One of the more controversial ideas in my manifesto is that of creating a Universal Basic Income. The reason this is contentious is that many people say that it’s too expensive and won’t benefit society. I don’t believe this is the case, and in fact believe that the benefits could be enormous, especially if combined with tax reform to simplify the existing system and make it much fairer.
Warning: what follows is a fairly technical look at this proposal and relies at least a little on some existing knowledge of income tax, capital gains tax, national insurance and inheritance tax.
What is Universal Basic Income?
Essentially a Universal Basic Income is a bit like the state pension, but instead of only being paid to people of a certain age, it is extended to everyone registered as a taxpayer in the UK. This will include non-earners and low-earning taxpayers who currently fall within the personal allowance.
The universality of this payment means that from an administration perspective it is fairly simple, as there is no test against the recipient’s means, nor is there a requirement to wait until a certain age to claim Universal Basic Income.
Benefits of Universal Basic Income
Universal Basic Income has a number of benefits for both the state and the citizenry, namely:
Pounds falling (into your pocket, maybe)
- Working-age people will no longer be utterly reliant on employers and therefore open to exploitation. Workers will have a decent support structure to fall back on if working conditions are too poor or don’t represent a good salary for the time invested.
- Benefits-claimants will for the most part reduce their reliance on the dreaded assessment process with the Department of Work and Pensions (DWP). These are anecdotally cited by those in very poor circumstances as exacerbating their conditions rather than helping.
- The payment of a single amount to all residents is much simpler from an administrative perspective than means-testing and age-limited benefits.
- If Universal Basic Income is introduced as part of a wider tax reform, it can also provide progressiveness to the tax system when combined with a very simple headline rate of tax.
- Studies carried out with Universal Basic Income in other countries generally show an increase in both happiness and productivity when everyone is entitled to a level of income that allows them to survive, but still allows them to strive for additional earnings if they want luxuries.
Downsides of Universal Basic Income
The main downside is the cost. Providing a truly universal income is expensive, so it needs to be considered as part of a wider set of tax reforms.
A second downside is more nebulous, in that it can be perceived as unfair if very wealthy individuals receive a benefit from the government. This can be seem with the Winter Fuel Payment that was made available to everyone over a certain age, with a large number of people complaining that the absurdly rich should not get that. This is despite the fact that means-testing this benefit would make it much more expensive, so the government likely made it cheaper overall by making it universal (or at least universal over a certain age).
Both of these are addressed if Universal Basic Income is introduced as part of the tax system, e.g. almost as a negative income tax rate as popularised by Milton Friedman. With this, the Universal Basic Income should be seen less as a benefit paid to everyone and more as an integral part of the tax system that allows progressiveness.
Coins – how many will this cost?
Cost of Universal Basic Income
Ultimately no measure can (or at least should) be introduced without significant costings to ensure that society can survive economically. Accordingly, I have approached the costings based on the following assumptions:
- Population of 70 million.
- Taxpayer numbers 32 million with mean earnings of £37,100 p/a.
- Total income in the UK of £1.19 trillion.
- Total annual capital gains of around £67bn (based on total CGT of £14.9 billion and assuming a blended tax rate of 22%).
- Total wealth in the UK of around £15 trillion.
- Average generational time for inheritance tax of 25 years.
Based on this, the cost of providing Universal Basic Income to the whole of the UK would be as follows:
|UBI Level (per annum)||Cost|
Table 1 – Cost of UBI per annum
Clearly these figures are eye-watering even at the lowest level. With a target of extending the current state pension to all ages, the second row would be necessary, i.e. £9,000 p/a. For a greater provision, the cost rises significantly.
Harmonising Income Tax and Capital Gains Tax
Part of my proposal is to harmonise the tax system and make it much less complex for the average taxpayer. As such, the expectation is that the cost of running HMRC (the UK tax authority) will be reduced, however this figure has not been included in this calculation.
In this proposal, I acknowledge that income tax and capital gains tax are treated differently for historic reasons, but in reality probably shouldn’t be if the goal is to treat those who work for a living fairly compared with those who live off their wealth.
As a result, my proposal is to blend together income tax and capital gains tax as follows:
- Eliminate the personal allowance, starting rate band, dividend allowance, savings allowance, basic rate band and higher-rate band from income tax, and likewise eliminate both the annual capital gains allowance and the uplift that applies on death (which currently means that assets pregnant with gains get a free pass if the owner dies). Essentially this replaces both taxes with a flat rate of tax.
- Apply that flat rate of tax to all income and gains by default, regardless of source. Clearly some additional research would be needed when considering things like main residences, which may need to have the accrued gains taxed on death and transferable for house moves.
