Income Standards: A Challenge for Citizen's Income

Anne G. Miller ( borrowed from Citizen's Income U.K.)

Abstract

The objective in this paper is to design a Citizen's Income (CI) scheme where the primary purpose is to prevent poverty, based on the benchmarks provided by the Minimum Income Standards. It is expected to result in a large measure of redistribution.

It also provides a novel 'Quick Calculator Table' for estimating a ball-park figure for the personal income tax rate that would be required to finance a given CI scheme, if it were financed from a hypothecated personal income tax system, in which all personal incomes from all sources were taxed at the same tax rate, and there were no personal allowances, tax reliefs, exemptions, or other tax expenditures.

The Family Budget Unit and Minimum Income Standards

The Family Budget Unit at York University was set up in 1987. One of its founders, trustee, director, and inspiration, was our own late Mimi Parker, (one of the founders in 1984 of the Basic Income Research Group, inspiration, and editor of the BIRG Bulletin, later re-titled the Citizen's Income Bulletin, until 1998). The FBU calculated budgets for different household groups according to Modest But Adequate (MBA), and Low Cost but Acceptable (LCA), standards, (www.york.ac.uk/res/fbu). Researchers and others could compare their ideas or experience with these benchmarks.

In 2006, the FBU and the Centre for Research in Social Policy at Loughborough University combined resources to produce a set of Minimum Income Standards (MIS), funded by the Joseph Rowntree Foundation, (www.minimumincomestandard.org). Its final report was launched in July 2008. It is based on 39 focus groups, involving more than 200 people, in combination with input from experts in heating and nutrition. Thus, it combined the two approaches previously used separately by the two institutions.

In addition, the organisation publishes the budget details for MISs, comparable to the FBU's LCA standard, in spreadsheet format, (www.minimumincomestandard.org/ready_reckoner.htm), for 13 household types. The challenge here is to design a CI scheme that prevents poverty as defined by the benchmarks of the MIS.

Define a CI scheme:

a) The tax and benefit unit is the individual. This leads to financial autonomy.

b) Eligibility is based on citizenship.

c) The CI is administered as a regular payment to the individual, rather than as a Negative Income Tax (NIT), where an income is paid net of any lesser tax liability, or as a Tax Credit (TC), where the CI acts as a credit deducted from a greater tax liability.

d) In CI schemes, selectivity or contingency is minimal, and definitely not based on personal circumstances that could vary frequently. Thus, the level of CI may vary according to age, but definitely not according to gender, sexual preferences, race, religion, legal status of partners, or other domestic living arrangements, nor to any past or present work performance nor any willingness-to-work tests. It is assumed that costs that arise on account of a disability (for care, mobility, special diets, equipment, heating or laundry, etc) will be paid in addition to any CI benefit.

A Full Citizen's Income, FCI, is one that is expected to cover the minimum expenditure necessary for an individual to meet his/her needs, including that of participating in society. An example of a Full Citizen's Income to meet the Minimum Income Standards of all is given in the Summary Table (Table 3) below, leading to a flat rate tax of 0.57, but is not discussed in detail here.

A Partial Citizen's Income, PCI, would not be sufficient for an individual to cover the minimum expenditure necessary to meet his/her needs, on the assumption that the shortfall can be made up from other sources, particularly earnings. (A PCI may go some way to satisfy those who would prefer a participation income scheme, because the PCI provides the incentive to top up one's CI from earnings. It could produce the same effect as a participation income, but without the control and coercion that seems to be an integral part of participation income schemes.) Even on a flat tax rate of between 0.40 and 0.50, many a recipient would face a lower income tax rate than the current high effective marginal tax rates in the UK caused by the combined income tax rate and benefit withdrawal or taperrate.

Vulnerable Adults

There are some adults, whom, for reasons of old age or disability, a humane society should not require to have to top up a Partial CI with earnings, (although they would be at liberty to earn extra, if they wished). Thus people of age 65 and over, and people with disabilities would receive a Full Citizen's Income.

However, (young) children need (constant) care, and the question arises of how to design a CI scheme that would recognise both the needs of children and of the adults who are responsible for their care. Four different approaches are considered briefly here.

