The next great tax reform: Universal Basic Income

Anthony Painter
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Universal Basic Income could replace elements of the welfare state (Source: Getty)

Radicalism and popularity rarely march in step.

Yet, there is one policy that the Chancellor has pursued, urged on by the Liberal Democrats when in coalition, that has achieved both: the expansion of the personal tax allowance.

By the end of this parliament, the personal allowance is likely to have nearly doubled in cash terms since 2010.

Just a sweetener?

Far from just being a nice sweetener, the enhanced personal tax allowance could form the bedrock of an entirely new social contract. In fact, if anything, Westminster has underplayed its potential importance.

With further enhancement and reform, the personal allowance could become the foundation for a UK universal basic income - a flat rate, unconditional payment to all citizens - with the benefits for work incentives, entrepreneurialism and investment in human capital that could flow from that.

Read more: Savings allowance riddled with complexities for taxpayers

Basic income has usually been advocated as a replacement for the current welfare state, while the tax conversation has been glossed over - but it is potentially more critical.

One must assume that it is inadvertent, but the personal tax allowance has begun to assume some basic income form. To illustrate this, imagine if the personal tax allowance added to national insurance allowances were expressed as a cash sum as opposed to a tax rate of zero percent.

Basic allowance

These two allowances taken together currently total just below £3,000. We could view this as a "basic allowance". If you were to gradually increase the national insurance threshold to the personal allowance level then the two sums together are in the region of a basic income of just below £4,000 per person proposed by the RSA.

The major difference between basic income and such a "basic allowance" is that the former is given as a cash payment to all. The full personal tax allowance is only enjoyed by those earning above the full allowance level (£11,000 in 2016-17).

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Basic income or "basic allowance" would have to be paid to all in full including to all those earning beneath the existing threshold. This would rectify some of the current distributional anomalies of personal allowance where those who earn the least receive less support.

As the "basic allowance" was expanded, slowly but surely, the tax credits system which has incredibly distorting marginal tax rates of up to 80 percent for many low earners could be phased out. The "basic allowance" would be the core aspect of a new tax system based on clarity, genuine progressivity, and clear work incentives at every earning level. And it would be received by all.

Costs and transitions

There are undoubtedly costs to meet. Such a system could cost up to an additional one per cent of GDP, virtually identical to the total cost of changes to personal allowances over the course of the 2010s. Some additional revenue could come from additional tax charges on higher earners of the kind introduced by George Osborne to claw back additional personal allowances for those earning over £100,000.

However, much as the pension system evolved over two decades towards a single-tier payment, this transition to "basic allowance" could happen over two to three parliaments. These would ultimately be political decisions taken at the time.

Read more: Constant changes are too taxing for savers

The critical argument in favour of basic income is that it enhances freedom by giving people a greater chance to build their lives- whether through work, personal development, entrepreneurship, or civic contribution - with far less state interference and consequent perverse incentives. It is this that justifies a significant investment.

Missing the big picture

To see a "basic allowance" as outlined here as a new welfare system alone is to miss a much bigger picture.

The transition would build on a popular part of the tax system while making the system simpler and more progressive. "Basic allowance" would help people adapt to perpetual change, including much-debated impacts of new technology on work.

It would do so by continuing the current direction of tax policy and become a great tax reform in its own right.