This study draws extensively on the 1994 Wave of the Living in Ireland Survey , the
Irish element of the European Community Household Panel. Brendan Whelan and
James Williams of the ESRI’s Survey Unit were responsible for the survey design, data collection and database creation.

1.1 Background to the Study
Partnership 2000 for Inclusion, Employment and Competitiveness gave a commitment that
A further independent appraisal of the concept of, and full implications of introducing a basic income payment for all citizens will be undertaken, taking into account the work of the ESRI, CORI, and the
Expert Working Group on the Integration of Tax and Social Welfare and the international research.
In line with this commitment, a Working Group on Basic Income was established, which agreed terms of reference for a study on basic income, divided into two phases:
1.
An evaluation of the cost and distributional implications of the introduction of a basic income scheme similar to that proposed by CORI in Pathways to a Basic Income (Clark and Healy,
1997).
2.
An examination of the dynamic effects of such a system from a broad economic and social perspective.
This report represents a part of the first phase of this overall study. It deals with the cost and distributional implications of the introduction of a basic income scheme. This phase of the study has been further subdivided into two main elements:
(a) An aggregate analysis of the costing of the basic income scheme, using macroeconomic statistics, and an analysis of the distributional effects on illustrative households, along the lines of Clark and
Healy, 1997.
(b) A microsimulation-based analysis of the costs and distributional impact of a basic income on actual families, using a tax-benefit model based on relevant survey data.
This report deals centrally with the second set of analyses. It is structured as follows.
Chapter 2 describes the basic approach underlying SWITCH, the ESRI taxbenefit model, and describes the adjustments made to the model’s database to ensure full representation of the income tax base – a key factor in costing the basic income proposal. In order that this microsimulation analysis can be compared with that undertaken using the alternative aggregate costing and illustrative households (item
(a) above), a great deal of work has gone into
 careful specification of the baseline demographic and economic scenarios underlying the analysis
 specification of baseline policies under the conventional tax and social welfare systems
1

 specification of the precise parameters of the basic income scheme to be examined, and
 specification of the framework for the analysis.
This work is described in Chapter 3 of the present report. Chapter 4 describes the costing of the basic income proposal, and shows how the tax rate required to finance it has been derived. The sensitivity of the basic income tax rate to alternative assumptions on the tax base, potential savings on current income supports, and additional items of expenditure associated with the basic income proposal is considered. Chapter 5 outlines alternative perspectives on the distributional impact, including an assessment of the differential impact on men and women. Chapter 6 looks at the impact on poverty as measured by relative income poverty lines, and under an alternative measurement approach (linked to the definition in the National
Anti Poverty Strategy) using information on which households were measured as suffering “basic deprivation”. The main findings are drawn together in the concluding chapter.
1.2 Evaluating Proposals for a Basic Income
There is widespread agreement on some of the problem areas within the current income tax and social welfare structures. Transitions from welfare to work can be impeded by the fact that for some individuals, the net financial reward from taking up employment may be small. For some other individuals, receiving income support under the Family Income Supplement scheme, increases in hours of work or in pay rates may lead to a very limited increase in disposable income – even after the recent change to a net income basis of assessment for FIS.
A key issue for policy is whether policy changes operating broadly within the existing structure of the income tax and social welfare codes, or a radical reform of the tax/transfer system known as basic income, offer a better structure in which choices about income maintenance and income taxation can be made in the future.
This is an issue which has attracted considerable international interest (see, for example, Atkinson, 1995; Brittan and Webb, 1990; Gelauff and Graafland, 1994; and van Parijs, 1992). In the Irish context, earlier studies of this issue include Honohan,
1987; Callan, O’Donoghue and O’Neill, 1994; Ward, 1994; Integrating Tax and
Social Welfare by the Expert Working Group on the Integration of the Income Tax and Social Welfare Systems, 1996; and Clark and Healy, 1997. The latter study contains a proposal which (suitably amended to deal with changes in the most recent budget) forms part of the terms of reference for the current study.
Our main report focuses on four key issues concerning the introduction of a basic income:
1.
What would the introduction of a basic income scheme cost, and what taxation provisions would be necessary to finance it?
2.
Who would gain and who would lose from the introduction of the basic income scheme, and by how much?
3.
What would be the impact on the extent and depth of income poverty?
4.
What would be the impact of the proposal on the distribution of income as between men and women?
2

No attempt is made at this stage to take into account behavioural responses to alternative reforms. This phase of the study concentrates instead on “cash” or “firstround” effects, which will form a basis on which phase 2 of the study – dealing explicitly with dynamic effects – can build.
3

2.1 Introduction
Much of the debate on tax and welfare reforms tends to focus on the effects of tax and social welfare policy changes on a small number of supposedly "typical" families.
While this approach can help to understand the nature of a policy change, it can also be highly misleading. The most commonly analysed "typical" family at Budget time is a one-earner couple, with 2 children, taxed under PAYE. Less than 1 family in 20 actually falls into this category, and those who do differ widely in terms of income, housing tenure and other characteristics relevant to their social welfare entitlements and income tax liabilities.
Concentration on the effects of a policy change on a small number of hypothetical households cannot provide an overall picture of the gains and losses associated with complex reform packages; and by concentrating on a small number of supposedly "typical" families may lead to the neglect of effects which are important for significant groups.
Microsimulation models simulate the tax and benefit position of a large-scale sample of families, using micro -level data on individual and family incomes and other characteristics. These microsimulation models have a number of advantages. A taxbenefit model based on a large-scale representative sample of the population automatically takes account of the wide diversity of circumstances in the population; can help to identify the overall pattern of gains and losses; and can help to assess the impact of policy changes on financial incentives to work.
The usefulness of microsimulation models in analysing tax and social security policy has been amply demonstrated by such international experience. Tax-benefit models have been constructed for most OECD countries, with the US and the UK having a particularly rich experience in their construction and use
1
. In many instances, models of this type are the only way in which accurate costing of complex changes to taxes and benefits can be derived. But the more fundamental advantage of such models is that they permit a representative picture to be constructed of the overall effects of a policy change, from which it is possible to identify the characteristics of gainers and losers from a policy change, the overall impact of a change on the distribution of income, and the impact on financial incentives to work.
2.2 The SWITCH Model
The tax-benefit model used in the present report is the latest version of SWITCH, the ESRI tax-benefit model. This model was first constructed in 1989, using data from
1 A major EU-funded project is now under way to provide a tax-benefit model capable of analysing tax and welfare policy issues in a cross-national setting, with sub-models for each of 15 EU countries (the
EUROMOD project)
4

the 1987 Survey of Income Distribution, Poverty and Usage of State Services. It has been tested, developed and used continuously since then in a wide range of analyses.
A new version was constructed in more recent years, based on data from the 1994
Living in Ireland Survey . This model has now been specially extended and developed to deal with the range of microsimulation analyses required for the present report.
Here we outline the key features of the model which are relevant to the current analysis.
2
SWITCH combines two key ingredients: detailed micro-level data on the incomes, family composition and labour market participation of a large scale nationally representative survey of households; and a set of computer programs which model, or “simulate”, the social welfare entitlements and income tax liabilities of these households . The 1994 Living in Ireland Survey provides the information required by the model. It contains detailed information on more than 4,000 households with individual interviews covering more than 10,000 adults. The Survey forms part of an EU-wide household panel study managed by EUROSTAT. The first wave of this panel study was undertaken in the latter half of 1994, and the Irish element included many additional questions on incomes, labour market status and receipt of social welfare payments designed to provide a suitable base for the construction of a tax-benefit model. The model-based analysis is not, however, restricted to analysis of the situation in 1994: several procedures have been developed which bring the model database into line with recent developments in employment, unemployment, rates of pay and the size and structure of the population: these are described in Section 2.3 and in Chapter 3.
Overall the Living in Ireland Survey provides a good representation of the population in terms of age, marital status and sex. It also provides a nationally representative picture in terms of the key issues of distribution of employment and unemployment across households and individuals. (Callan, Nolan, Whelan, Whelan and Williams, 1996). Coverage of the income tax base is also quite good, and special adjustments to improve this coverage are described in the following section. The survey- and model-based estimates of the social welfare population show good representation of the broad groups of schemes, and most of the major schemes. While model-based estimates of expenditure on some individual schemes (particularly the smaller schemes) can be higher or lower than actual expenditure, the overall coverage and cost estimates are much closer. Thus, the model database appears to be more than adequate for the estimation of the cost and broad distributional consequences of a basic income scheme.
The structure of the computer routines used to simulate present income tax and social welfare policies is described in Callan, Richardson and Walsh (1997). One underlying assumption is that there is full compliance by taxpayers in respect of tax liabilities arising from income reported to the survey, and full take-up of social welfare entitlements. There are, however, two exceptions to this rule.
First, model-based analysis (Callan, Richardson and Walsh, 1997) suggests that the actual rate of take-up of Family Income Supplement is rather low. Thus an
2 For further details on the structure and validation of the model see Callan, Richardson and Walsh
(1997).
5

alternative approach is to assign take-up of FIS in a way which ensures that the rate of take-up approximates the latest estimates (about one in three of caseload and expenditure). This alternative – and more realistic - approach, based on a low rate of take-up, is used throughout the present study.
Secondly, there is a divergence between the concept of farm income used in the survey (“family farm income” as used in the National Farm Survey) and income for tax purposes. A precise adjustment for this is not possible; but an approximate adjustment has been made which ensures that the model’s simulation of the tax revenue from farm incomes is brought into line with the actual tax revenue generated from that source. This adjustment suggests that farm incomes as estimated for the survey must be reduced by over half to ensure that the predicted tax take from farm incomes is close to the actual tax take.
2.3 Calibration of the SWITCH Model
The total income tax base is a key element in the costing of the proposed basic income. Furthermore, the distribution of that total income tax base can be of critical importance in determining the distributional effects of changes to tax and social welfare policy, including radical changes such as the introduction of a basic income.
For this reason our analysis has paid particular attention to comparisons between estimates of the tax base and its distribution from the SWITCH model and statistical information supplied by the Revenue Commissioners.
In principle, a random sample of households, in which each household had an equal chance of selection, and non-response was randomly distributed, would be
“self-weighting” i.e., each household would have an equal probability of selection
(e.g., a chance of 1 in 250) and estimates of national totals could be produced from survey totals by simply multiplying the relevant survey totals by 250. Many samples – including the Living in Ireland Survey – are not of this type.
3
The sampling frame for the Living in Ireland Survey is based on the Electoral Register – a list of persons. This gives a higher probability of selection to households containing several adults of voting age. In order to adjust for this factor, a lower weight must be attributed to households with several adults, and an above average weight to households with fewer individuals. Differential weights can also help to ensure that a survey is representative in the face of differential non response rates e.g., as between urban and rural areas.
A set of weights has been calculated for the Living in Ireland Survey , as described in Callan, Nolan, Whelan, Whelan and Williams (1996, Chapter 3), which ensures that the survey is nationally representative in terms of a number of key dimensions: the number of adults in the household, the number of earners, the socioeconomic group and the age of the “household reference person”, and the location of the household (Dublin, urban and rural areas).
In this study, we use a procedure developed by Gomulka (1992), which derives adjusted weights which ensure that the grossed-up survey estimates meet a
3 There are many reasons why surveys diverge from the simple standard outlined: these include considerations such as the nature of the sampling frame available, and design effects imparted by concerns about cost and/or minimisation of sampling error.
6

number of constraints. Chief among these is that the number of taxpayers in certain income bands (above £10,000 per annum) should match the numbers reported in the
Income Distribution Statistics of the Revenue Commissioners. (An adjustment is made to the reported figures to allow for the fact that the published data are based on returns of approximately 90% of Schedule D cases and close to 98% of Schedule E cases). This procedure involves the attribution of higher weights to cases in the survey which are in income bands otherwise underrepresented by the survey data (e.g., the top of the distribution of income for the self-employed). It is also a feature of the procedure that it attempts to minimise deviations between the initial weights and the revised weights.
The “control totals” used in the weighting procedure, designed to adjust the
1994 tax base, were:
 numbers of self-employed taxpayers in income bands from £10,000 to £15,000 and upwards to £50,000 or more
 a similar set of control totals for other taxpayers (mainly PAYE)
 age distribution of the population in five year bands
 distribution of population across Dublin, other urban areas and rural areas
 total numbers of men and women engaged in paid work
For tax units with incomes below £10,000 no such constraint was imposed, as it was judged that survey data probably gave a more accurate picture of this element of the income distribution than Revenue Commissioners data.
The net effect of these adjusted weights can be seen in the following set of tables, which show the estimated distribution of taxpayers, income and taxes generated by the SWITCH model (using the revised weights); and the corresponding distribution of taxpayers, income and taxes as reported in the Statistical Report of the
Revenue Commissioners , and adjusted for the coverage of the published statistics.
7