1. The same PCI could be given to adults and children alike, so that it meets the MIS benchmarks.
2. Children aged 0-15 inclusive would receive a Child CI (CCI), and a Parent-with-Care (PwC), usually the mother, would not be expected to have to top up her CI to meet her MIS, (although she would be entitled to earn extra if she wished). She would receive a FCI, in recognition of her time, physical and emotional efforts, and constraints on her life due to child-rearing responsibilities. A Lone Parent (LP) and the PwC in a two-adult household would receive the same amount, and it would have to be sufficient to meet the greater MIS of the LP. This would remove the odious and intrusive cohabitation rule, and a PwC would not have to inform the authorities every time her status as a LP or cohabitée changed. This arrangement would infringe the idea of a 'pure CI scheme', because this FCI is contingent on an activity status, or unpaid work status. However, it is also a matter of justice, that a PwC should receive more than a working-age adult without care responsibilities.
3. Each child would have a care package associated with him/her, dependent on age (ie date of birth).
4. One could adopt the Scandinavian model, where the majority of children attend state-funded nurseries, staffed by highly trained nursery nurses, who are more knowledgeable in child development than the average parent, and this leaves both parents free to join the labour market.

Each of the four options is considered here.

A fourth category of vulnerable adults is that of carers. This is contentious between organisations working on behalf of people with disabilities, and organisations for carers. Even if a package covering constant care is organised for, and administered by, the person with the disabilities, s/he might decide not to pay a member of his/her household to care for him/her, but the carer of last resort is likely to be a member of the household, who would de facto have to take on the responsibilities when paid carers are sick or on holiday. It is assumed here that a member of the household would be designated as carer, and receive a Full CI in return for accepting 'carer-of-last-resort' status.

Citizen's Income should be related to the prosperity of the country

In tables 2 and 3 below, each level of CI is expressed as a proportion of GDP per capita, (The Blue Book 2008, Tables 1.2 and 1.5). If CI levels are expressed in this way for all countries, it facilitates a comparison of the generosity of each country's proposed or actual scheme, although it ignores access to public services such as education and health. However, in order to translate this into a personal income tax rate, it is necessary to relate GDP to 'The Total Resources of Households and Non-Profit Institutions Serving Households, NPISH', (The Blue Book 2008, Table 6.1.3). This is the potential TAX-BASE, when there are no personal tax allowances, tax reliefs, exemptions or other tax expenditures. (This reclaims the tax base, and allows a lower income tax rate to be levied than otherwise.) TAX-BASE divided by the population gives the average personal income for the UK, which is referred to here as Y-BAR, and this is used to calculate the personal income tax rate necessary to finance the given CI scheme, (see Miller 2006, for the argument underlying this approach). It is assumed that the same proportions of GDP per capita for FCI, PCI and CCI would be applied each year of a government's administration, using the most recently available figures for GDP, population, TAXBASE and Y-BAR. Adopting the same proportions each year should have the added advantage of providing a stabilising effect on the UK's economic cycles. The Blue Book 2008 gives GDP and GDP per capita figures for 2007, on which CIs for 2009-10 could be based.

It is assumed here that the CI scheme is funded by a hypothecated personal income taxation system, (where employees' National Insurance contributions are subsumed into the income tax system), partly because benefits and personal taxation are reverse sides of the same coin. A hypothecated system also helps one to consider what is feasible in terms of the cost, as it measures the direct impact on the population, and again facilitates international comparisons. Of course, other methods of financing a CI scheme can also be explored. Most of government expenditure (as opposed to transfers) has been of the same order of magnitude as the tax revenue from other types of taxes in the UK (see Miller, 2006).

A flat tax (or proportional tax) is assumed here, mainly for convenience, because it is easier to calculate the tax revenue yielded than that from a progressive scheme, where one would need far more information about the distribution of the gross income. It would not preclude higher rates of income tax being imposed at higher income levels, when the time came for implementation. Obviously a progressive system would be more just, and in Scandinavian countries, tax rates of around 0.65 are not unknown. But, even a flat tax coupled with a CI scheme can be a very effective method of reducing income inequality. A flat-rate tax is often proposed for political expediency, because it is thought that it might be easier to sell to those who would otherwise be hit by a progressive scheme. A standard flat rate of income tax will be calculated, which would be levied on personal income from all sources, which will be that required to finance the CI scheme.

A Citizen's Income scheme taking account of Minimum Income Standards

Table 1 gives the MIS including rent, but excluding childcare expenditure, for 13 different household configurations in column 1. The proportion of Y-BAR that this represents is given in column 2.

Now, a CI scheme must be created where the vulnerable adults receive a FCI, while an able-bodied, working-age (16-64 inclusive) adult without the responsibility for the day-to-day care of adults or dependent children receives a PCI, on the assumption that s/he is likely to be able to earn enough extra income, after paying the personal income tax, to reach his/her MIS.

