providing social security to people in different life situations and enabling flexible transition between different forms of work, studies and family life.

Opponents of basic income have generally focused on the presumed high cost of the system and its negative effects on work morale. Opponents argue that basic social security paid unconditionally would provide the right to a free ride and weaken the position of work as the foundation of our society. Opponents and defenders can be found in political circles on both the right and the left. The right has primarily been concerned about the costs of the system and its incentive effects. The left (especially in the union movement) has been worried that basic income would cause an increase in low-income work and polarise the labour market.

Different basic income models

The idea of basic income is to deliver a periodic cash payment to everyone in the system on an individual basis. According to the definition, there are no conditions or work requirement involved with receiving basic income. The purpose is not to increase the net income of middle- or high-income earners, so basic income models nearly always involve a tax system reform in which the added income provided by basic income is recovered from high-income earners via taxation.

The purpose of basic income is generally considered to be the replacement of different forms of means-tested minimum social security. The starting point for Finnish discussion has usually involved separating the housing allowance from basic income, but in theory it could also be covered by basic income if the basic income was high enough. However, this would present a challenge in terms of financing. Another challenge would be how to take regional differences into account. For example, if the basic income paid in a small community was based on housing costs in Helsinki, this could mean an unreasonably high income without a work requirement. On the other hand, basic income based on housing costs in small communities would be inadequate in the Helsinki capital region. Housing costs also differ depending on whether a person owns or rents their home. Regional differences in housing costs could be taken into account by, for example, making basic income proportional to the average rent per square meter in the community. Differences in the type of housing could be balanced by taxation.

One possible method of implementing basic income is a negative income tax model. This model involves only paying basic income to those who fall below a certain income level so that the amount of the payment gradually decreases as the person’s income rises.

Basic income models are very different.

Basic income models are very different. For example, they can be classified according to the model’s:

relationship to other social security (target group, level, supplementary benefits).
financing method (income tax reform or other sources of financing)
targets (related to labour markets, social policy and society in general)
effects (to the extent that they can be assessed).

Basic income and other social security

Depending on the model, basic income is a rather extensive reform of the tax and social security system that has to be combined with existing institutions in one way or another. Basic income is generally seen as a system that would replace means-tested minimum social security benefits and put them on the same level. The higher the basic income, the greater the number of subsidy forms it could replace. However, proposals generally suggest that some means-tested benefits could be retained alongside basic income, at least for such special groups who, for one reason or another, cannot be expected to participate in the labour market.

Basic income models vary according to which groups would be included in the scope of the system. In some models, basic income would only be paid to people of working age. Other models would also include minors and/or pensioners, and in this case basic income could have different levels for different age groups. Some models propose that basic income only be paid to citizens while others would grant it to non-citizens with permanent resident status, for example, after they had lived in the country for a certain period of time. There are also models where a benefit called basic income would only target a certain population group, such as those entitled to social security, people who receive unemployment benefits or have irregular income, or where the right to basic income would have a time limit. Other proposals include models that resemble basic income but are based on a work requirement and/or means testing.

The level of the benefit also varies considerably between different models. Full basic income means that the level of the benefit is sufficient to cover the essential costs of housing and living. Partial basic income means that other social security is needed to supplement basic income if a person’s earnings are not sufficient. Other differences between models include whether basic income would be subject to taxation or whether it would be a tax-exempt benefit. The idea of basic income as a more limited system functioning as part of existing social security has also been proposed.

How would basic income be financed?

In theory, there are many different alternatives for financing basic income. Many of the models would reform income taxation so that the added income provided by basic income would gradually be collected back as a person’s earnings increased. The idea is that basic income would not significantly change the net income of an average wage-earner. Adjustment of tax rates and the amount of basic income can affect income distribution: the basic income model can be implemented in a way that maintains the current income distribution or in a way that changes it in one direction or another. Money will circulate in the economy in a different way when everyone receives basic income and also pays a higher income tax. Income taxation can be supplemented with other direct or indirect taxes as needed.

A switch to a flat tax rate for income taxation is often proposed in conjunction with basic income. However, this is by no means essential, because progressive taxation can also be used with basic income.