Table 2.1: Estimates of Income Distribution from SWITCH model and Revenue Commissioners
Statistics, 1994
All SWITCH
1
Revenue Commissioners
2
1994/95
Income Range Number Gross Income Income Tax Number
0 258.3 less than £5000 473.0
1571.0
£5000-9999 368.1 2646.8
£10000-£14999 243.5
2977.5
£15000-£19999 155.6 2714.8
£20000-£24999 105.1 2335.1
£25000-£29999 65.2 1778.6
£30000-£34999 38.0 1220.4
£35000-£39999 23.5 879.4
£40000-£49999 25.7 1138.8
£50000 plus 25.8 1938.9
12.7
211.7
463.3
534.1
474.0
406.8
305.4
242.1
335.8
732.1
327.2
310.7
243.5
155.6
105.2
65.2
38.0
23.5
25.6
25.8
Gross Income Income Tax
795.5
2325.2
2989.1
2698.3
2350.6
1776.7
1227.1
878.8
1137.7
2134.8
14.0
227.3
478.4
551.8
513.4
415.2
314.0
240.7
332.9
688.3
Total 1781.8 19201.1
Over £10,000 682.4 14983.4
3717.9
3493.5
1320.2
682.4
18313.7
15193.0
3776.1
3534.8
Notes: 1. The incomes on which the SWITCH distribution are based do not incorporate the adjustment to farm incomes referred to in the text; but the tax take predicted by the model does incorporate this adjustment.
2. SWITCH estimates are based on weights adjusted to match the estimated number of cases from Revenue Commissioners data for incomes above £10,000 per annum.
3. Based on Tables IDS1 and IDS2 of the Statistical Report of the Revenue Commissioners
1996 . Data have been scaled up to allow for the fact that data published in that report are based slightly less than complete coverage (approximately 90% of expected numbers of
Schedule D cases and 98% of Schedule E cases).
Table 2.2
: Estimates of Income Distribution for All Excluding Self-employed , SWITCH model and
Revenue Commissioners, 1994
Non Self-employed SWITCH 1 Revenue Commissioners
Income Range Number Gross Income Income Tax Number Gross
2 1994/95
Income Tax
Income
0 257.2 0.0 less than £5000
£5000-9999
428.4 1427.2
316.1 2272.8
£10000-£14999
205.4 2510.2
£15000-£19999
132.0 2301.2
£20000-£24999
88.8 1977.4
£25000-£29999
54.2 1475.7
£30000-£34999
30.7 988.7
£35000-£39999
18.5 693.6
£40000-£49999
19.0 842.9
£50000 plus
12.0 799.0
Total
Over £10,000
1562.3 15288.8
560.6 11588.8
0.0
11.8
196.8
411.6
482.9
419.4
348.1
252.4
199.7
262.9
297.9
2883.5
2675.0
283.7
260.4
205.4
132.0
88.8
54.2
30.7
18.5
19.0
12.0
1104.6
560.5
682.5
1947.0
2520.5
2289.0
1985.7
1475.8
991.6
690.1
839.6
784.0
14205.9
11576.4
12.2
204.3
428.2
488.8
448.2
354.7
261.3
195.1
255.0
269.9
2917.8
2701.2
Notes: 1. After reweighting to match the estimated number of cases from Revenue Commissioners data for incomes above £10,000 per annum.
2. Based on Tables IDS1 and IDS2 of the Statistical Report of the Revenue Commissioners
1996 . Data have been scaled up to allow for the fact that data published in that report are based slightly less than complete coverage (approximately 98% of Schedule E cases).
8

Table 2.3
: Estimates of Income Distribution for Self-employed, SWITCH Model and Revenue
Commissioners, 1994
Self-employed SWITCH
1
Revenue Commissioners
2
1994/95
Income Range Number Gross Income Income Tax Number
0
£40000-£49999
£50000 plus
Total
1.1
6.7
13.8
219.5
0.0 less than £5000
44.5 143.7
£5000-9999 52.0 374.0
£10000-£14999
38.1 467.2
£15000-£19999 23.6 413.5
£20000-£24999 16.3 357.7
£25000-£29999 11.0 303.0
£30000-£34999
£35000-£39999
7.3
5.0
231.6
185.9
295.8
1139.9
3912.4
Over £10,000 121.8 3394.6
0.0
1.0
15.0
51.7
51.2
54.5
58.7
52.9
42.4
72.9
434.1
834.4
818.5
43.5
50.2
38.1
23.6
16.3
11.0
7.3
5.0
6.7
13.8
215.6
121.9
Gross Income Income Tax
113.0
378.2
468.6
409.3
364.9
300.9
235.5
188.6
298.1
1350.8
4107.8
3616.6
1.8
23.0
50.3
63.0
65.2
60.4
52.7
45.6
77.9
418.4
858.3
833.5
Notes: 1. The incomes on which the SWITCH distribution are based do not incorporate the adjustment to farm incomes referred to in the text; but the tax take predicted by the model does incorporate this adjustment.
2. SWITCH estimates are based on weights adjusted to match the estimated number of cases from Revenue Commissioners data for incomes above £10,000 per annum.
3. Based on Table IDS2 of the Statistical Report of the Revenue Commissioners 1996 . Data have been scaled up to allow for the fact that data published in that report are based slightly less than complete coverage (approximately 90% of expected numbers of Schedule D cases).
From the point of view of the costing of a basic income, a key feature is that the total income tax base predicted by the model is now approximately £19,200m – somewhat greater than the £18,300m figure derived from the Revenue Commissioners data.
However, the SWITCH based figure incorporates a greater element of social welfare receipt than the Revenue Commissioners data; and also includes a substantial element of family farm income which, after the adjustment described above, is not a part of the income tax base (for the conventional system or for a basic income system).
Further adjustments to the weights, made in the context of projections to the year
2001, ensure that the SWITCH income tax base for basic income purposes (excluding transfers which are replaced by a basic income) is aligned even more closely with an estimate of the same concept based on inputs from the Revenue Commissioners.
These adjustments are described in the next chapter. Here we may note simply that the methods used were similar to those described here, with statistical information on the Revenue Commissioners’ projected distribution of taxpayers’ incomes used to calibrate the SWITCH weights for the year 2001.
9

3.1 Introduction
Clark and Healy (1997) and Callan, O’Donoghue and O’Neill (1994) arrived at quite different findings on the cost and distributive impacts of alternative basic income schemes. Such differences could arise from
 differences in the proposal examined
 differences in the economic and social environment (the year of the study, the income tax base, demographic differences)
 differences in the methods of analysis (aggregate costing with hypothetical households versus microsimulation modelling)
 differences in the framework of analysis (comparing a basic income scheme with a conventional policy in a given year, as against a comparison of the basic income system in 3 years time with the current conventional system)
The present study provides an opportunity to reconcile these different perspectives, focusing on the proposal contained in the terms of reference for the study, and using a common tax base and demographic base to analyse the proposal. A substantial part of the work in this project has been the careful definition of
 the benchmark policies against which the introduction of a basic income is to be evaluated
 the harmonisation of basic income payment rates with respect to social welfare rates, to ensure that the analysis can focus on the impact of the basic income structure as against the conventional policy structure
3.2 Economic and Social Background: Projection to 2001
A macroeconomic forecast of GDP or GNP is not sufficient when projecting the microsimulation database into the future. Macroeconomic growth may come from growth in income or growth in employment; and growth in income may be uneven across sectors. The tax take predicted from a microsimulation model (whether
SWITCH or the Revenue Commissioners’ own model) will depend on the split of income growth between rates of pay and employment growth, and on differential growth in incomes across sectors. The model database is adjusted to take account of changes between 1994 and 2001 in three main areas:
Income growth and income distribution
The goal here is to ensure that the projection of the model database for the year 2001 is aligned with the level and distribution of gross income as supplied by the Revenue
Commissioners. This goal is attained via a three step process.
10

1.
Growth in incomes per taxpayer are taken into account using the same parameters as have been used in the Revenue Commissioners model for the years 1994 to
2001. These specify separate parameters for growth in income for mainly selfemployed taxpayers (Schedule D) and for others, mainly PAYE taxpayers.
2.
The weighting procedure described earlier is then used to ensure that the distribution of gross income in the model database is aligned with the corresponding distribution as projected by the Revenue Commissioners.
3.
As a final step, we make a small upward adjustment (about 3.5%) to the income growth factors used in the model projection, to ensure that the total tax base for basic income purposes is aligned precisely with the corresponding figure derived from Revenue Commissioners total income tax base less taxable transfer payments (including social welfare and FAS payments) which would no longer exist under a basic income system.
Changes in employment and unemployment
The reweighting technique described in Section 2.4 was reapplied to take account of projected growth in male and female employment to the year 2001, and the projected fall in unemployment. The projections were drawn from the ESRI’s medium-term forecasts (Duffy, Fitz Gerald, Kearney and Shortall, 1997).
Demographic change
The reweighting procedure was also used to adjust the survey weights to take account of growth in the population, the likely increase in the number of households, and changes in the age structure of the population over the 1994 to 2001 period. The projections were drawn from the ESRI Medium Term Review 1997-2003 (Duffy,
Fitzgerald, Kearney and Shorthall, 1997).
3.3 Alternative “Conventional” Policies
A benchmark for the development of conventional policy is needed, against which the costs of tax cuts and social welfare expenditure increases can be measured.
In our analysis, this benchmark is provided by the “no policy change” scenario which underlies the multi-year projections accompanying the 1998 budget. In this scenario, all relevant social welfare parameters are indexed with respect to prices over each of the years 1999, 2000 and 2001, but tax parameters are “frozen” in nominal terms. The rate of price increase assumed for each of the 3 years was 2%, in line with the macroeconomic projections provided by the Department of Finance (cumulating to a
6.12% increase over the 3 years). All tax parameters which are expressed in nominal terms (personal, PAYE, lone parent, widowed and age-related tax free allowances, mortgage interest limits and disregards, general and age-related income tax exemption limits and child additions to those limits, and the width of the standard rate tax band) are indexed by the rate of price increase. Similarly, on the social welfare side, all payment rates (personal rates, rates for qualifying adults and for child dependants) and all means test parameters expressed in money terms are indexed with respect to prices. Both tax and welfare parameters were rounded to the nearest 10 pence.
The analysis requires the construction of possible conventional scenarios for tax and welfare policy. The evolution of policy in this area is uncertain, as stated
11

government commitments cannot be translated into precise tax and welfare policies.
But precision is necessary if we are to be able to compare a basic income system with a conventional system. The scenarios constructed for this study should be considered as technical assumptions rather than predictions. We now set out the basis for their construction.
One key feature is that the resources allocated to income tax cuts (relative to the
“no policy change” scenario) amount to £250m per annum, in line with the notes to the multi-annual budgetary projections; while the resources allocated to increases in social welfare increases (over and above price inflation) are assumed to be of the order of £80m per annum (about two-thirds of the total increase in expenditure above the “constant levels of service” assumed in the no policy change scenario).
Within this budgetary envelope, three variants of conventional tax policy were considered:

Rates/bands: Under this scenario, tax cuts would be implemented using reductions in the standard rate of tax, and widening of the rate band. The resources are sufficient to permit a cut in the standard rate of tax from 24% to 21%, and an increase in the standard rate band from £10,000 to £11,900.