In the scheme devised here,

FCI is determined by the MIS of a female aged 65 & over.

CCI = (MIS of the Lone Parent with 3 children - FBI) divided by three

PCI = MIS of the 2-adult household with three children - FBI - 3 x CCI.

These latter two cases relate to the households where the expenditure is most constraining.

Unusually, CCI equals PCI in this scheme.

The results for each household group are given in columns 3, 4 and 5 of Table 1. While making sure that the most vulnerable are protected from poverty, others may receive more than the minimum necessary for their MIS. This is especially obvious in the cases of the pensioner couple, and the 2-adult household with 4 children, both of which are shown in italics.

TABLE 1. MINIMUM INCOME STANDARDS AND CITIZEN'S INCOME LEVELS FOR DIFFERENT HOUSEHOLD TYPES

Bold shows those households purely on PBI, which does not meet MIS.

Italic shows households that gain disproportionately from the CI scheme.

** Source: 'Benefit and Pension Rates', April 2009, BRA5DWP, from www.dwp.gov.uk. These give Pensioner Credit levels, income-based Job Seeker's Allowance for those aged 25 and over, adding £56.11 for each dependent child, and a family or Lone Parent premium of £17.30 pw, where relevant. It is assumed that all Means Tested Benefits lead to HB entitlement.

TABLE 2. PERSONAL INCOME TAX RATE QUICK CALCULATOR TABLE

SUMMARY OF THE INFORMATION REQUIRED TO ESTIMATE THE PERSONAL INCOME TAX RATE WHICH COULD FINANCE A CITIZEN'S INCOME SCHEME, SHOWING THE EXTRA COSTS OF FULL CITIZEN'S INCOMES FOR SOME.

Note: Most of the data have been updated to 2007 (the most recently available figures) from the following sources:

* Mid-year population estimates for 2007 were obtained from: www.statistics.gov.uk/statbase/Product.asp?vlnk=15106.

** 'Total Resources of Households and Non-Profit Institutions Serving Households', 2007, (QWMF), = £1 078 911 m (Blue Book 2008, Table 6.1.3).

Thus, average gross income (Y-BAR) = £17 695 pa; multiplying by 7/365 = £339.35 pw,

***GDP (output method) at market prices, 2007, (YBHA) = £1 401 042 m (Blue Book 2008, Table 1.2)

GDP per capita, 2007, (IHXT) = £22 977 pa; multiplying by 7/365 = £440.65 pw (Table 1.5)

Disability benefits, 2007, (EKY6) = £10,486 m, would add about 0.01 to the tax rate (Blue Book 2008, Table 5.2.4S).

The cost of the above CI scheme has been estimated using the novel 'Miller Personal Income Tax Rate Quick Calculator Table', in Table 2. This table summarises in a compact way the information necessary to calculate a ball-park figure for the income tax rate that would be required to finance a simple Citizen's Income scheme, such as the example above, if it were to be financed solely from a flat-rate personal income tax (assuming that National Insurance contributions will be subsumed into the income tax system), on taxable income from all sources, with no personal allowances, tax reliefs or exemptions, except the CI. Information relating to 2007, available in 2008, could be used to determine CI levels for the tax year 2009-10. The quick calculator table works well as a spreadsheet, for working out the costs of changes to a scheme.

The Blue Book is the United Kingdom National Accounts, published annually by the Office of National Statistics. The four-letter reference codes are used by the ONS.

The system above would require a personal income tax rate of 0.42, which is not out of the bounds of feasibility. In the tax year 2009-10 under the current personal income tax system, a person with an income greater than £43,875 (with a personal allowance of £6,475 + tax threshold for higher income tax rate of 0.40 at income level of £37,400) will already pay a combined tax rate of 0.40 income tax and 0.01 National Insurance contributions. At a gross income of £43.875, his/her net income will be £32,198:

£6,475 + (1.00 - 0.20 inc tax - 0.11 NI) x £37,400 - 0.11 NI x (£6,475 - £5,720)

= £6,475 + £25,806 - £83

= £32,198.

(There is an anomaly in that the employee's NI contribution rate of 0.11 starts at £110 pw, or £5,720 pa, which is less than the personal allowance of £6,475 at which the standard rate of income tax applies).

