Report for Working Group on Basic Income

 Prepared by

Professor Charles M. A. Clark

St. John’s University

Jamaica New York 11439

USA

February 12, 1999.

 
Chapter 1. Introduction

1.1 Objectives

The objectives of Phase 1 is to “consider and evaluate the economic, budgetary and distributional impact of the introduction of a basic income in Ireland.” The reason for having two consultants investigate the questions included in Phase 1 is that two previous studies looked at these issues and reached very different results. In Analysis of Basic Income Schemes for Ireland and in Integrating Tax and Social Welfare, the ESRI produced estimates of the necessary tax rates needed to fund a basic income system in Ireland of up to 68% or more. Pathways to a Basic Income (Clark and Healy, 1997), using the Revenue Commissioners estimates of the tax base showed that the CORI Basic Income Plan could be financed with a 48% flat tax. Both groups reached different distributional impacts as well. Thus the intention of the Working Group was to discover the source of these disagreements. Much of the difference can be explained by the fact that the proposal that the ESRI looked at was significantly different from the one proposed by CORI and analyzed in Pathways. Some of the difference, however, could possibly be due to the different methods used to estimate costs, necessary tax levels and distributional impacts. Hence the desire of the Working Group to have both groups of researchers look at the same proposal, using the two methodologies.

 For Phase One to be successful both sets of researchers were to look at the same Basic Income proposal, which was designed by the Working Group on Basic Income, and was laid out in the terms of reference. Also, the consultants needed to use the same assumptions and basic data. To insure that our data was not biased, we have relied on, where available, official government statistics and projections. It is only by using official estimates that the two sets of researchers can study the same proposal, under the same assumptions, and thus have their differences reflect differing methodologies.

 This report includes: the projected costs of the proposed Basic Income System over the three year implementation period; estimations of the levels of tax necessary to financing the Basic Income System; estimates of the costs and revenues for each of the three years of implementation; estimates of the distributional impact of the proposed Basic Income System, using a Household Budget Survey based model; comparison of the proposed Basic Income system with three government options; estimates of the impact on Poverty; Gender implications of the proposed Basic Income system; and a decomposition of the structural and benefits effects of the CORI Basic Income proposal; as well as some suggestions for future research. 

1.2 Basic Income Proposal Studied Here Compared with CORI BI Proposal

It needs to be pointed out at the start that the Basic Income proposal under consideration here is not the CORI Basic Income Proposal, but instead is a proposal designed by the Working Group on Basic Income for the purposes of this study. Specifically, the Basic Income proposal studied here has had its basic income payment levels harmonized (harmonization being provided by the ESRI) with projected social welfare rates. The purpose of this is to separate the structural elects of a Basic Income system from the benefit effects. The CORI Basic Income Proposal contains higher benefit levels and lower tax rates, thus its distributional effects, as well as its impact on poverty, will be different from the proposal studied here. These differences are discussed in Chapter 8.

 1.3 Report Highlights

Some of the highlights of this report are:

•     The necessary level of the flat tax to finance the Working Group designed Basic Income System is 47.26%.

•      The Working Group Basic Income System could be financed with a tax rate of 40.21% if the proposal adopted a balanced current budget instead of an over £2 billion current budget surplus.

•      Increases in average household disposable income under the Basic Income System are very progressive, with the largest percentage increases going to those in low income groups, and the smaller percentage increases going to the top income households.

•         The Basic Income System brings each average household income decile above the poverty threshold.

•       Following current trends and policy will not bring all average households above the poverty threshold.

•       The static benefits of the CORI Basic Income proposal (which prompted this research project) come mostly from the structural effects for the low income (bottom 50%) and not from the higher benefit levels (benefit effects).

Chapter 2. COST OF BASIC INCOME SYSTEM

 2.1 Introduction

In estimating the costs of implementing the Basic Income system under consideration in this study it is necessary to first estimate the costs of full implementation for each of the three years of the study, although full implementation is only achieved in the third year of implementation, 2001/2002. We do this by first estimating the payment levels and projected population for the three years. Then we estimate the costs of the Social Solidarity Fund, the balance required to fund other government services and the expected savings to be generated by the proposal. This allows us to calculate the net costs of the proposal, the necessary first step in determining the required tax rate.

 The cost of the Basic Income system at 1998 payment rates is as follows:

 Table 2.1

Payment Schedule, 1998

The Total cost of Basic Income Payments in 1998: £10,772,374

 2.2 Payment Adjustments:

Payment adjustments are provided by Tim Callan of the ESRI based on the commitments in Partnership 2000, and in line with a harmonization between Social Welfare rates and basic income payments. The actual CORI proposal has different payment rates. Harmonization of Social Welfare rates and BI payments is undertaken in order to illustrate the “structural” benefits of a basic income system, as distinct from the advantages of the higher benefit payment contained in the CORI proposal This exercise only partially captures these effects, for the real suggested benefits of a basic income system as a “structural” change relate to dynamic effects and behavioural responses (such as in the elimination of unemployment and poverty traps), all of which are excluded from Phase One of this research project and hopefully will be adequately dealt  with in Phase Two.  

Table 2.2

Basic Income Payments Over Three Years of Implementation

2.3 Population Adjustments

Over the implementation period, the population of Ireland is expected to grow. We have adjusted the population for the three implementation years, using the population forecasts contained in the ESRI’s Medium-Term Review: 1997-2003, p. 22. Assuming a smooth transition to the 2001 forecast, we obtain the following population estimates.

Table 2.3

Population by Age 2001

(Thousands)

 2.4 Cost of Basic Income Payments Over the Three Years:

The costs of the Basic Income payments over the three years (at full implementation) is arrived at by adjusting for population projections in Table 2.3 and for rises in the basic income payment (Table 2.2). 

Table 2.4

Costs of Basic Income Payments at Full Implementation for 1999,2000,2001

2.5 Cost of Social Solidarity Fund

The Social Solidarity Fund is designed to compensate any low income households that might be adversely affected by the implementation of the Basic Income system. As one of the primary goals of a basic income system is to help those in low income, it is an explicit goal not to lower, the disposable income of any low income households. The implementation of the Social Solidarity Fund is beyond the scope of Phase One of the research on Basic Income. Before such a method of implementation can be designed, it is first necessary to determine which low income households could be adversely affected by the proposed policy. This is part of Phase One, specifically that part of Phase One carried out by the ESRI. What is important for this study is to show that the Social Solidarity Fund, as designated in the proposal has sufficient funds to compensate possible low income losers. Here we are only considering the static effects of the Basic Income proposal The dynamic effects (as they relate to those in poverty) are addressed later in the report and in Phase Two.

 The cost of the Social Solidarity Fund in 1998 is estimated at £344.8 m. This is itemized in the following table.

Table 2.5
Cost of Social Solidarity Fund, 1998

The cost of the Social Solidarity Fund over the three years, adjusted for rises in the CPI, is estimated as:

Table 2.6

Cost of Social Solidarity Fund, 1999, 2000,200l

 2.6 Balance Required to Fund Other Government Services

Based on the 1998 post budget estimates, a Basic Income system would have to fund f 3,081 million over the costs of the Basic Income system in order to contribute the same mount to the funding of other government services that the current taxes that are being replaced by the Basic Income system are contributing (Income Tax, Employment and Training and Health Levies and PRSI Receipts). This figure is arrived at by subtracting the costs of the expenditures the basic income system is replacing from the estimated revenues of these three taxes. 

Table 2.7

1998 (Post Budget numbers)