Personal allowances: Under this scenario, all tax-cutting resources would be focused on increases in personal allowances, which would rise (for a single person) from £3,150 to £4,400.

Mixed tax cuts: This strategy would combine elements of the previous two, and follow the broad shape of tax-cutting strategy in the past 5 years. Our estimates with the newly calibrated SWITCH model suggest that this would allow a cut in the standard tax rate of 2 percentage points, a 1 percentage point cut in the top tax rate, a widening of the standard rate band to £11,000 (single), and an increase in the basic personal allowance (single) to £3,550.
On the social welfare side, the development of social welfare rates is explained in
Table 3.1 below. (The table also illustrates how basic benefit rates are linked to corresponding social welfare rates, as discussed in the next section). The resources allocated to social welfare increases over and above inflation are allocated as follows:

The first step is to meet remaining commitments under Partnership 2000. These are to ensure that payment rates for Supplementary Welfare Allowance and shortterm Unemployment Assistance reach the (price-indexed) levels indicated by the
Commission on Social Welfare; and that all qualified adult rates reach at least
60% of that (price-indexed) standard.

Remaining resources are used to increase and harmonise payments for the elderly. This is partly for technical reasons, to ensure that the comparison between basic income and the conventional system reflects essential differences in structure. Our estimates suggest that a harmonised payment for the elderly, on this basis, would be £96 for those aged 66 to 79, with a higher rate of £101.30 for those aged over 80. Qualified adult rates for these schemes are adjusted in line with the increases for personal rates.

There is no general increase in social welfare rates over and above inflation, under this scenario: the only rates which increase by more than inflation are rates for the elderly, and the small increase required under Partnership 2000 to attain
12

price-indexed CSW standards for a limited number of other rates. This contrasts with actual policy developments in recent years, under which social welfare rates have risen somewhat ahead of prices.
Table 3.1 : Social Welfare Rates and Basic Benefit Rates, 1999-2000: A Harmonised Scenario
Price inflation (%)
General rate of increase for
SW (%)
Most SW schemes
1998 1999+
2.0
70.50
83
2.0
2000
2.0 2.0 Dept. Finance projection
2.0 2.0 Only rates for elderly, short-
£ per week
2001 Comment term UA, SWA and certain
QAA rates increase by more
74.80 Using general rate of increase
96.00 for SW
Aged over 66
(OACP, OANCP, Widow
Over 66 etc.)
Addition for over 80s 5
OACP (80+)
Basic benefit (21-64)
Basic benefit (66-79)
Basic benefit (80+)
Basic benefit (0-17)
Basic benefit (18)
Basic benefit (19)
Basic benefit (20)
88
72
83
88
22
30
40
50
5.30 Indexed to general rate of increase for SW
101.30 OACP plus the addition for those aged over 80
74.80 Linked to Most SW schemes
96.00 Linked to OACP
101.30 Linked to OACP (80+)
22.90 Calculated as % of basic
31.20
41.60 benefit for 21-64, % from 1998 rates
52.00
Notes: Values for 1998 basic benefit parameters are as per terms of reference; values for 1998 social welfare schemes are actual rates. Developments from 1999 to 2001 are designed to ensure that the rates are harmonised, as explained in the comments to the table.
In the construction of illustrative scenarios for this project, income tax cuts costing £250m per annum (on a full year basis) for each of three years were envisaged, with social welfare increases (over and above price indexation) costing
£80m per annum for each of the three years. The SWITCH estimate of the cost of the social welfare policy changes, measured against the “no policy change” scenario with price indexation of social welfare rates, is £246m over 3 years.
4 The SWITCH estimate of the cost of the tax changes, measured against the “no policy change” scenario – which simply means freezing the tax parameters at their 1998 levels – is estimated at about £750m over the 3 years.
3.4 Basic Income Policy
The payment rates for basic income (“basic benefits”) are, as agreed in clarifications of the project specification, harmonised with social welfare rates, in order to allow concentration on the impact of a shift in structure to a basic income.
The manner in which this is done is shown in Table 3.1 above. Social welfare rates are determined by applying the resources available for increases above indexation to the implementation of commitments under Partnership 2000 (raising some QAA rates
4 The gross cost is about £260m, but tax revenue increases by about £20m per annum.
13

and the personal rates for short-term UA and SWA), and to the creation of a uniform, higher rate of payment for those aged over 66 (with corresponding increases in QAA rates for relevant schemes). This results in an Old Age Pension rate (for all those over
66) of £96, with a higher rate of £101.30 for those aged over 80. Basic benefit rates for the elderly are linked to the OACP rate, while those for most adults (21-64) are linked to the rate applying to most social welfare schemes (UB, UA, DB etc.). The rates of payment for children and young adults (18 to 21) are determined by applying the same proportion of the main payment rate (aged 21 to 64) as was in the original terms of reference document.
3.5 Conclusion
In this chapter we described how the macroeconomic scenario for the analysis was constructed, and how the evolution of tax and welfare policy was projected in order to obtain a benchmark against which the introduction of a basic income scheme could be evaluated. As requested by the Working Group, a “harmonised” scenario was constructed under which the individual payment rates for adults and for the elderly would be the same under the basic income and conventional systems, in order that the analysis could focus on the impact of the change in structure rather than minor differences in payment rates.
One key feature of the framework of analysis is that basic income and a conventional system are evaluated on the basis of an identical resource requirement, in terms of the net revenue raised by the tax-transfer system to fund other government expenditure. In this context, cash gains by gainers must be offset in aggregate by the cash losses of the losers. This framework of analysis is different from that often used in the analysis of year-to-year budget changes, in which the focus is often on the real income changes for taxpayers and welfare recipients at different income levels. There are, of course, shortcomings in the traditional approach to budgetary analysis, as pointed out by Callan, Nolan, Walsh and Nestor (1999) and Callan, Nolan and Walsh
(1998). But each form of analysis can contribute to an understanding of the nature of a reform, and the feasibility of finding a path to its introduction.
An alternative frame of reference, stressed by Clark and Healy (1997), is to analyse the effects of the phasing-in of a basic income proposal against a benchmark in which each family has its real disposable income frozen at current levels. Such analysis is essential in finding a path which minimises or eliminates year-to-year losses in real disposable income. This can be a critical issue in the feasibility of a reform. What this analysis omits is that when real wages are growing, workers tend to expect growth in disposable incomes rather than simply a protection of their existing living standards. However, the terms of reference set out by the Working Group are focused on a different question: what would be the impact introducing a basic income over a three year period, rather than continuing with conventional policies over the same period? This frame of reference is more appropriate when evaluating the desirability of one set of tax/transfer policies against an alternative.
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4.1 Introduction
In this chapter we set out the calculations which determine the tax rate required to finance the basic income scheme under the specification set out above. It is useful in this context to bear in mind the “rule of thumb” set out by Akerlof (1978). This can be summarised as follows. A basic income system can be regarded as providing a set proportion of (pre-tax/transfer) income, and contributing a further proportion of average income towards the financing of other government expenditure. The tax rate required to finance such a system is simply the sum of these two proportions. This formulation brings out clearly the key role of the level of the income target, as a proportion of average income, in determining the tax rate. A 1 percentage point increase in the target income as a proportion of average income requires a 1 percentage point increase in the tax rate. If target income grows at the same rate as average income, there will be no change in the required tax rate; but a fall in the target income as a proportion of average income can give rise to a fall in the required tax rate.
The basic income target considered in Callan et al (1994) was set at £60 in
1993/4 terms, or roughly 48 per cent of average disposable income per adult equivalent at that time. Under the assumptions concerning the evolution of social welfare rates in the present study, the target basic income payment is £74.80 for most adults in 2001, or about 37 per cent of average disposable income per adult equivalent. This fall in the target basic income payment as a proportion of average income will, other things being equal, tend to reduce the tax rate required to finance the scheme from the levels seen in the study of the 1993/4 situation.
15

