Make welfare better with a Universal Basic Income (UBI)

Call it what you want, but letting the tax system work rather than using cumbersome eligibility requirements for each welfare program is fair and efficient

Don’t forget to pick up a copy of The Great Housing Hijack. Upcoming in-person events:

• Brisbane: 13th March 2024, 6pm at Avid Reader, West End

• Melbourne: 20th March, 12.20pm, John Cain Luncheon with Per Capita

• Melbourne: 20th March, 3.30pm at RMIT

• Canberra: 21st of March, 6.30pm hosted by The Australia Institute

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Universal welfare services are a good thing.

I like that we get to drive on public roads, kick a footy at the park, use a public library, and send our children to school, without having to jump through eligibility hoops to make sure our income is low enough to qualify.

After all, higher-income households can afford books, backyards, toll roads, and tuition, so it seems silly to just let these households use these services for free. Right?

One thing that is widely thought to be very bad is middle-class welfare.

But when middle-class welfare comes in a non-cash form we all love it, whether that form is schools, roads, hospitals, and other services. But cash? Nope. That’s a problem.

So our cash welfare system has evolved into a maze of hoop-jumping and arbitrary phase-outs of a huge range of different specific welfare programs to accommodate political whims.

Take a look at this guide and see if you understand the system.

And the closer we can inch towards universal cash welfare, which relies on the tax system to recover revenue rather than restrictive qualifying criteria and income-based phase-outs, the better that system will be for rewarding work and productive endeavours while saving billions in administrative costs.

Some cash welfare payments are already like this. And people love them.

Universality works

In New Zealand, the age pension (called NZ Super) is a universal basic income (UBI) for old people. It has no income or assets test for eligibility. Instead, age pensioners simply pay tax on their income if they work and earn above this UBI amount.

Australia’s age pension, in contrast, has an income and asset test that hits about 800,000 out of 2.6 million age pensioners and phases out the pension payment at 50c for every dollar earned. This is equivalent to an extra 50% tax rate on earnings, above and beyond any other income taxes. So if pensioners work they will lose 69c to 82.5c from every dollar earned!

Because people in New Zealand over 65 aren’t punished as much financially for working, more older people work in New Zealand (25%) than in Australia (15%). Sure, there is higher churn—meaning the same people both receive welfare and pay taxes—but churn is not a real economic concern or cost.

Churn is a made-up, and very Australian, marketing phrase used for political convenience. Churn is costless because it simply requires two instant and free electronic payments, but administrating systems to avoid it cost billions in manpower, resources, and much more in bad work incentives.¹

Because of its great work incentives and efficiency, New Zealand’s over-65s UBI has even attracted the interest of the Institute of Public Affairs (IPA), which published a report about it and not only recommended copying this for pensioners, but for students as well. An ode to generous and broad welfare if ever I’ve seen one.

The relevant economic concept we should be discussing when it comes to welfare design is the Effective Marginal Tax Rate (EMTR). It is an income earner’s marginal tax rate plus the marginal rate at which you lose other income or benefits. So for age pensioners, their EMTR is 69-82.5%. Is it worth working and only keeping 17-30c out of every dollar? Not really.²

And that’s the problem with our aversion to middle-class welfare. In reality, it punishes work rather than incentivising it. And unfortunately, those high EMTRs hit a huge range of Australian households.

Consider the chart below (thanks to Dave Plunkett for the analysis here). It shows the situation of a single-income family that rents their home with two children and a HECS student loan debt.