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)

 Balance required to find other government services (7.979 - 4.898) = £3,081m.

 The projections for Other Government Services are provide in Table 2.8 below for the years 1999, 2000 and 2001. The estimates are arrived at by using a method requested by the Department of Finance, which takes into account the projected growth in revenues and spending. As noted above, this saddles the proposed Basic Income system with a cost which is not part of any Basic Income policy, and which grossly exaggerates the cost of such a policy in that it includes rapidly growing current budget surpluses (2.1 billion in 2001/02), thus is in many ways unfair to include in a study designed to answer questions about “Basic Income” systems. This rapid growth can best be seen in the third column of Table 2.8 which shows the rate of increase of this figure, well above the projected increases in Government spending (4% per year). Had this figure increased only at the rate of inflation (from Pathways in 1997) than the Basic Income System could have been tided with a tax rate of 43.6%. Furthermore, if the Basic Income System were structured so as to achieve a balanced budget, and not the projected £2,132 million Current Budget Surplus, than the Basic Income System could be implemented with a tax rate of 40.2%. Thus we have included an appendix to give a more accurate estimate of the costs and tax rates associated with a Basic Income system (see Appendix A).

Table 2.8

Costs of Funding Other Government Services

2.7 Savings Incurred by the Basic Income Plan

Table 2.9

Savings Incurred by the Basic Income Plan (1998)

 Savings over three years of implementation, adjusted by the projected growth in Government spending of 4% per year:

Table 2.10

Savings Incurred by the Basic Income Plan 1999,2000,2001

2.8 Net Costs of Basic Income Proposal

The net cost is calculated by adding the costs of the basic income payments, with the costs of the social solidarity fund and the balance required to fund other government services, plus the addition of the Administrative Costs, and then subtract the savings incurred by the Basic Income system. The estimates for the three implementation years are given below.

Table 2.11

Net Costs of CORI Basic Income System, 1999; 2000; 2001

(£m)

Chapter 3. FINANCING OF THE BASIC INCOME PLAN

 3.1 Introduction

In estimating the tax rate to finance the proposed Basic Income system, we first have to estimate the tax base for 2001/02. The Revenue Commissioners provided the consultants with base estimates for the years 1998/9 through 2001/02, based on their projections as of the summer of 1998. Since this time most of the other estimates used in this study (such as population, estimates of costs and government spending) have been adjusted to reflect new information, while the tax base projections have remained frozen. There is good reason to believe that had the tax base projections also been adjusted to the latest forecasts from the Revenue Commissioners there would have been more growth in the tax base (as it would have been based on a more up-to-date base year), thus providing for a larger tax base and consequently a lower tax rate. Therefore, the estimates provided here must be considered lower than what should be expected.  Of course, in keeping with the terms of this study, all the analysis is based on static analysis, with no consideration of possible dynamic (behaviour) effects of a move to a Basic Income system It is hoped that these questions will be addressed in Phase Two. 

3.2 Estimating the Tax Base

The following are the tax base figures as provided by the Revenue Commissioners.

Table 3.1

Unadjusted Tax Base (fm), 1998/99 - 2001/2002

Under a basic income system, some items that are currently included in the tax base will need to be excluded and some items which are currently excluded will need to be included, thus the estimates of the tax base provided by the Revenue Commissioners needs to be adjusted. These additions and subtractions were suggested in a Memo, dated September 30, 1998, from the Revenue Commissioners. As some of the items listed include estimates from 1995, 1996 and 1997, these estimates need to be adjusted for the final year of implementation (2001/2002). The following table provides the list provided by the Revenue Commissioner, with their original estimates, plus adjustments for 2001/2002 using two adjustment factors: CPI and growth in the tax base. The most accurate method of adjusting these items is to make adjustments based on each specific items growth relative to growth in the tax base. This method, however, would be very time consuming and costly, and might not be possible anyway. This study adopts the estimates based on growth in the tax base, as this one is most closely linked with the factors under consideration. We have also added back into the tax base the 100 million to be spent on social useful work in the social solidarity fund, as this income would be subject to taxation under the 3 proposed Basic Income system.