4.2 Costing and Financing the Basic Income
Cost of Basic Benefit Payments
The total gross cost of the basic benefit depends simply on the size and age structure of the population, since it is paid to each individual (or in respect of each child) without any conditions or adjustment in respect of household circumstances, income etc. The projected age distribution of the population is shown in Table 4.1, along with the payment rates and the associated aggregate cost. The total cost of paying a basic benefit at these rates comes to £11,969 m per annum.
Table 4.1 : Age Distribution in 2001 and Cost of Basic
Benefits
Age
Under 17
18
19
20
21-64
65-79
80+
Total
Number Basic benefit rate
(‘000s) £ p w
982.5
53.9
62.2
64.5
2,116.5
343.7
80.3
3,703.5
31.20
41.60
52.00
74.80
96.00
101.30
22.90
Cost
£m p a
1,173
88
135
175
8,254
1,720
427
11,969
Net Contribution from Tax/Transfer System to Exchequer Resources
The conventional tax transfer system makes a substantial contribution to the
Exchequer. A basic income system must replace that contribution, in addition to covering the costs of the basic benefit itself. Estimating the contribution of the conventional tax/transfer system to the Exchequer in 2001 requires a projection of the revenues from income tax, PRSI and levies (all of which are to be replaced by a flat tax rate and a Social Responsibility Tax) and of expenditure on social welfare schemes which are to be replaced by a basic income (this includes most cash transfers but does not include expenditure on non-cash benefits such as free travel, which are not replaced by the basic income scheme).
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Table 4.2
: Estimated Net Contribution of Conventional Tax/Transfer
System to the Exchequer, 2001
Item Projected value 2001
£m per annum
A Income tax
B Employment & Training Levy
C Health Contribution
D Employee PRSI
E Private Sector Employer PRSI
F Subtotal: PRSI and levies=B+C+D+E
G Total revenue=A+F
H Welfare expenditure (to be replaced by BI)
I Net contribution to the Exchequer=G-H
6353
250
312
631
1669
2862
9215
4329
4886
Notes: Items A to D and H are derived from a microsimulation-based projection of revenues and expenditure on social welfare schemes which are to be replaced by a basic income.
5 Item E is derived as follows. The Department of Finance supplied a figure of £1,510m for total employer PRSI in 1998.
An approximate estimate of the exchequer funded element can be derived by taking 2% (the main public sector employer rate) of the total public sector pay bill (£5,600m as per Budget 1998). The resulting estimate of private sector employer PRSI for 1998 is projected to the year 2001 by the growth in the income tax base, following the procedure adopted by the
Clark/Healy team.
Our estimates of revenues, expenditure and the net contribution of the tax/transfer system are set out in Table 4.2. The income tax and employee PRSI projections are based on a detailed microsimulation projection, which takes account of forecast income growth over the period and of income tax cuts costing £250m per annum relative to the “no policy change” scenario. The social welfare expenditure estimates take account not only of changes in social welfare payment rates, but also of the forecast fall in unemployment, and a forecast fall in the numbers of children for whom child benefit would be payable. Thus the projected expenditure on social welfare is designed to be consistent with the population forecasts which underlie the gross cost of the basic benefit payment (see Table 4.1), and the employment/unemployment forecasts which underlie the estimates of the tax base.
Combining these expenditure and revenue items, we see that the net contribution made by the conventional system to the financing of other government expenditure is approximately £4,970m per annum.
Savings
Our analysis also takes account of estimates of certain additional savings in government expenditure. The introduction of a basic benefit is treated as allowing a reduction in expenditure on Community Employment Schemes, FÁS training schemes, and educational maintenance grants. The total savings of such expenditure
5 A microsimulation based projection is required in order to ensure that the analysis is consistent.
Differences between projections based on administrative statistics and those based on a microsimulation basis are minimised by the procedures set out in Section 3.2. Neither simple projections based on administrative data nor the microsimulation method can claim to be always superior to the other.
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in the model database are estimated at £269m.
6
In an earlier draft, we also made provision for a “clawback” from the farm sector, as the basic income could be regarded as designed to replace certain other income supports currently received by that sector. Doubts have been raised about the legal feasibility of this approach, particularly with respect to the use of EU funds involved. The Working Group in considering this issue preferred to have the basic income proposal analysed without provision for such a clawback and our current draft therefore makes no provision for a clawback of agricultural income supports. Our estimates do allow, however, for administrative savings in the Department of Social Community and Family Affairs consequent on the abolition of the social welfare payment structure of £90m. This gives a total “other savings” figure in the region of £360m per annum.
Tax Base
The main remaining element in determining the tax rate required to finance the scheme is the size of the income tax base available under a basic income scheme. We have, as described earlier, made adjustments to the SWITCH database to ensure that it matches the level and distribution of the tax base as estimated by the Revenue
Commissioners for the year 2001. Table 4.3 clarifies the derivation of the income tax base for basic income purposes used in our analysis. The procedures involved follow those used in the Pathways analysis, starting from the estimated tax base under the conventional system, adjusting for payments which will be replaced by a non-taxable basic income, and adding an aggregate income estimate for low-income farmers and self-employed.
7
We consider other possible adjustments to the tax base in a later section, dealing with the sensitivity of the estimated tax rates to such alterations from our baseline estimates.
6 This is somewhat below total expenditure on these items: we discuss the implications for the tax rate required to finance basic income in a separate section.
7 A portion of the projected income tax base under the conventional system represents taxable social welfare payments which would, under a basic income system, be replaced by a non-taxable basic benefit. Such payments must be excluded from the income tax base. Similarly, payments under CE schemes and FÁS training allowances (which count as part of gross income, though not giving rise to significant tax revenue) are to be replaced by a non-taxable basic benefit.
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Table 4.3: Income Tax Base, for Basic Income Purposes,
2001
Item
RC estimate of income tax base under conventional system, with
£m per annum, 2001
£29,796m abolition of main allowances and reliefs
Deduct
Social welfare incomes which would not be present under a basic income system
FAS payments, CE payments, no longer present under a basic income system
Add
Estimate of incomes of poorest
40,000 self-employed and farmers in 2001
Result: Estimate of tax base for basic income purposes, 2001
£563m
£356m
£130m
£29,007m
The tax rate required to finance the basic income scheme is then calculated as
51.6 per cent, as summarised in Table 4.3 below. The total revenue required by the basic income scheme is given by the gross cost of the basic benefit scheme, plus the net contribution of the tax/transfer system to the Exchequer, less the specified savings in administration and other income maintenance schemes. Some of this revenue is supplied by a Social Responsibility Tax. The remainder must be supplied by the income tax, and the tax rate is simply calculated as the ratio of the required revenue to the size of the income tax base for basic income purposes.
Table 4.4: Derivation of Tax Rate Required to Finance Basic Income, 2001
Item
(A) Cost of basic benefit payments (see Table 4.1)
(B) Net contribution required (see Table 4.2)
(C) Savings 1
(D) Total expenditure = (A)+(B)+(C)
(E) Social Responsibility Tax 2
(F) Revenue required from flat tax = (D)-(F)
(G) Income tax base for BI
(H) Derived tax rate=(F)/(G)
Basic income system
11,969
4,886
(359)
16,496
1,540
14,956
29,007
51.6%
Notes: 1. This item makes provision for savings arising from the replacement of certain income supports by a basic income (for further discussion of the issues involved, see text). The amount shown includes a provision for expenditure on Community
Employment and FAS training payments and the maintenance element of educational grants. It also includes provision of £90m for reduced administration costs.
2. The Department of Finance estimate of private sector pay is £16,120m in 1998.
This figure is uprated to 2001 by the growth in the income tax base (for basic income purposes) as estimated by the Revenue Commissioners. Estimated revenue is then 8% of this figure.
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We now consider how sensitive this estimate of the required tax rate (51.6%) is to a number of alternative assumptions.
4.3 Sensitivity of the Tax Rate Required to Finance Basic Income to
Alternative Assumptions
Other possible adjustments to the income tax base
A note provided by the Revenue Commissioners identifies certain other adjustments which might be made to the income tax base. The net impact of downward and upward adjustments not already incorporated would be to add roughly
£435m to the income tax base. A simple calculation (based on the figures in Table
4.4) would suggest that this might reduce the tax rate required to finance the basic income proposal by 0.7 percentage points.
One of the main additions to the tax base concerns “deposit interest income undeclared or not recorded”, but on which DIRT has been paid. Close to £400m of such income is identified. The implicit assumption is that – even in the context of free capital flows and the advent of the euro – these deposits will remain in the tax net, despite a rise in the tax rate from 20-24% up to about 50%. This is a dynamic issue which we do not consider further here.
The other main potential addition to the tax base identified in the Revenue note concerns the abolition of tax relief for employee contributions to pension funds.
This raises complex issues – both static and dynamic – concerning the tax treatment of pensions more generally.
8
The existing treatment (exemption for contributions, exemption for pension fund income and taxation of pension benefits) is the most common internationally; but other alternatives are possible. New Zealand undertook a radical reform of the tax treatment of pensions within the context of a “conventional” tax and welfare system. A basic income system could also involve a similar radical restructuring of pensions. However, the key differences between a basic income system and a conventional system can be captured without a change in the tax treatment of pensions; radical or minor changes in the tax treatment of pensions are possible under either system, but the distributive consequences attached to such changes are not a feature of the basic income system itself. For this reason, our main costing and distributive analysis follows that in the Pathways document in leaving the tax treatment of pensions unchanged.
The Social Solidarity Fund
The CORI basic income proposal as set out in Pathways included provision for anti-poverty payments of £366m (in 1997 terms). The proposal examined here makes a lower provision for anti-poverty payments of £63m (in 1998 terms). The
Social Solidarity Fund also includes provision for additional payments to the elderly of £180m, assistance with mortgages of £25m and funding of socially useful work of
£100m (all in 1998 terms).
9
These expenditure items were not taken into account in
8 For example, removing the tax free status of contributions can have implications for future pension benefits, with distributive consequences that would require a complex dynamic analysis.
9 The Social Solidarity Fund also makes provision for expenditure on Optical, Dental and Aural
Benefit, equal to that on the Treatment Benefit scheme; our approach to the costing simply leaves this
20

our baseline costing or distributive analysis, because there was insufficient information on how this money would be spent to allow it to be attributed to particular individuals and families. However, a rough calculation suggests that this expenditure could add about 1.2 percentage points to the tax rate required to finance a basic income. Distributive effects using our baseline costing are presented in the next chapter. The findings from this analysis were used by the Working Group as an aid in designing a detailed specification of compensatory payments under the Social
Solidarity Fund. This specification was then modelled in SWITCH, and further costing and distributive analysis is also reported in the next chapter.
Expenditure savings
Our analysis took account of potential expenditure savings of approximately
£359m per annum. Upward adjustment to this figure could arise from undercoverage in the survey of payments under the FAS, CE and educational grant schemes: the maximum upward adjustment would be of the order of £160m, which would translate into approximately a half-percentage point reduction on the basic income tax rate. If
EU rules permitted the use of EU agricultural income supports to fund a general income support, there would be further savings, which would see the tax rate required to fund the basic income proposal fall by about 0.7 percentage points.
Replacement of Employers’ PRSI by Social Responsibility Tax
The net cost implications of the shift from employers’ PRSI to a Social
Responsibility Tax (SRT) are relatively small: the SRT raises some £130m less than employers’ PRSI. The distributive implications of this shift cannot be analysed as the
SWITCH model does not simulate employer PRSI. As the distributional impact of the shift cannot be analysed, we also exclude its cost impact in our distributional analysis, which means that the tax rate required to finance the basic income scheme in the distributional analysis is slightly lower at 51.2 per cent.
4.4 Conclusion
Our estimates suggest that a figure close to 51% can be taken as a reasonable baseline estimate of the tax rate required to finance the basic income scheme set out in the terms of reference. Sensitivity analysis suggests that the tax rate required to finance the scheme might be up to 2 percentage points lower or about 1 percentage point higher than the baseline estimate, depending on judgements as to the elements which might be included in the tax base, the potential for retaining EU funding of certain schemes with an income support element, and the size and nature of certain additional expenditures associated with the basic income proposal (the social solidarity fund). In the next chapter we consider the distributive effects of such a basic income scheme.
As noted in the introduction to this chapter, the basic income proposal under consideration is one which provides to most adults a payment of about 37 per cent of average disposable income (per adult equivalent). A higher income guarantee would, item out of both the savings and costs. The Social Solidarity Fund also includes a saving on interim payments under the Supplementary Welfare Allowance scheme, which is already taken into account in our calculations.
21

