GUARANTEED MINIMUM INCOME SCHEMES REVISITED, REVISITED

by PETER SAUNDERS*

In an earlier paper in this Journal, I raised some issues for consideration by proponents of a guaranteed minimum income (GMI) scheme (Saunders, 1988). The argument developed in that paper was intended to illustrate that, in practical application, GMI schemes are not the panacea for resolving the problems of the current income support system that GMI proponents often believe is the case. This is not to deny the worthiness of the objectives of those who favour a GMI scheme. Rather, it is to emphasise that GMI schemes face the same trade-offs between fairness, efficiency, adequacy and complexity as all other income support arrangements. These are resolved in a different way under the GMI, but there is an implicit set of values underlying GMI proposals that needs to be drawn out and subjected to scrutiny. After spelling out some of these conflicts within a GMI framework, I concluded in my earlier paper that:

None of the fundamental challenges currently confronting income support poky will be resolved by the introduction of a GMI scheme (Saunders, 1988, p. 32). Since then, I have had the opportunity to study a provocative paper on

GMI recently published in Economic Papers (Hawke and Lewis, 1989). The paper by Hawke and Lewis (hereafter H-L) outlines a particular GMI scheme using data for 1986-87, a scheme which, according to the authors, is:

. . . much fairer than the current system and it is financially viable. Its adoption would provide an income net for all individuals, eliminate most of the horizontal and vertical inequities that plague our current system and encourage greater participation in the labour force (‘Hawke and Lewis, 1989, p. 47).

These are grand claims indeed and, if correct, would place all those grappling with income support policy issues in considerable debt to the authors. Unfortunately, this is not the case. In fact, the H-L GMI proposal illustrates better than I could have done myself the inherent difficulties, complexities and conflicts in income support reform that caused me to write my earlier paper on the topic. In a response of this length, it is not possible to address all of my detailed reservations with the H-L proposal. I will concentrate on those that are of greatest significance and relevance to my general thesis, but would emphasise that this debate is as much about different value positions as about what might be regarded as purely technical matters.

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* Social Welfare Research Centre, University of New South Wales.

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The H-L proposal involves payment of a flat rate GMI payment (or social dividend) to all permanent Australian residents. All existing social security cash payments would be abolished, and the GMI payments would be financed by revenue from a re-structured personal income tax system. The authors set the social dividend payment (in 1986-87 dollars) at $2950 a year, or about $56.50 a week. There is no rationale for establishing the GMI payment at this level, except that it “represents the average per capita payment for a single person with two dependants and a married couple with one dependant” (H-L, p. 38), as they existed in 1986-87. The authors justify providing the same GMI payment for children as for adults on the grounds that families with older children will on average have more assets which will compensate them for the fact that the level of the GMI does not increase with age. This is a particularly contorted piece of logic, and one that in any case does not address the fundamental issue. What is most worrying about the H-L proposal is not so much that the GMI payment does not increase with the age of children, but rather that the GMI payment is set at the same level for adults as it is for children. Whatever one’s general views on the usefulness of equivalence scale research, one clear and undisputed finding is that the needs of children are lower than the needs of adults. In what sense then is the H-L proposal fair? Since the GMI payment is set at the same level for adults and children, whereas existing income support payments for children are well below the adult rates of payment, the proposal implies a very substantial redistribution away from single adults, childless couples and families with few children, towards all families with two or more children.

As Table 1 in H-L indicates, the proposal would lead to declines in the disposable incomes of all single beneficiaries and pensioners, many families without children and all low income families with less than two children. These declines are not insubstantial. For example, a single aged pensioner would, according to H-L‘s estimates, be $2572.4 a year (or over $49 a week) worse off, while a single parent pensioner with one child would be $253.20 a year (or about $5 a week) worse off. The authors recognise such implications, but appear relatively unconcerned by them, preferring instead to make (unsubstantiated) claims about the technical merits of their proposal in terms of its effects on efficiency and work incentives.

The costings of the proposal also appear to be subject to considerable dispute. The authors dismiss the framework developed in my paper to illustrate the relationship between the level of the GMI payment and the tax rate required to finance the scheme, on the grounds that my examples are misleading. Yet while they accept that the logic underlying my examples is “unassailable” (p. 39), their own costings appear to have a particularly strange logic of their own. The estimated revenue required to finance the scheme is derived as follows: Gross cost of the GMI payments ($47.6 billion) less savings from abolition of all existing social security and welfare programs ($20.5 billion) plus existing personal income tax revenue ($38.1 billion) equals the net cost of the scheme ($65.2 billion). The net cost is then

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expressed as a proportion of the total taxable income ($141.9 billion) to arrive at the required tax rate of 45.9%. (It is interesting to note that their own figures indicate that the tax rate required to finance the GMI payments alone can be estimated to be just over 33.5% (i.e. $47.6 billion divided by $141.9 billion equals 0.335), exactly what my own arithmetic suggests would be required to finance a GMI payment which, as H-L note, is equal to “33.6 per cent of average per capita (taxable) income” (p. 39).)