The basic income models proposed in Finland have generally been criticised for the high marginal tax rates they require, which are seen as disincentives. Financing based on income taxation can be supplemented by other taxes in order to reduce the marginal tax rate in basic income models. The basic income models presented in Finland have, for example, proposed environmental taxes, inheritance and wealth taxes, the elimination of tax deductions, and an increase in property and capital income taxation as ways to supplement financing by means of income taxes. Use of consumption taxes to finance basic income has also been suggested in some connections.

One possibility for implementing basic income is the so-called negative income tax model. Negative income tax is a combination of taxation and automatic income support in which an income transfer is paid when a person’s earnings remain below a certain level. This is gradually reduced as earnings increase. Although basic income and negative income tax have a somewhat different history and support base, they can technically produce nearly the same result. The advantage of negative income tax is that it could help achieve the presumed impacts of basic income at a lower marginal tax rate. However, implementation of this model would require real-time monitoring of earnings. The national income register that is planned to be launched in early 2019 would make this possible in Finland.

How would basic income affect us?

Micro-simulation analyses can be used to assess the impacts of basic income models on households and the entire population. These analyses generally indicate that basic income would increase net earnings for low-income earners who have some earnings in addition to social security. However, the effects would vary in different cases due to the joint impact of benefits.

Basic income would most clearly increase net income for social security recipients whose current benefit level is lower than the basic income and for those with no income or a low income who don’t receive any social security benefits. Basic income, for example, would substantially improve the income of entrepreneurs with the lowest earnings, because currently, they are not eligible for an adjusted unemployment allowance. Efforts are often being made to build basic income models so that the net earnings of middle-income earners would not change at all.

The relationship between basic income and the EUR 300 of exempt earnings currently used in Finland should also be examined. If the exempt earnings component is not included in the basic income model, people doing casual work may actually end up with less net earnings. Child and activation increases for labour market subsidy and basic unemployment allowance may also be a disincentive if they remain in force.

The most interesting effects of basic income would, naturally, be so-called dynamic effects, in other words, those affecting human and company behaviour.

The most interesting effects of basic income would, naturally, be so-called dynamic effects, in other words, those affecting human and company behaviour. An experiment is the only way to bring about these effects to some extent. For example, there have been fears that a higher marginal tax rate would weaken work incentives for middle- and high-income earners.

Conversely, it has been suggested that basic income would encourage people to try entrepreneurship because it would guarantee a minimum income even when the company is struggling. Economists have shown that the proposed basic income models would still contain some disincentives unless other social security elements were reformed at the same time. However, the mere knowledge of a steady income could psychologically increase the willingness to accept casual work. One of the problems in terms of today’s social security is the so-called bureaucratic disincentive. This refers to the extra paperwork that casual workers must complete in order to report working hours, work locations and the pay received for that work to the authorities and the delays in payment caused by the need to check that information. The complicated system also makes it difficult for recipients of overlapping subsidies to understand how work affects different benefits. Uncertainty about the effect that work income has on benefits may already be enough to create a disincentive.

In order to achieve the desired positive effects, more attention must be focused on the joint impacts of basic income, other social security components, and taxation. The current basic income model still has many shortcomings, particularly in relation to work incentives. One solution is to lower taxation on low incomes or implement a tax deduction for work income that only applies to low-income earners. The fact that the low level of primary benefits forces many low-income earners to regularly seek basic social assistance represents another disincentive. If we want to restore basic social assistance to its original role as temporary emergency assistance and simultaneously prevent it from causing disincentives, basic income must be higher than the existing minimum unemployment allowance.

A reform of the housing allowance would also be needed in conjunction with the basic income model, by allowing, for example, a certain amount of exempt earnings for low income earners. The possible benefits of the basic income model would probably be most effectively achieved if basic income could be set high enough to also replace the housing allowance and in some way take regional and other differences into account in the costs. However, in this case, the high cost of financing basic income would be a challenge.

This article is based on Johanna Perkiö’s report Suomalainen perustulokeskustelu ja mallit (Public debate and proposed models for a universal basic income system in Finland)^[ii].

[i] Kiiski Kataja, Elina (2016): Megatrends 2016: The future happens now. Sitra. https://staging.sitra.fi/julkaisut/Muut/Megatrendit_2016.pdf

^[ii] Perkiö, Johanna (2016): Suomalainen perustulokeskustelu ja mallit. Työpapereita 85/2016. Kela. http://hdl.handle.net/10138/159369