- Alongside this, abolish National Insurance.
I have looked at what this would generate for various headline rates of tax compared to the current c. £400 billion raised by income tax, national insurance and capital gains tax.
|Headline tax rate||Tax take||Increase in tax take|
Table 2 – Tax Take with Harmonised Income Tax and Capital Gains Tax
At 50%, this means that the total expected tax take would increase by £227 billion p/a, which is not enough to fund even the lowest Universal Basic Income in Table 1. As such, it is necessary to go further.
Harmonising Inheritance Tax
One of the major issues that I think we are somewhat blinded to is the tax on estates following death. At present, this tax is widely considered optional once you reach a certain level of wealth, as wealthy individuals can gift away any value of their assets and pay no tax at all as long as they survive for seven years. I therefore propose the following:
- Change the basis of taxation to one of receipts rather than gifts, and tax at the same headline rate as any other income.
- Eliminate the seven-year gifting rule and make all gifts subject to the harmonised receipts tax beyond certain specific limits (currently £250 p/a per recipient).
- Eliminate the £3,000 annual gift allowance, the gift from regular expenditure allowance, business relief, agricultural relief and woodland relief. Consider replacing these with a deferment of tax for genuine transfers of family businesses.
- Eliminate almost all trusts used specifically for inheritance tax planning, i.e. most relevant property trusts, loan trusts, discounted gift trusts, etc. We should move back to a series of direct personal ownership of assets to improve the transparency of wealth distribution.
With these changes, the expected tax take would be as follows:
|Headline tax rate||Tax take||Increase in tax take|
Table 3 – Harmonised Inheritance Tax Take
This is all based on a comparison to the current rate of £6.1 billion each year and assumes that all wealth in the UK passes down to subsequent generations every 25 years (i.e. some £600 billion each year).
Again, on its own this is not sufficient to fund any of the Universal Basic Income levels mentioned above, so it is necessary to look at both proposals together.
Harmonised Receipts Tax
If the assumption is that both proposals are implemented, the combined figures become as follows:
|Headline tax rate||Total tax take||Increase in tax take|
Table 4 – Combined Increased Tax Take
Clearly this is much better. At a combined rate of 50%, these changes allow for a Universal Basic Income of between £6,000 and £9,000, which is an excellent start, but not enough for me to be satisfied.
However, there is an additional consideration. If the Universal Basic Income is set at around £9,000, the entire cost of the state pension can essentially be eliminated, as the Universal Basic Income will replace it. This itself currently costs around £105 billion p/a, which increases the budget for Universal Basic Income to £626 billion vs a requirement of £630 billion, which is within reach. This is especially the case when we consider the rest of the UK benefits system, which currently spends between £250 and £300 billion, including the state pension costs linked above. My assumption is that the majority of these benefits can also be eliminated. If we assume £150 billion of additional funding, this increases the budget for Universal Basic Income to £776 billion, which should be enough to fund a Universal Basic Income of around £10,000 p/a for all UK residents.
How Will Universal Basic Income Affect Me?
Great question! For all proposed policies regarding tax and benefits, this is vital to consider. As such, I have done the calculations below based on a Universal Basic Income of £10,000 and assuming a headline tax rate of 50%.
|Income||Net Income Now||Net Income – UBI and 50% tax||Effect|
Table 5 – Impact on Personal Finances for Earners
Table 5 shows that the overall impact of this is that the highest earners will be asked to pay a little more – £6,000 in the case of someone earning £250,000 a year, which is likely not going to result in a major lifestyle change. On the other hand, someone earning £12,000 will be better off by £4,000 every year, which as a percentage of net earnings is huge. this will, with any luck, reduce the reliance on lower-earners on state benefits to top up their earnings, and will allow a greater number of people to go into roles which have historically not provided enough pay to live comfortably, such as social care.
I do not believe there is any reason not to at least test the above proposition in certain areas, such as Greater London.
On Thursday 1 December 2022, we are hoping the Mayor will listen to Londoners who have told us that they feel that social security system is deliberately difficult to navigate, with barriers put in place to make it harder for them getting the help they need. As Chair of Economy in the London Assembly I recently led a committee on food insecurity where users of the foodbanks felt like they had very few options to help them survive. It was when one said: “we needed universal basic income” that I realised that we had to make the case for UBI.
This motion comes immediately after the Mayor of London, Sadiq Khan signed an open letter to the PM, alongside myself and 300 politicians and academics, calling for a UBI trial.
I believe that, if the Mayor thinks our nation is ready for a trial, surely our capital city should be leading by example. As the open letter clearly states the basic income system could be the next NHS.
Some more information about the open letter is available on the Mirror’s website.