N o points need to be made about these costing calculations. First, H-L assume that introduction of the GMI is accompanied by the abolition of all social security and welfare programs. This would imply that Commonwealth funding of welfare services provided through, for example, the Home and Community Care Program, the Disability Services Program and the Children’s Services Program, as well as all Aboriginal Advancement Programs, would be eliminated. If the aim of the GMI is simply to replace all existing income support payments, then the appropriate figure for costing purposes is expenditure on cash benefits alone rather than total social security and welfare outlays. Cash benefit expenditure by the Department of Social Security (DSS) in 1986-87 amounted to $16.1 billion (DSS Annual Report 1986-87), well below the $20.5 billion figure used by H-L in their costings. A more sinister interpretation is that H-L actually intended to eliminate all DSS welfare programs, on the grounds that such benefits “are inefficient and paternalistic compared to direct cash targeting” (p. 45). From this perspective, their costings make more sense, but their proposal makes far less sense. Most beneficiaries of welfare service programs receive a DSS pension or benefit and thus would suffer a loss of service support as well as a decline in income support. It is difficult to understand how this can be described as a fairer and better targeted system.

Second, in estimating the required tax rate, H-L use total taxable income derived from the 1986-87 Taxation Statistics as the tax base. This is, of course, a serious underestimation of the tax base under the GMI because the Taxation Statistics exclude all of the income of non-taxpayers. Against this, H-L take no account of the tax revenue collected from pensioners and beneficiaries that would be lost because the GMI would itself not be taxable. Whiteford (1989) estimates that pension and benefit recipients contributed over $800 million or about 5% of the total income tax revenue in 1980-81, and this amount will have grown considerably since then.

There is more to this than just casting doubt on the reliability of the costings produced by H-L. If their costings are well out, as they appear to be, so too are their estimates of the alleged effects of the GMI proposal on income distribution and incentives. This is particularly worrying, given the emphasis H-L place on the beneficial effects of their scheme on efficiency and work incentives. However, the authors’ arguments that the GMI would lead to an increase in labour supply are in any case not convincing. For example, H-L refer to the poverty trap changes shown, for a sole parent with two children in their Figure 1, and then argue on page 46 as if similar changes to effective marginal tax rates would apply to all taxpayers.

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Furthermore, their own preferred tax schedule (Table 2) implies a marginal tax rate of 65% on all taxable incomes over $22,000 a year, an amount that is less than average weekly earnings were in 1986-87. In summary, while H-L place great emphasis on the impact of their scheme on efficiency and work incentives, it is not at all clear that the proposal would do anything to ease these problems overall, and may in fact make them worse.

Overall, it is clear that the authors place great weight on claims that a GMI scheme is more simple to understand and thus less stigmatising than current income support arrangements. As with all income support (and tax) objectives, achieving more in one direction normally involves some sacrifice elsewhere. In the case of the H-L proposal, it appears that equity and adequacy take a distant second place to simplicity. This may have appeal to those obsessed with conceptual purity and technical elegance, but provides little comfort to those whose living standards would suffer as a consequence. That these people would mainly be towards the lower end of the income distribution makes the H-L proposals all the more worrying.

In short, the H-L proposal is a good illustration of the dangers of devising technocratic solutions based on simplistic economic concepts and analysis to solve real world problems without due consideration of the prevailing social, human and policy context. The authors claim that their scheme offers a workable solution to the “very real problems faced down here on earth’ (p. 37). If that is so, maybe the moon is made of green cheese after all!

REFERENCES 1. Department of Social Security (1989). Annual Report 1986-87, Canberra: AGPS. 2. Hawke. A. and Lewis, D.E. (1989). “A Fair and Feasible Income Support Program for

3. Saunders, P. (1988). “Guaranteed Minimum Income Revisited: Paradise Lost or Guiding

4. Whiteford, P. (1989). “Taxation and Social Security: An Overview”, Australian Tax Forum,

Australia”, Economic Papers, Vol. 8, June, 37-47.

Light?” Economic Papers, VoI. 7, September, 25-32.

Vol. 6, No. 1. 1-39.

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