Universal Basic Income guarantees fiscal sustainability through a Social Security Tax to guarantee effective solvency

["DESIGNING A BASIC INCOME GUARANTEE: TARGETING, UNIVERSALITY AND OTHER CONSIDERATIONS,” Institute for Economic Justice, October 2021, , Accessed 6/26/23, GDS – PL]

***UBIG – Universal Basic Income Grant

***RPL - Food poverty line

***LBPL - Lower-bound poverty line

5.EFFICIENCY AND COST EFFECTIVENESS

In considering cost and efficiencies, proponents of targeting usually argue that: universality is heavily inefficient as it provides support to those who do not need it - while targeting is more cost-effective by restricting benefits to a limited pool of recipients who are ‘deserving’, thereby also allowing larger transfer values to this group. This section explores the ways in which universality can more effectively eliminate inefficiencies and avoid administrative costs, and considers the claims that targeting is more affordable with higher transfer values.

5.1 IN/EFFICIENCIES OF UNIVERSALITY

A UBIG is sometimes argued to be inefficient due to leakage, because it is paid to those who ‘do not require the assistance’, thereby wasting resources that should be used for the poor. However, this logic is flawed as it fails to understand the exact nature of how a UBIG should be designed. A UBIG can maximise the pro-poor and redistributive aspects of social protection by ensuring that everyone is eligible, while utilising taxation as ‘claw-back mechanisms’ to progressively recoup the benefits given to those who don’t need them.

A Social Security Tax (SST) can be introduced as a primary component of progressive financing of a UBIG, ensuring that everyone contributes according to their ability. If an SST is progressively levied on all income earners starting for example at a rate of 1.5% on those earning up to R80 000 per annum, and increasing by 0.5% for upper brackets of R80 000 to R350 000, R350 000 to R1 million, and above R1 million, it would be possible to raise around R68.24 billion tax revenue for 2022/23. The results are shown below in Table 3, with the highlighted cells adding up to R68.24bn.

Table 3: Social security taxation options per income bracket (R billion)

The rates of the SST itself would need to be finessed to not include major jumps at particular thresholds – but this can easily be done with more graduated rates, or as is done with PIT brackets, without hugely altering the level of taxes collected and distribution of benefits. This would avoid discontinuity effects – in both the tax rate levied and persons eligible. Higher-income earners do not benefit unduly, due to the tax, and the wealthy cross-subsidise payment of the BIG. Table 4 below shows the net benefit of a UBIG at the FPL and LBPL combined with the graduated SST. We see that for those earning between R35 000 and R150 000, net benefits range from around R9 550 to R7 080 per year from a UBIG at the LBPL (including the SST tax they pay). By contrast, those earning R500 000 and R1 million contribute a net amount of R2 240 and R19 920 per annum.

What the table shows is that while a UBIG would be given equally, the effect of the SST is to maximise the transfer of its net benefit to lower-income earners. As seen above, even if the UBIG is delivered at the FPL, lower-income workers earning below R350 000 per annum will still receive a net benefit. The annual value of a UBIG at the FPL is R7020, which is greater than the amount owed in SST for low-income workers. Those earning R70 000 per annum for example will receive a net benefit of R7020p/a. Those earning R500 000 per annum – taxed at an SST of 2.5% – will owe a net R5480 per annum, etc. This indicates that lowincome earners benefit most, middle income earners are not unduly squeezed, and high-income earners are progressively taxed. What this means, is that far from creating inefficient wastage of resources, the key benefits of making a BIG universal are that it enables the appropriate tools to: eliminate leakages to those who don’t need it, focus distribution of benefits to lower-income earners, and create substantial financing. In this regard, a UBIG enables more effective targeting of those who need support by use of taxation measures – hence avoiding the numerous issues created by employing traditional targeting measures.

Targeting a BIG, on the other hand, means forgoing the ability to utilise an SST, thereby losing a substantial financing option. This is because it would be inequitable for those not eligible for a BIG to, nevertheless, be taxed the SST, particularly low-income workers. A possible critique of this claw-back mechanism is the presence of those in the upper-income deciles that do not declare direct income; this meaning a number of people will be eligible to receive the BIG without being able to claw it back. However, the likelihood of 100% uptake, or any significant levels of uptake, by those in upper-income deciles is extremely low. Research widely suggests that the economically well-off generally self-exclude from social assistance even where eligible due to perceptions of not requiring the assistance.56 Furthermore, a range of tax measures being proposed would still affect those not declaring income, such as a luxury VAT or estate tax, and ultimately a wealth tax.