other things being equal, require a higher tax rate. For example, a basic benefit providing a payment in 2001 of 48 per cent of average income (roughly the proportion of average income represented by the lowest social welfare payments in 1994) would require a tax rate of about 60 per cent.
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5.1 Introduction
While the tax rate required to finance the basic income proposal in the agreed scenario is of central interest, so are the likely distributional consequences: how many people gain or lose, who are the gainers versus losers, and how would the numbers in poverty be affected? We go on to show how this impact would be modified by expenditure from the Social Solidarity Fund, detailed in Section 5.3 of this chapter. In this and the next chapter we analyse the “cash” or “first round” impact of the introduction of the basic income scheme, financed by a flat tax rate of 51.2 per cent, as described in Chapter 4. The distributional consequences are, of course, sensitive to both the tax rate required to finance the scheme, and to the likely behavioural responses to the change in tax/transfer structure which will be the subject of Phase 2 of the study on basic income. Here though our focus is on teasing out the initial impact of the scheme as described, in terms of gainers and losers and impact effect on relative income poverty. The main point of comparison adopted here is the income accruing to each tax unit in 2001 under the “mixed tax cuts” scenario described in
Chapter 3: an appendix to this chapter shows that the broad distributive impact remains similar when measured against alternative tax strategies focusing on increased allowances, or on cuts in the standard rate of tax coupled with a widening of the standard rate band. In this chapter we focus on the pattern of gains and losses from the basic income scheme. In the next chapter we turn to the first-round impact on relative income poverty.
5.2 Gains and Losses from a Basic Income Without the Social Solidarity
Fund
Table 5.1 shows estimates from the SWITCH model of the numbers of gainers and losers from the introduction of the basic income scheme described earlier. (Tax units are ranked by income per adult equivalent, using the equivalence scale of 1 for the first adult, 0.66 for a second adult, and 0.33 for children.) Losers outnumber gainers overall, but gainers significantly outnumber losers in the bottom 30 per cent of the income distribution. However, there are substantial numbers of losers predicted even in the lower reaches of the income distribution. Virtually all those at the top of the distribution lose, but so do about one in four in the bottom 30% of the distribution, and a substantial majority of those in the second and fourth decile from the bottom.
Quite different results will be found when the Social Solidarity Fund is used to compensate these potential low income losers, but our initial analysis is designed in part to identify such potential losers in order to facilitate the design of the compensatory mechanisms.
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Table 5.1
Numbers of Losers and Gainers from Introduction of a Basic Income (without
Social Solidarity Fund), by Approximate Decile of Income Per Adult Equivalent
______________________________________________________________________________________
Range of disposable income Loss No Change Gain All per adult equivalent > £0.50 p.w. > £0.50 p.w.
______________________________________________________________________________________
<= 72 7.9 0.3 190.8 199.0
> 72 <= 76 69.2 97.0 33.8 200.0
> 76 <= 97 75.7 51.9 69.7 197.3
> 97 <= 113 117.4 19.6 62.6 199.6
> 113 <= 142 64.6 28.3 106.2 199.2
> 142 <= 181 59.3 1.8 138.1 199.2
> 181 <= 225 107.8 11.3 78.8 197.9
> 225 <= 272 176.2 0.8 23.0 200.0
> 272 <= 337 184.6 0.0 14.3 198.9
> 337 179.5 0.0 19.8 199.3
All 1042.3 211.1 737.2 1990.6
______________________________________________________________________________________
Table 5.2 shows that average gains (for gainers) and losses (for losers) are quite substantial. While the greatest losses are at the top of the income distribution, there are substantial average losses in the middle reaches of the distribution, and significant losses (particularly in proportion to income) in the lowest deciles.
Table 5.2
Average Change in Disposable Income, Basic Income (Without Social Solidarity
Fund), by Approximate Decile of Income Per Adult Equivalent
______________________________________________________________________________________
Range of disposable income Loss No Change Gain All per adult equivalent > £0.50 p.w. > £0.50 p.w.
______________________________________________________________________________________
<= 72 -12.54 -0.34 44.14 41.82
> 72 <= 76 -10.21 0.00 22.81 0.32
> 76 <= 97 -7.09 0.02 37.89 10.68
> 97 <= 113 -7.64 -0.03 41.99 8.67
> 113 <= 142 -18.69 0.03 42.79 16.77
> 142 <= 181 -28.45 0.12 25.25 9.04
> 181 <= 225 -19.49 -0.01 21.76 -1.96
> 225 <= 272 -22.06 -0.18 35.96 -15.31
> 272 <= 337 -25.60 0.00 53.19 -19.92
> 337 -47.69 0.00 35.59 -39.40
All -23.42 0.01 35.96 1.05
______________________________________________________________________________________
Table 5.3 shows how the impact of the scheme (without a social solidarity fund) varies across different types of tax unit. More than half those who are predicted to lose from the introduction of the basic income scheme are single and without children. This includes about two-thirds of the single employed, 55 per cent of the single retired, and one-fifth of the single unemployed. Single earner couples without children are more likely to gain than lose, while about two-thirds of single earner couples with children gain. The single earner couples who gain account for about 25 per cent of all gainers. (The one-third of the single employed who do gain account for a further 25 per cent of all gainers). More than 80 per cent of dual earner couples without children lose; even where there are children, dual earner couples are more likely to lose than gain. Most couples affected by unemployment gain, whether they have children or not. Most lone parents – whether employed or non-earning - lose.
More retired couples gain than lose.
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Table 5.3
: Impact of a Basic Income without Social Solidarity Fund on Disposable Incomes for Families of Different Types
______________________________________________________________________________________
Family Type Loss No Change Gain All
> £0.50 p.w. > £0.50 p.w
______________________________________________________________________________________
Numbers of tax units (thousands)
Single Employed without Children 414.4 15.8 185.7 616.0
Single Unemployed without Children 21.0 52.6 33.0 106.6
Employed Lone Parent 22.2 0.0 4.6 26.9
Non-Earning Lone Parent 80.4 0.3 1.4 82.1
Single Retired Tax Unit 127.8 70.0 32.4 230.2
Single Earner Couple without Children 43.3 1.4 60.6 105.3
Single Earner Couple with Children 60.2 1.7 123.0 184.9
Dual Earner Couple without Children 92.5 0.2 18.5 111.3
Dual Earner Couple with Children 95.9 2.0 60.6 158.5
Dual Earner Couple with Relative Assisting 4.2 0.0 14.7 18.9
Non-Earning Couple (>= 1 UE) no Kids 0.3 0.6 6.0 6.9
Non-Earning Couple (>= 1 UE) with Kids 3.3 0.0 21.9 25.2
Retired Couple 32.9 26.3 60.8 120.1
All Other Tax Units 43.8 40.0 113.2 197.0
All 1042.3 211.1 736.5 1989.9
_____________________________________________________________________________________
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5.3 Adjustments to the Basic Income Scheme to Compensate Low-
Income Losers
This section has two parts. We begin (Section 5.3.1) by identifying more closely the main low income losses associated with the basic income scheme in the absence of compensatory payments from the Social Solidarity Fund.
This information was used by the Working Group to design compensation mechanisms for low income losers as part of the Social Solidarity Fund. Section 5.3.2 describes the compensation mechanisms proposed by the group, and the way in which they are modelled in further analysis. Section 5.4 then outlines the profile of gains and losses under the basic income scheme with compensatory payments from the Social Solidarity Fund.
5.3.1 Identifying Low Income Losers under the Basic Income Proposal without a Social Solidarity Fund
A detailed breakdown of the potential losses for families of different types in the bottom 4 deciles of the distribution of income per adult equivalent shows that family units headed by a single, widowed, separated or divorced person (rather than by a couple) account for most of the potential losers. Single employees, single unemployed, lone parents and the "other" category (mainly ill and disabled but including some carers and widows below pension age without children) account for about 95% of all potential losers in the bottom 4 deciles.
An in-depth investigation was undertaken to identify the reasons for the incipient losses. We report on each group in turn.
Single employees
About half of the losses for single employees are for young persons aged under 21. Under the basic income proposal, their earnings would be subject to tax at approximately 50%, while they would receive a basic benefit of between £22.90 (at age 17) and £52 (at age 20). But the individuals identified here have earnings and tax free allowances which would leave them better off under the standard system (e.g., a
20 year old with a standard tax free allowance of £83 per week would be about £5 per week better off at earnings of £100 per week).
The basic income proposal includes, over and above the social solidarity fund, a figure of £100m for payments financing “socially useful work”. As the mechanism for allocating these moneys was not specified in advance of this preliminary distributional analysis, some losses are found to arise among persons on temporary employment schemes, with incomes from that scheme in excess of the basic benefit payment. Under the basic income option analysed here, these individuals receive the same total payment - part as basic benefit, and the remainder as a scheme-based payment. But the disposable income from this package is lower in the basic benefit scheme, because a tax rate of about 50% applies to the non-basic-benefit element of the payment, where little if any tax would be payable under the conventional system.
The allocation of the moneys for socially useful work is described later, in tandem with the specification of the social solidarity fund, and a reanalysis including these specifications is performed later, showing that most of the losses identified here are compensated.
26

Single unemployed
Most of the losses for this group are for young persons aged under 21. For these individuals, the basic benefit payment (between £31.20 and £52) is lower than the UA or UB they would receive under a continuation of the standard tax and welfare system, where the maximum rate of individual payment is the same for 18 to 20 year olds as for those aged 21 and over (£74.80).
The remainder of the losses in this group arise for individuals on state training schemes where the income from the scheme is in excess of the basic benefit rate for the individual. While the individuals retain this excess as part of their income under the basic income proposal, income other than the basic benefit is subject to tax at approximately 50%, so these individuals are found to be better off under the conventional system where little if any tax would be payable.
Lone parents
The bulk of the losses here arise from the fact that, under the social welfare scenario specified by the Working Group, the personal rates for certain social welfare schemes (notably Widows Contributory Pension and Deserted Wife's Benefit) are above the corresponding basic benefit rate (£78.60 as against £74.80 per week). This arises from the fact that the basic benefit rate is linked to the main rate for UB, DB and means-tested schemes, while the personal rate for some non-means-tested schemes is higher. Similarly, some losses arise because the basic benefit payment for children may be below the combination of child dependant rates (which are higher for lone parents than on most schemes) and child benefit rates (which include higher payments for higher order children, whereas the basic benefit rate is constant for all children).
For a smaller number of cases, there are losses associated with the fact that the individuals have both a social welfare income and a non-social welfare income (from employment or property income). In these circumstances, the basic benefit may replace the amount of the social welfare payment, but the tax rate applying to the other income source is higher than under the standard system, leaving the individual worse off than under the conventional system.
Single Retired
The bulk of the losses in this category are found to arise from the payment of a
Living Alone Allowance (at a rate of £6.40 per week in 2001) under the standard system. This payment is not included in the specification of the basic income proposal, where payments are differentiated only according to age.
There are also some losses for individuals for whom the basic benefit exactly replaces a social welfare pension. These losses are associated with the taxation of non-social welfare incomes (mainly occupational pensions, but also including some investment incomes). Under the basic income proposal these incomes would be subject to tax at about 50%, whereas under the conventional system the amount of tax payable would be significantly lower.
27

Other
This is a somewhat disparate group, including individuals who are ill or disabled, as well as some carers, and some widows (those without children, below pension age, and not in employment). The main reason for losses in this group is that payment rates under the conventional system for Widows’ Contributory Pension,
Carer's Allowance and Invalidity Pension are above the basic benefit rate (which is pegged to the commonest rate of payment in the social welfare system). Some young individuals who qualify for the full rate of Disability Allowance, but would receive a basic benefit of less than the full adult rate are also found in this group.
5.3.2 Compensation Mechanisms Examined by the Working Group 10
The proposal under analysis makes provision for a Social Solidarity Fund, of approximately £280m in 2001 terms. It is our understanding that this expenditure would be directed at compensating certain losers, particularly those on low incomes.
In addition, there is provision for expenditure of £100m (gross) on “socially useful work”: this may also have the effect of compensating for some losses, though its primary aim is to ensure an incentive to take up such work. Table 5.4 shows the aggregate extent of gains and losses from the basic income scheme as modelled above.
11
It can be seen that aggregate losses in the lower half of the income distribution come to around £180m per annum.
Table 5.4 Aggregate Gain/Loss in Disposable Income Under Basic Income (Without Social
Solidarity Fund) compared with Mixed Tax Cut Scenario, Classified by Approximate
Income Decile
______________________________________________________________________________________
Range of disposable income Loss No Change Gain All per adult equivalent > £0.50 p.w. > £0.50 p.w.
______________________________________________________________________________________
£m per annum
<= 72 -5.2 0.0 439.1 433.9
> 72 <= 76 -36.9 0.0 40.2 3.3
> 76 <= 97 -28.0 0.1 137.8 109.9
> 97 <= 113 -46.8 0.0 137.0 90.2
> 113 <= 142 -62.9 0.0 237.0 174.1
> 142 <= 181 -88.0 0.0 181.8 93.9
> 181 <= 225 -109.6 0.0 89.4 -20.2
> 225 <= 272 -202.7 0.0 43.1 -159.6
> 272 <= 337 -246.3 0.0 39.8 -206.6
> 337 -446.3 0.0 36.8 -409.5
All -1272.6 0.1 1382.0 109.5
______________________________________________________________________________________
The aggregate amount earmarked in the proposal for the Social Solidarity Fund thus has the potential to compensate low income losers, if it were sufficiently well targeted. If such compensation is actually to take place, however, a key issue is how it is to be structured and targeted.
One key issue is whether the compensation is designed to be a temporary mechanism, smoothing the transition to a new system, or a permanent feature of the new system. If it were to be a temporary mechanism, then the current occupants of
10 For reservations on the nature of the compensation mechanisms, see the Overview by the Working
Group.
11 The aggregate gain is £130m, approximating the administrative savings assumed in the analysis.
28

certain social positions would find their incomes protected against loss, but future occupants of those positions would have lower incomes than under the conventional system. The compensation mechanisms examined by the Working Group are intended, with one exception, to be permanent. We describe the permanent compensation mechanisms below, and model the distributional impact of the basic income scheme including these permanent compensatory features.
One element of the compensation package examined by the Working Group is explicitly designed to be temporary. This concerns the impact of the scheme on young people aged 18 to 21, currently unemployed or otherwise entitled to a social welfare payment. Such individuals may currently have a social welfare payment of up to the full adult rate, but would obtain less under the age-differentiated payment structure of the basic benefit. The Working Group examined a temporary compensation mechanism to ensure that those currently aged 18 to 20 and whose unemployment assistance payments were above their basic income entitlement would continue to receive the higher payment; but this feature would last for a maximum of three years.
Our modelling approach is to exclude this temporary compensation mechanism, in order to focus on the long-term distributional impact of the shift to a basic income scheme. Under the time frame envisaged in the analytic framework, by the year 2001 the distributional impact would be as analysed here.
Thus, we analyse the permanent element of the compensation mechanism under the proposal, which is designed to protect current and future occupants of certain social positions against income losses. The associated costs are also ongoing rather than temporary.
The permanent compensation package has five main elements:
1.
A payment of £10 per week to all those living alone, with no income other than basic income, and to those in households where one adult is in need of care and no household member has an income other than the basic income.
This is wider than the Living Alone Allowance, but is designed in part to replace the social welfare system’s Living Alone Allowance for elderly people;
2.
A higher basic benefit payment for third and higher order children. This compensates for the higher rate for such children under child benefit;
3.
A disability payment of £4 per week in the basic income system, for those who are out of work for more than a year and unable to work.
4.
A tax allowance of £2,000 for those entitled to an Old Age Contributory
Pension and an occupational pension, with the allowance available only against the income from the occupational pension.
5.
A payment of £50 per week for those engaged in “socially useful work” schemes.
Some of these compensation elements involve departures from the purity of the basic income scheme. The structure of the additional payment for single persons and wider units with no independent income could create a disincentive towards individuals living together. But the overall response in terms of household formation will also be influenced by an increase in the amount payable to couples under the more individualised basic income scheme. In any event, the size of the additional payment for one-person households may be small enough that behavioural responses to this
29