Table 3.2

Revenue Commissioner’s Adjustments to Revenue Tax Base for Basic Income, 2001/02

Table 3.3

Adjusted Revenue Commissioner’s Projected Tax Base, 2001

Year                                         Tax Base (£m)

2001                                         29,796 + 428.4 = 30,224

3.3 Social Responsibility Tax

Under the Basic Income Proposal the social responsibility tax replaces PRSI. It is set at 8% of employers’ payroll, which would amount to £1,290m in 1998. This is adjusted for the three year period in line with projected increases in GDP:

Table 3.4

Social Responsibility Tax, 1999-2001

3.4 Calculating the Tax Rate for the Basic Income System in 2001/02

Calculating the necessary tax rate for financing the Basic Income System under consideration here is straightforward. You take the net cost of the system, (which includes the funding of other government services) and subtract the revenue Tom the social responsibility tax. You then calculate what the necessary tax rate that generates sufficient income to pay for the basic income system. 

 In 2001, the net costs are projected to be:                        £15,823.7m
Subtract the Social Responsibility Tax                 minus £1,540.0m
Necessary to finance out of flat tax                      Total     £14,283.7m 

With a tax base of £30,224m in 2001, a flat tax of 47.26% is what is required to fund the Basic Income proposal.

 
3.5 Changes from First Draft

The projected tax rate in this draft is higher than the 45.63% in the first draft due to: increase in population estimate used; inclusion of replacing the Health Levy along with other taxes being replaced; use of the Department of Finance’s method to measure the Other Government Services figure and the elimination from Savings the Agricultural Income Support funding of 208.4 (in 1998). Other changes: addition of income from socially useful work into tax base and use of the ESRI’s method for estimating 1998’s Other Government Services figure have worked in the opposite direction.

 
APPENDIX: Basic Income Proposal with Balanced Budget.

The Basic Income Proposal being here studied is costed to include a projected budget surplus of £2,132 million. This surplus is one reason that the “Other Government” calculated in Table 2.8 has grown considerably since Pathways was published. The following table gives the calculation of the necessary tax rate without the £2,132 million surplus.

Table A.1

Costs, Revenue and Tax Rate for BI Proposal without Budget Surplus, 2001/02.

Chapter 4. Implementing the Basic Income System over a Three Year Period

4.1 Introduction

Following the Gradual Approach used in Pathways to a Basic Income, the Basic Income System is implemented over a three year period, in equal increments of one third, while the existing tax and social welfare that is being replaced is decreased in one third increments each year. Thus in Year 1 we have one third of the Basic Income System and two thirds of the existing system; in Year 2 we have two thirds of the Basic Income System and one third of the existing system and in Year 3 we have full implementation of the Basic Income System Following this approach, as we see in Tables 4.1, 4.2 and 4.3, the Basic Income System can be implemented with a little fiscal impact. It should be noted that given the built in £1.1 - £2.1 billion surplus in each of the implementation years, the existence of a 46.8 million deficit in the first year is economically meaningless (since it provides for a 1.1 billion punt surplus).

 The existing system is adjusted as follows. Tax collection is estimated to grow at the projected rate of GDP. Income Tax, PRSI and Employment and Training and Health Levies were projected for Years 1 and 2. In Year 1 we multiplied the projected value of these taxes by 2/3. In Year 2 we multiplied the projected value of these taxes by l/3. In Year 3 these taxes are eliminated. Social welfare spending that is being replaced by the Basic Income system was also projected for years 1 and 2. In both years it is increased by   the amount set out in Appendix 4 of the “Basic Income Study - Data Required by Consultants” document. Social welfare administration costs are included in the Other Government values. 

The Basic Income System is calculated for Year 1 at l/3 the costs levels given in Chapter 2 above, and for Year 2 at 2/3 the projected levels. Year 3 levels are at the full estimated levels.  

Table 4.1

Year 1: Basic Income System (1/3); Existing System (2/3)

 COSTS
Payment Schedule