Able-bodied, working-age adults without day-to-day caring responsibilities

In 2009-10, for someone receiving a PCI together with a gross income of £43,875, his/her net income would be £30,048, (ie. £4,600.56 + (1 - 0.42) x £43,875). For most of the range of gross income up to about £25,000, an able-bodied, working-age adult would be better off with the PCI than under the current tax system. For most of the range of gross income up to about £14,000, s/he would face a lower effective marginal tax rate of 0.42, instead of the high combined income tax rate and benefit withdrawal rates, which, for Working Tax Credit, for instance, is usually at least 0.70, and thus s/he would have a greater incentive to earn more and to increase his/her income. Most of the 0.4325 of the population receiving FCIs will almost certainly be better off than under the current tax system.

Many of those receiving only a PCI, who live in areas where there are few opportunities even for part-time work, would face a problem. Maybe this could be addressed in the short-run, by offering a Housing Benefit scheme, to top up their incomes. It would be part of the safety net necessary for those who do not qualify for a CI, or who are deemed to be in poverty in spite of it. If the CI scheme has the effect of redistributing to, and thus regenerating, run down areas in the medium term, as hoped, work opportunities would be increased. The shortfall in the MIS for those living alone with PCIs is (£210.65 - £88.23) pw = £122.42 pw. Even where there is work, unskilled people on a minimum wage rate of about £6 per hour, and a tax rate of 0.42, would take 35 hours per week to earn this. The granting of a Housing Benefit (of £52.30 as stated in the MIS schedule) would reduce it to 20 hours per week. Sharing housing would also help to reduce the short fall. A student living on his/her own would be in the same situation, but many are likely to be living in their parental homes, or sharing with other students. The maximum student loan for maintenance for the 2009-10 academic year, for a student from England or Wales living away from home (except for those in London), will be £4,950. This is 0.28 of Y-BAR, compared with 0.26 from the PCI.

An alternative rate for the PCI might be considered, if it were thought that the PCI should not be less than that which an unemployed, single, working-age adult receives already in the form of state benefits, ie Job Seeker's Allowance in 2009-10 of £64.30 pw plus Housing Benefit, assumed here to be £52.30 pw. (PCI = £116.60 pw or £6,079.86 pa). This represents 0.3436 of Y-BAR. If the PCI were increased to 0.345, (£117.00 pw or £6,100.71 pa), it would increase the required income tax rate by 0.032, (see the Table 3 below), that is, the relevant income tax rate would increase to approximately 0.452. Note that two-adult households with children would gain disproportionately from such a move.

A second option would be to allow an earnings-disregard of £122.17 pw (£6,370 pa, or 0.36 of Y-BAR) for those receiving a PCI (or even a CCI), such that each pays zero tax on their gross income (excluding the CI), until the net income (including the CI) reaches the MIS rate of 0.62 Y-BAR, ie. £210.40 pw (£10,971 pa). (A PCI with an earnings disregard is beginning to look even more like a participation income than does a PCI without one, again without the control or coercion). A ballpark figure for the maximum loss of tax revenue from adult earnings only, (by assuming that all adults would earn at least £6,370), can be gained from (0.3788 x 0.36 x 0.42) = 0.05727. It can be shown by using a more accurate method that the earnings disregard could add an extra 0.06 to the flat-rate tax, (for the method, see Miller, 2008). An earnings disregard has other disadvantages in addition to the loss of revenue. These include the complications of administering the tax system, (such as, is it a weekly disregard or an annual one?), and the fact that employers operating PAYE schemes would be able to distinguish between a vulnerable adult who pays tax and the others who do not. But these are typical of any progressive scheme.

Single people with disabilities

Even assuming that the MIS estimates for a working-age individual with disabilities living alone would be the same as those for an able-bodied, working-age adult at £210.65 pw, (0.62 of Y-BAR), the FCI that the former would receive, at 0.56 of Y-BAR, is less than his/her MIS. Even sharing with an able-bodied, working-age adult who is not a designated carer and receives 0.26 of Y-BAR, would not be sufficient together to reach the MIS (0.91 of Y-BAR) for a two-adult household. However, many working-age adults with disabilities, will live in a household with a designated carer, and each will receive 0.56 of Y-BAR, which together is greater than the MIS for a two-adult household. So, the question is that of 'How to address the MIS of the individual with disabilities living on his/her own?' One answer would be to increase the FCI for all those with disabilities to 0.62, which would add 0.0054 to the standard income tax rate, (ie. 0.0902 x 0.06). Another solution would be to expect it to be covered in the costs-of-disability package that would have to be worked out for each individual. This would cost less because it would only affect those living on their own, without a designated carer.