could be slight. Potentially more important is the fact that the additional payment to single person households with no income other than a basic income raises the effective marginal tax rate above the nominal level of 51 per cent. For a job close to minimum wage levels, the effective tax rate on earnings can rise to 55 per cent on a full-time job or close to 60 per cent on a part-time job. These potential impacts will be taken into account in our later work on the measurement of financial work incentives and disincentives. The structure of this payment, and the need to assess disability, would also increase administrative costs; but the extent to which administrative savings affect the overall costings is also slight.
In modelling the elements of the compensation package we make a number of simplifying assumptions.
1.
The presence of a household member “in need of care” is defined as coinciding with the payment of a carer’s allowance; if anything, this may tend to underestimate the cost of this element of the package;
2.
This element of the package requires no additional assumptions;
3.
The disability supplement is payable to those currently in receipt of
Disablement Allowance, Invalidity Pension and Disability Allowance;
4.
It is not possible for technical reasons to model the envisaged allowance precisely. An approximation is possible, however, with some indication of how this differs from the actual proposal. Since most of the taxable income of pensioners arises from occupational pensions
12
, the tax allowance is modelled simply as an age allowance. It therefore applies also to those not entitled to a contributory pension. Most of this group will obtain no benefit from the allowance because of the lack of other income. The main exception would be civil service pensioners who have an occupational pension but no entitlement to an old age contributory pension. The extension of the compensatory tax allowance to this group will raise the aggregate cost, and increase the number of gainers in the analysis. But some indication of how this differs from the actual package which the Group wished to examine is given below;
5.
The payment of £50 per week gross to those engaged in socially useful work is modelled as a £23.60 net increase in the income of those on Community
Employment schemes. The aggregate gross cost is about £104m, under a projection that the number of places available is “frozen” at the level of 40,000 reached in 1998, but the aggregate net cost (taking into account the tax revenue) is about £49m.
5.4 Distributive Impact of Basic Income with Compensatory Payments
The overall pattern of gains and losses in moving from the “conventional” baseline policy (with a mixed package of tax cuts) and the revised basic income scheme with compensatory elements in place is set out in Table 5.5 below.
12 One could also argue that the restriction of the relief to occupational pensions only is somewhat arbitrary, as some individuals may have made provision for retirement through direct investment in property or other assets.
30

Table 5.5
Numbers of Losers and Gainers from Introduction of a Basic Income with
Compensation Mechanisms, by Approximate Decile of Income Per Adult
Equivalent
______________________________________________________________________________________
Range of disposable income Loss No Change Gain All per adult equivalent > £0.50 p.w. > £0.50 p.w.
______________________________________________________________________________________
Number of tax units (thousands)
<= 72 7.3 0.0 191.7 199.0
> 72 <= 76 19.7 86.3 94.0 200.0
> 76 <= 97 33.8 47.4 116.2 197.3
> 97 <= 113 33.8 23.6 142.2 199.6
> 113 <= 142 43.7 28.3 127.2 199.2
> 142 <= 181 64.4 10.1 124.7 199.2
> 181 <= 225 129.8 1.5 66.6 197.9
> 225 <= 272 178.0 0.9 21.1 200.0
> 272 <= 337 184.6 0.8 13.6 198.9
> 337 179.7 0.3 19.3 199.3
All 874.8 199.4 916.3 1990.6
__________________________________________________________________________________ _
It is clear that the introduction of the compensation package alters the balance between the numbers of gainers and the numbers of losers quite substantially. The original package involve losses for about one million tax units, and gains for about three-quarters of a million. The revised package, with compensation mechanisms in place, involves gains for 945,000 tax units, and losses for 855,000. It remains true that both average gains (for gainers) and average losses (for losers) tend to be quite substantial. Overall, 70 per cent of tax units in the bottom 4 deciles would gain from the introduction of a basic income, 18 per cent would be unaffected and 12 per cent would lose.
Table 5.6 examines the size of gains and losses across the income distribution.
We distinguish between the bottom 4 deciles, deciles 5 to 7, and the top 3 deciles. We see that just under 1 in 3 tax units are set to experience a large gain, while more than 1 in 3 would experience a large loss. Small or intermediate gains are more common than the corresponding losses. But there is considerable variation in the incidence of the different sizes of gain and loss across the income distribution. Looking first at the bottom 4 deciles, we find that almost 45% of tax units would gain more than £10 per week from the introduction of a basic income, while only 6% would experience a similar loss. Among the middle income groups, about 40% would see a large gain while 1 in 4 would face a large loss. For the top 3 deciles, by contrast, about 5 out of 6 tax units face a large loss, while only 7% would see a similar gain.
31

Table 5.6: Distribution of Gains and Losses by Size, Classified by Income Group: Basic
Income with Compensation versus Mixed Tax Cut
Decile
Loss
£ p w
Little change
Over £10 £5 to £10 £1 to £5
Less than
£1
£1 to £5
Thousands of tax units
Gain
£5 to £10 Over £10
372.5
238.2
Bottom 4 49.9
Middle 3 144.0
14.9
46.3
29.3
40.8
164.5
51.8
84.9
38.9
80.1
36.4
(5-7)
Top 3 512.8 22.9 5.3 3.6 5.2 5.4
All 706.7 84.1 75.5 220.0 129.0 121.8
Note that the “no change” category now includes changes of less than £1 rather than £0.50
43.0
653.6
Table 5.6a: Distribution of Gains and Losses by Size, Classified by Income Decile, Basic
Income with Compensation versus Mixed Tax Cut.
Loss
£ p w
Little change
Decile
Over £10 £5 to £10 £1 to £5 Less than
£1
Thousands of tax units
Gain
£1 to £5 £5 to £10
Over
£10
Bottom
2
3
4
5
6
7
8
9
Top
Total
4.1
19.7
10.6
15.4
34.1
39.7
70.2
158.1
177.2
177.5
706.6
1.5
0.0
6.2
7.2
6.6
7.2
32.4
15.0
6.5
1.4
84.1
1.6
0.0
16.5
11.3
2.4
12.2
26.1
4.1
0.8
0.5
75.5
0.2
88.9
50.0
25.4
30.8
17.2
3.8
2.2
0.8
0.7
220.0
6.2
22.9
13.5
42.2
9.4
23.4
6.1
3.4
0.4
1.5
129.0
7.2
18.7
17.5
36.7
7.2
19.0
10.1
2.1
1.5
1.7
121.8
178.2
49.8
83.0
61.5
108.7
80.3
49.2
15.2
11.6
16.1
653.6
Focusing again on the bottom 4 deciles, Table 5.7 shows that large gains are particularly likely for couples dependent on welfare payments, including both the unemployed and the elderly. Gains arise for such couples principally from the payment of a full basic benefit rather than a qualified adult addition as in the conventional system. Single employees in these deciles are also likely to gain, as their low earnings mean that the gain from the basic benefit outweighs any negative impact from the application of a higher tax rate to their earnings. Low earning couples with children also gain, in part because the payment of basic benefit is automatic, whereas they may not be taking up their entitlement to Family Income Supplement. There are large gains also for some single unemployed, which can reflect the fact that a full basic benefit is paid rather than an unemployment assistance payment reduced by the
“benefit and privilege” assessment for young adults living with their parents.
32

Table 5.7: Distribution of Gain and Loss by Family Type for Tax Units in Lowest 4 Income
Deciles, Basic Income with Compensation versus Mixed Tax Cut
Family Type
Single Employee
Single Unemployed
Lone Parents
Couples with/without
Children
Unemployed Couples with/without Children
Single Retired
Retired Couple
Other
Total
Loss Little Gain
Over £10 £5-£10 £1-£5 change £1-£5 £5-£10
Over £10
11.8 3.4 3.9 7.3 5.0 6.6 70.8
17.5
10.8
0.1
1.3
3.1
0.2
1.5
2.6
0.0
39.5
29.2
0.6
10.9
2.5
0.7
15.4
2.0
0.5
19.4
32.9
67.5
2.1
1.4
0.6
5.6
49.9
0.8
3.7
1.1
1.3
0.6
8.7
0.3
0.6
66.7
0.5
1.0
41.2
1.7
0.7
42.4
0.6
11.7 20.2 21.9 11.9
14.9 29.3 164.5 84.9 80.1
26.1
14.7
26.9
113.4
372.5
The compensation scheme substantially reduces the number of low income losers, as intended. While the scheme without compensation involved losses for about
270,000 tax units in the bottom 4 deciles, the scheme including the social solidarity fund and payments for “socially useful work” reduces this figure to about 110,000.
However, the nature of the compensation mechanisms used – which try to avoid serious departures from the principal of a basic income – means that there are difficulties in targeting the payment. These difficulties lead to some significant remaining losses, and a cost of compensation which is substantially greater than simply the sum of the potential losses. We consider each of these issues in turn.
In Section 5.3.1 we identified 5 main groups among the bottom 4 deciles for which the basic income scheme without a social solidarity fund would involve losses: single employees, single unemployed, lone parents, single retired and the “other” category. The compensation scheme examined here eliminates the incipient losses for the single retired and reduces them for the other groups. In explaining the remaining losses the basic source of the loss is as described in Section 5.3.1; what remains to be explained is why the compensation mechanism examined here does not eliminate it.
We find that the single most important cause of the remaining losses is the reduced benefit payable to those aged under 21. This affects some young single employees and young single unemployed persons, and accounts for almost two-thirds of the large losses among the bottom 4 deciles. While temporary compensation for those currently aged under 21 is envisaged, the analysis shows the long-term impact on those falling into this age group. Differences between the basic benefit rates, which are linked to the commonest rates of welfare payment, and the higher personal and child rates for certain lone parents under the conventional system are the second most important factor. (Again, see Section 5.3.1 for details). While some such losses are compensated for by the £10 per week payment, lone parents living with their own parents, or widows with an adult child in employment would not qualify for this. Other less numerically important factors include the fact that the conventional system gives both tax allowances and welfare payments to employed lone parents, while the basic income system replaces both with a single payment: even if this includes the extra £10 per week there are losses for a high proportion of this small group.
33