Support for families with children

Let us return to the alternative ways of supporting families with children

1. If all children and all adults under the age of 65 (excluding those with disabilities, and carers of last resort) received the same PCI, it would have to be of the order of 0.40 of Y-BAR in order to meet MIS for families with children, and will cost (0.679 x 0.40) + (0.321 x 0.56) = 0.2716 + 0.1798 = 0.4514, before adding on the disability payments, safety net and administrative costs, yielding an income tax rate of about 0.48. So, this approach is more expensive than the one estimated above.
2. The scheme estimated in Table 2 above is an example of the second option, where PwCs receive FCIs.
3. However, so far, I have not addressed the child-care costs. The child-care costs cited by MIS were £135.05 pw, (£7042 pa, or 0.3980 of Y-BAR) for babies, toddlers and pre-school children needing constant care, while for primary school children it is £51.93 pw, (£2707.78 pa, or 0.1530 of Y-BAR). There are 3,592,600 babies, toddlers and pre-school children aged 0 - 4 inclusive, representing 0.0589 of the total UK population. There are 4,157,600 children, aged 5 - 10, representing 0.0682 of the total population. It is feasible to imagine a system where each child has associated with it a cost-of-child-care payment, determined purely by his/her age (i.e., date of birth). If these were financed out of the income tax system, the cost of child-care would add another 0.034 to the standard tax rate, bringing it up to 0.454.

   (0.0589 x 0.3980) + (0.0682 x 0.1530) = 0.023442 + 0.010435 = 0.034.

   However, perhaps it could be financed out of another type of taxation?

4. If the Scandinavian system were adopted, the majority of children would be sent to state-funded nursery schools, where they are nurtured and taught by highly trained nursery staff, who understand far more about child development than most parents. This releases both parents to be part of the labour market. This is not an approach that is likely to be adopted overnight, but it would have the effect of unpaid care being shifted into the paid care system and being included in GDP, and therefore would become more highly valued in our society. This would definitely have to be financed as part of government expenditure out of other types of taxation, and not the hypothecated personal income tax system.

The cost of housing

One of the problems facing any income maintenance scheme is that of the high housing costs in many parts of the UK. A CI scheme is not a panacea for all ills, and should not be expected to cure the problems in the housing market, which are due to different causes. For instance, these problems could be addressed directly by regulating the housing market more tightly, by controlling the amount of mortgages lent as a proportion of valuation, and limiting mortgages to only two-and-a-half (or three) times a borrower's income. Further, if Capital Gains Tax were payable when a home-owner downsized the value of his/her main home, and other similar measures were adopted, then perhaps, housing bubbles could be averted, and houses could become merely homes again, rather than speculative investments. These measures could protect new low-cost housing from being bought by wealthy people as investments. An advantage of the CI scheme is that it provides an incentive to share accommodation and reduce the pressure on housing, whereas the present system has the reverse affect, pushing people apart.

TABLE 3. SUMMARY OF TAX RATES: STANDARD RATE AND OPTIONAL EXTRAS

Conclusion

The CI scheme put forward meets the MIS of most of the population. There are concerns about the assumption that able-bodied, working-age adults without caring responsibilities will always be able to earn enough to top up their Partial Basic Incomes to meet their Minimum Income Standard. This is also true for working-age adults with disabilities. Suggestions were made for ways to address this. The standard income tax rate required to finance the scheme in Table 2 is 0.42, which is feasible. Most individuals with a gross income of less than £25,000 (in addition to the CI) are likely to be better off, both in terms of net income, incentives to work, and the financial autonomy granted by the CI system.

Bibliography and sources of data

Family Budget Unit, www.york.ac,uk/res/fbu

Miller, Anne G. 'Assumptions and calculations for a simple Citizen's Income Scheme', Citizen's Income Newsletter, 2006, issue 1, pp. 1 - 12.

Miller, Anne G. 'Designing and Costing Simple Basic Income Schemes', paper presented to the Basic Income Earth Network Congress, Dublin, 21 June 2008. www.basicincomeireland.com

Minimum Income Standards, www.minimumincomestandard.org/ready_reckoner.htm, Centre for Research in Social Policy, Loughborough University.

DWP, NewBenefitRates.pdf. dated 11 Dec 2008, from www.dwp.gov.uk/whatsnew

DWP, 'Benefits and Pension Rates, April 2009', BRA5DWP, www.dwp.gov.uk

Office of National Statistics, United Kingdom National Accounts, The Blue Book 2008

Population figures: www.statistics.gov.uk/statbase/Product.asp?vlnk=15106.