The gross cost of the compensation package as described above, together with the provision for “socially useful work”, is estimated at about £370m. When the tax take from payments for “socially useful work” is taken into account, this falls to
£418m. While this sum is more than the total required to compensate the losers in the bottom half of the distribution, the aggregate net losses for the bottom half of the distribution fall only from £190m to £135m. Thus, while the compensation package does reduce the extent of net losses in the lower part of the income distribution, significant losses remain.
Why does the compensation package not have a greater impact on low income losses? The results show that about £180m of the additional net expenditure (or the
“tax expenditure” involved in the tax free allowance for the elderly) goes to the top half of the income distribution. This figure would fall by at most £40m if the proposal for a special pension allowance could be modelled precisely, to exclude civil servants not in receipt of an Old Age Contributory Pension. Furthermore, the net additional expenditure requires a rise in the tax rate from 51.2 per cent to 52.9 per cent, which generates some additional losses among low income earners (principally in the fifth decile). But a third factor is that a significant proportion of the “compensatory payments” go to tax units which are in the bottom half of the income distribution, but were not set to lose from the original package. Further refinement of the compensation mechanism could be considered, but the present analysis is sufficient to make clear the trade-offs between precise targeting of the compensation payments, departures from the simplicity of the basic income scheme and the tax rate required to finance increased compensatory payments.
Table 5.8
: Impact of a Basic Income (With Compensation Mechanisms) on Disposable
Incomes for Families of Different Types
______________________________________________________________________________________
Family Type Loss No Change Gain All
> £0.50 p.w. > £0.50 p.w
______________________________________________________________________________________
Numbers of tax units (thousands)
Single Employed without Children 419.9 17.1 179.1 616.0
Single Unemployed without Children 20.9 38.3 47.4 106.6
Employed Lone Parent 21.6 0.0 5.3 26.9
Non-Earning Lone Parent 14.7 27.5 39.9 82.1
Single Retired Tax Unit 36.1 64.9 129.2 230.2
Single Earner Couple without Children 44.2 0.6 60.5 105.3
Single Earner Couple with Children 63.2 1.8 119.9 184.9
Dual Earner Couple without Children 93.7 1.2 16.4 111.3
Dual Earner Couple with Children 102.4 0.4 55.7 158.5
Dual Earner Couple with Relative Assisting 5.3 0.0 13.6 18.9
Non-Earning Couple (>= 1 UE) no Kids 0.3 0.6 6.0 6.9
Non-Earning Couple (>= 1 UE) with Kids 3.2 0.0 22.0 25.2
Retired Couple 23.0 26.6 70.5 120.1
All Other Tax Units 26.2 20.5 150.3 197.0
All 874.8 199.4 915.6 1989.9
______________________________________________________________________________________
Table 5.8 gives a broader perspective on gains and losses by family type across the whole income distribution. It shows that gains are particularly likely for those who are retired (both singles and couples) and for unemployed couples, as well as for single earner couples, though substantial numbers of losers are also found in the latter group.
Those in the “other” category, which includes many of those ill or disabled are also
34

likely to gain. Single employees and dual earner couples with or without children remain likely to lose. The compensation package has altered the balance for nonearning lone parents, so that they are about equally likely to gain or lose; but employed lone parents are still more likely to lose than to gain.
Table 5.9 (overleaf)
13
continues to focus on gains and losses by family type over the whole distribution, but shows the distribution across different levels of gains or loss. Most of those who gain or lose (over 80% of losers and two-thirds of gainers) do so by more than £10 per week. Losses for single employees are likely to be substantial. Over 300,000 such employees would, on these estimates, lose more than
£10 per week. This is almost half of all those set to lose an amount that great.
However, because the single employed is such a large group and a minority do gain, they also account for a smaller but still significant proportion – about 20 per cent - of those whose income rises by more than £10 per week. For single or dual earner couples a particularly high proportion of those who gain or lose generally do so by more than £10.
13 Note that the “no change” category now includes changes of less than £1 rather than £0.50.
35

Table 5.9: : Impact on Families of Different Types of a Basic Income with Compensation Mechanisms
________________________________________________________________________________________________________________________
Loss or gain in £ per week Loss of No Gain of All
£10 or £5 to £1 to change £1 to £5 to Over
or more £10 £5 £5 £10 £10
Family Type________________________________________________________________________________________________________ _
Numbers of tax units (thousands)
Single Employed without Children 335.2 49.1 28.6 26.6 26.7 27.1 122.7 616.0
Single Unemployed without Children 17.9 1.3 1.5 40.1 10.9 15.4 19.4 106.6
Employed Lone Parent 18.9 2.0 0.7 0.0 0.8 0.9 3.6 26.9
Non-Earning Lone Parent 9.2 2.9 2.6 29.5 2.5 2.0 33.4 82.1
Single Retired Tax Unit 15.1 7.1 13.9 66.8 49.5 46.5 31.2 230.2
Single Earner Couple without Children 40.8 2.1 1.0 1.6 1.5 3.0 55.5 105.3
Single Earner Couple with Children 54.3 4.3 4.5 1.9 5.0 5.0 109.9 184.9
Dual Earner Couple without Children 90.0 1.6 2.0 1.3 0.7 2.3 13.4 111.3
Dual Earner Couple with Children 87.2 8.9 6.1 1.8 4.0 3.6 46.9 158.5
Dual Earner Couple with Relative Assisting 4.4 0.0 0.5 0.4 0.4 0.3 13.0 18.9
Non-Earning Couple (>= 1 UE) no Kids 0.3 0.0 0.0 0.6 0.0 0.3 5.7 6.9
Non-Earning Couple (>= 1 UE) with Kids 1.9 0.8 0.6 0.0 1.0 0.4 20.6 25.2
Retired Couple 19.0 2.2 1.7 28.2 3.9 3.0 62.1 120.1
All Other Tax Units 12.5 1.9 11.8 21.1 22.2 11.9 115.5 197.0
All 706.6 84.1 75.5 220.0 129.0 121.8 652.9 1989.9
________________________________________________________________________________________________________________________
36

5.5 Gender Impact of a Basic Income
One feature of the basic income proposal is that it would provide an independent income to many women who currently do not have an independent source of income. This would include women for whom a “qualifying adult allowance” is currently paid under the social welfare system 14
, and many women who are engaged in full-time child rearing or caring roles, and others not engaged in paid work. Table 5.10 below shows the static impact of a move to a basic income system on the individual incomes of adult men and women: the results are shown for the basic income system without the compensation mechanisms described in the previous section, but the addition of these elements makes little difference to the results shown in this section.
Table 5.10: Gain/Loss in Individual Disposable Income for Men and Women
Loss £10 p w or more
Loss £5-£10 p w
Loss £1-£5 p w
Little change
Gain £1-£5 p w
Gain £5-£10 p w
Gain £10 p w or more
All
% of men
52.4
5.8
5.1
10.2
2.8
2.9
20.8
100%
% of women
25.2
6.8
7.2
13.1
2.6
2.5
42.5
100%
Over 40% of women experience a large gain in individual incomes (more than £10 per week), compared with about 20% of men. Correspondingly, about half of the men experience a loss in individual income of more than £10 per week, compared with about 25% of women. Much of the redistribution is between spouses or partners.
When we look instead at “tax unit” income – which combines the incomes of spouses and partners – we see that the pattern of gains and losses is much more similar across the sexes (Table 5.11), though more men than women see their tax unit income rise by
£10 per week or more.
Table 5.11: Gain/Loss in Tax Unit Disposable Income for Men and Women
Loss >£10 p w
Loss £5-£10 p w
Loss £1-£5 p w
Little change
Gain £1-£5 p w
Gain £5-£10 p w
Gain £10 p w or more
% of Men
36.3
5.0
5.1
10.0
3.2
3.5
36.9
100.0%
% of Women
35.5
6.5
7.8
12.7
3.4
3.6
30.5
100.0%
14 The system allows for “split payments” where the qualifying adult allowance can be paid direct to the person concerned; but the payment of the income is still dependent on a spouse or partner’s qualifying for a personal rate payment.
37

5.6 Conclusions
The cash or “first-round” impact of the basic income proposal was examined against three alternative baselines, associated with different forms of tax-cutting strategy. We focus on results for the “mixed” tax cut strategy, because, as shown in the Appendix to this chapter, the main distributive features are similar for each of the other two baselines.
Our results show that the introduction of a basic income scheme would have complex and far-reaching distributive implications. Most of the gains and losses involved are in excess of £10 per week. In broad terms, there is a substantial redistribution from the upper to the lower half of the income distribution; and a redistribution from those without children to those with children. However, there are substantial numbers of gains and losses at each level of the income distribution, and among those with and without children.
We also examined compensation mechanisms for low income losers as requested by the Working Group. These mechanisms did alter the balance between the numbers of gainers and losers, making gains more likely than losses. Over 70% of those in the bottom 4 deciles would be set to gain from the introduction of a basic income, with 6% facing losses. Couples, both unemployed, retired and with earnings, and single employees and single retirees were all likely to gain substantially. About
50,000 tax units in the bottom 4 deciles faced losses of £10 per week or more. Many of these were young single people, either unemployed or in employment, but some lone parents were also likely to be affected. Over the whole income distribution, single employees without children, lone parents either employed or unemployed, and dual earner couples with or without children were particularly likely to lose.
Turning to the gender impact we find evidence that the basic income scheme would transfer resources within families from men to women. The overall impact on family income would, however, be very similar for men and women, with men seeing a slightly more favourable effect.
38

Appendix: Distributive Effects of the Basic Income Scheme Measured
Against Alternative Tax-cutting Strategies
In addition to the “mixed tax cuts” strategy used as a baseline in the chapter, we also measured the distributive effects of the basic income scheme against two alternative strategies: one with an exclusive focus on increasing personal allowances, and one with a focus on cutting the standard tax rate and widening the standard rate band.
The main features of the distributive impact of the introduction of the basic income scheme are not strongly affected by the tax-cutting strategy used as a baseline.
The count of gainers and losers is almost identical for each of the three strategies, with the basic income scheme involving losses for about one million tax units and gains for about three-quarters of a million.
Table 5.A.1 shows the percentage change in income for each decile group, measured against the three different baselines. It can be seen that the impact on the bottom three deciles is almost identical across the three strategies, reflecting the fact that very little tax is paid by these groups. The rest of the bottom half of the distribution (deciles 4 and 5) experience gains on average from a basic income: the gains are somewhat less when measured against a tax-cutting strategy focused on allowances, which is the most favourable to this group. There are losses for the top four income deciles measured against each of the three tax cutting strategies.
Table 5.A.1 : Distributional Impact of a Basic Income Measured Against
Alternative Tax-Cutting Strategies
Decile
Poorest
2nd
3rd
4th
5th
6th
7th
8th
9th
Top
All
85.4
4.3
11.7
10.9
9.8
3.2
-1.4
-4.9
-5.1
-5.9
0.4
Increased
Allowances
Mixed Tax Cuts
85.2
4.2
12.8
11.6
11.1
4.4
-1.0
-4.9
-5.6
-6.6
0.4
Standard Rate Cut and Wider Band
85.2
4.3
13.1
11.7
11.6
4.8
-1.0
-5.2
-6.0
-6.4
0.4
The main features of the distributive impact of the introduction of a basic income are not, therefore, very sensitive to the tax-cutting strategy used as a baseline.
In each case we find very strong gains at the bottom of the income distribution, with particularly large proportionate gains for the bottom decile; smaller gains for those in the middle of the income distribution; and losses for the top four deciles, but particularly in the top 30% of the distribution.
39

6.1 Introduction
The previous chapter analysed in some detail the initial pattern of gains and losses from the basic income proposal in the agreed scenario. In this chapter we continue to examine the “cash” or “first round” impact of the introduction of this basic income scheme, but our focus shifts to how the numbers in poverty would be affected. Once again it is necessary to emphasize that behavioural responses to the change in tax/transfer structure are not being taken into account. As in Chapter 5, incomes under the basic income scheme are being compared with the income accruing to each tax unit in 2001 under the “mixed tax cuts” scenario described in Chapter 3.
First of all, in Section 6.2, we examine the impact of a basic income proposal without the compensation mechanisms proposed under the Social Solidarity Fund. Later, in
Section 6.3, we examine the impact of the proposal with the compensation mechanism.
In analysing poverty we will for the most part be concentrating on the numbers falling below relative income poverty lines, and the extent to which they fall below those lines. We will also refer to those below such lines and experiencing manifest deprivation.
6.2 Poverty Rates Under a Basic Income (Without Social Solidarity Fund)
Versus the Conventional System
In order to assess the impact on relative income poverty of a policy change using the tax/benefit model, one must first be sure that the model is able to simulate the baseline situation accurately as far as poverty rates are concerned. Table 6.1 first shows the percentage of persons living in households below relative income poverty lines in the 1994 survey, using social welfare receipts and tax payments recorded in that survey. It then shows the corresponding poverty estimates when simulated social welfare receipts and tax liabilities generated by SWITCH are used instead. While the latter are lower, it is clear that the simulated baseline is close enough to the actual
1994 situation to allow the model to be used for a broad assessment of the impact of policy changes on relative income poverty.
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Table 6.1
Model-based Estimates of Income Poverty Compared With 1994 Survey Results
Proportion of mean equivalent income
Level of Poverty Line for a single adult
(1994 values)
1994 Survey
(Recorded tax and social welfare)
1994 Estimates
(Modelled tax and social welfare)
40%
50%
60%
£ per week
52
65
78
6.8
20.7
34.0
% below poverty line
6.0
18.3
32.2
Notes: Proportion of persons living in households falling below relevant poverty line.
We now move on to the comparison between poverty rates under basic income versus the conventional system. Table 6.2 shows the projected head counts of poverty
(the proportions of individuals living in households below relative income poverty lines) in the year 2001 under both the conventional “mixed tax cuts” scenario and the basic income system as described above. We see first that with the 40 per cent and 50 per cent poverty lines the projected poverty rates under the conventional system scenario are similar to than their (modelled) 1994 levels, despite substantial growth in employment and falls in unemployment. The percentage below the half average income poverty line, for example, is up from 18% to 19%. A key factor in explaining this result is that over the full 1994 to 2001 period, most social welfare rates would, on the assumptions set out in Chapter 3, have grown faster than prices but more slowly than incomes in general. Thus, social welfare rates would, with the possible exception of pension for the elderly, have fallen as a proportion of average income.
Table 6.2
Projections of Proportion of Individuals Experiencing Relative Income Poverty,
2001
Proportion of mean equivalent income
40%
Level of Poverty Line for single person (2001 values)
£ per week
82
“Mixed tax cuts” scenario
10.6
Basic income without
Social Solidarity Fund
% below poverty line
6.6
50%
60%
103
123
19.8
30.3
15.5
25.2
Notes: Equivalence scale is 1 for first adult, 0.66 for other adults and 0.33 for children aged under 14.
The basic income structure, at payment rates harmonised with social welfare rates, would (on the technical assumption of no change in behaviour) have a noticeable impact on these projected rates of poverty. At the lowest cut-off and at the half average income line, the poverty rate is reduced by about 4 percentage points; and at the highest, 60 per cent line the reduction is 5 percentage points. These would represent significant reductions on the conventional scenario.
To put Ireland’s situation in a comparative context, we can draw on results for the extent of relative income poverty in European Union countries from the first wave of
41

the European Community Household Panel survey, for income in calendar year 1993.
Table 6.3 shows that Ireland had a particularly low percentage falling below 40% of mean income. With half mean income as the standard, Ireland had an income poverty rate similar to the UK, Greece and Spain, lower than Portugal but higher than the other
EU members covered. With 60% of the mean, Ireland had the highest relative poverty rate in the EU, jointly with Portugal, though only slightly higher than the UK, Greece and Spain. The poverty rates estimated under the basic income proposal would see Irish poverty rates fall closer to the Dutch and Danish rates at the 40% line. At the 50% line, the Irish rate under basic income would be 6 percentage points lower than under the conventional system with mixed tax cuts, and slightly lower than middle ranking countries such as Belgium, France, Germany and Luxembourg; but would still be 4 to 7 percentage points above the lowest (Dutch and Danish) rates. At the 60 per cent line, the introduction of a basic income would see Ireland move from the highest levels of poverty incidence in the EU to join with middle ranking countries such as France.
Table 6.3: Relative Income Poverty Rates in Wave 1 ECHP, 1993
Germany
Denmark
Netherlands
Belgium
Luxembourg
France
UK
Ireland
Italy
Greece
Spain
Portugal
% of persons below proportion of mean
40% 50%
9.9
2.9
4.7
7.3
6.5
7.7
12.3
7.7
11.2
14.8
11.0
17.1
15.2
6.0
8.8
13.3
15.4
14.9
21.3
21.6
17.7
21.8
19.8
25.2
60%
21.4
12.2
19.1
21.5
25.9
24.5
30.8
32.9
26.2
29.3
29.1
32.9
6.3 Understanding the Impact on Poverty Rates of Basic Income Versus the Conventional System
In order to understand the factors producing this pattern of results, we need to look first at the relationship between the levels of payment under the basic income scheme as specified, the conventional “mixed tax cuts” scenario, and the relative income poverty lines themselves. The adult (not elderly) rate of payment under the basic income scheme as specified is £74.80, in line with most social welfare schemes under the conventional scenario. Even the 40% relative income poverty line for a single adult living alone, given the level of average equivalent income in the sample projected for 2001, is a good deal higher than that at £82. Thus a non-elderly adult living alone whose only income is either the basic income payment, or a social welfare payment under the conventional scenario, would fall below that lowest poverty line. An elderly single person will receive £96 and be well above the 40% line
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in either case: they will however be under the 50% line which is £102 for a single adult.
The compensation mechanisms proposed under the Social Solidarity Fund would have a significant impact here. The £10 per week for persons living alone would raise the payment for a one-person household above the 40% line, while it would raise the payment for an elderly person above the 50% line. We return to this at the end of the section, where this is investigated in more detail.
Two non-elderly adults would receive £150 under the basic income scheme, in other words two full payments. This is above the 40% poverty line for a couple, which is £136 (£82 times the equivalence scale of 1.66), because the poverty line takes assumed economies of scale in consumption into account whereas the basic income system of course works on an individual basis. Once again, though, it is below the 50% poverty line for a couple, which is £169. An elderly couple, on the other hand, with two full basic income payments will receive £192, bringing them comfortably over the 50% poverty line.
We can see then why significant numbers would remain below the poverty lines under the basic income scheme without the compensation mechanisms under the social solidarity fund. What we also want to understand, however, is what exactly is responsible for the fall in poverty rates the basic income system does produce compared with the conventional system scenario, and who is affected. Since the rates of payment to a single adult and a single elderly person under basic income and the conventional system have been aligned here, the basic income system as modelled does not raise the income of an adult in receipt of a full social welfare payment. There are then essentially two significant ways in which the basic income system can add to the income received by a household in respect of an adult. The first is that of course in the conventional system some adults in low-income households will not be benefiting from any social welfare transfers. That is, they are neither getting a full individual payment, nor is a qualifying dependant payment being paid in respect of them to their spouse. All such adults will however receive the basic income payment. The second way is that where a qualifying adult payment is being received under the conventional system, the higher full basic income payment will be received by the household for that adult.
To see which effect is dominant here, we carried out an alternative simulation which simply took the conventional “mixed tax cuts” scenario for 2001 and raised payments in respect of qualifying adults on the main social welfare schemes - to the unemployed, ill/disabled, elderly and widows - to the corresponding full personal rate.
Table 6.4 shows that while this would reduce the numbers in poverty compared with the conventional scenario, at the 50 per cent and 60 per cent lines it would account for only a small proportion of the fall produced by the basic income system. At the 40 per cent line it is more important, however, accounted for almost half of the overall reduction brought about by the basic income system.
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Table 6.4
Projections of Proportion of Individuals Experiencing Relative Income Poverty,
2001
Proportion of mean equivalent
“Mixed tax cuts” scenario
“Mixed tax cuts” scenario plus QAAs
Basic income Basic income plus social income raised to full rate solidarity fund compensation
40% 10.6
% below poverty line
8.7 6.6 4.8
50% 19.8 19.0 15.5 13.0
60% 30.3 29.7 25.2 24.4
This means that, at the higher lines, it is the payment of basic income to adults who are not receiving social welfare which is the dominant factor in producing the fall in poverty associated with the basic income as modelled. If we look for example at the adults who are below the 50% income line under the conventional system in 2001 but above it under basic income, we find that 70 per cent are neither receiving a full individual social welfare payment, nor is a qualifying dependant payment being paid in respect of them. These individuals who benefit from basic income but not conventional social welfare are generally either at work themselves on low income, or the spouse of such an individual. About 25 per cent are self-employed (mostly outside agriculture), 17 per cent are employees, 34 per cent are working full-time in the home, and 10 per cent are in education. About three-quarters are married, and 55 per cent are women. About one-quarter of these adults actually have zero income under the conventional system: these are mostly married women working full-time in the home or students.
6.4 Impact of a Basic Income System with a Social Solidarity Fund
It is also important to look at the effects of the basic income system incorporating the Social Solidarity Fund as described in the previous chapter. As noted above, one of the aims of the £10 per week payment to persons living alone is to raise the incomes of those depending solely on basic benefit above the 40% line, and to raise the incomes of elderly adults living alone above the 50% line. Table 6.4 shows the relative income poverty rates projected for 2001 when these compensatory payments (and the other parts of the Social Solidarity Fund, as described in Chapter 5) are added to the basic income system. We can see that they are lower, but not dramatically so, than those produced by the basic income scheme alone at the 40 and
50 per cent lines, and little different at the 60 per cent line. The proportion falling below 40% of average income is cut to about 5 per cent, half of the rate under the conventional system. With the fund, the percentage falling below half average income is down to about 13 per cent, compared with 15 per cent with the basic income system alone and 19 per cent with the conventional mixed tax cuts scenario. Even with the fund, though, one in four persons remain below the 60 per cent line.
A closer analysis shows that much of the remaining relative income poverty can be related to the needs of children and young adults, compared with the resources allocated to them by the basic income system. The basic benefit rates for children
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used here have an implicit equivalence scale which follows that set out in the terms of reference. Thus, the rate for children under 18 was set at £22.90. But the needs of children, as implied by the equivalence scale used in poverty analysis, are set at 0.33 times the relevant poverty line. Even at the lowest, 40% poverty line this implies a rate of about £27, or about £4 per child higher than the basic benefit rate. (Under basic income with compensation, there is a higher rate of payment for third and subsequent children which is close to this £27 level.)
There is a further complication in that the poverty analysis equivalence scale treats the needs of older children (aged 14 and up) as equivalent to those of a second adult. Thus, at the 40% poverty line, the poverty line income for a child aged 14 to 18, or a young adult of 19 or 20, is about £53. This is just above the £52 payable as basic benefit to 20 year olds, and well above the payments of £41.60, £31.20 and £22.90 for
19 year olds, 18 year olds and 14 to 17 year olds.
The household types found below the 40% poverty line under basic income with compensation are predominantly lone parent households affected by the considerations outlined above. Single persons aged 21, living alone, are not found in poverty, but some single persons aged 18 to 20 are found below the 40% line.
6.5 Alternative Poverty Measures and the Impact of Basic Income Versus the Conventional System
Relying solely on head-count measures of poverty can be hazardous because they do not take into account the depth of poverty for those affected - the extent to which they fall below the income poverty line. Using a range of income poverty lines rather than just one, as we have here, helps to capture some of this complexity, but it is also useful to employ poverty measures which seek to reflect the depth and distribution of income poverty directly. Poverty gap and weighted poverty gap measures
15
have therefore also been calculated for the conventional and basic income scenarios in 2001 outlined above, and are shown in Table 6.5. The results suggest that the impact effect of a basic income on relative income poverty using these measures could be somewhat greater than on the head count. This is particularly pronounced at the lowest, 40% poverty line, where the poverty gap measure is only about half as great under basic income as in the conventional scenario and the difference in weighted poverty gaps is even greater. With the higher poverty lines the reduction is less but still substantial, and larger than the fall in the corresponding headcount measure. The table also shows that the social solidarity fund further reduces poverty gaps, when added to the basic income system.
This reflects the impact which basic income has in bringing up incomes which are well below the poverty lines under the conventional scenario, in other words - as we have seen - individuals who do not benefit from a conventional social welfare payment. These are in the households with the largest income poverty gaps, and the weighted poverty gap measure in particular is heavily influenced by precisely those cases. (It is necessary to stress once again here that these results are dependent on the
15 The poverty gap measure takes into account not only how many individuals fall below the poverty line, but by how far they fall below it. The weighted poverty gap measure puts a higher weight on reductions in the poverty gap for those with the lowest incomes, and less weight for those already close to the poverty line.
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assumptions that the introduction of basic income would not lead to behavioural responses which would reduce employment growth or income growth.)
Table 6.5
Poverty Gap Measures for Relative Income Poverty Lines, 2001
Proportion of mean equivalent
“Mixed tax cuts” scenario
Basic income Basic income with
Social Solidarity Fund income
40% poverty gap
0.014 weighted poverty gap
0.003
Poverty gap
0.007 weighted poverty gap
0.001 poverty gap
0.004
Weighted poverty gap
0.001
50% 0.041 0.012 0.028 0.007 0.023 0.005
60% 0.076 0.026 0.057 0.018 0.051 0.015
Finally, another important issue arises with respect to the way poverty is measured - indeed, it has a direct bearing on how one interprets the poverty gap based results we have just discussed. Income poverty lines form the core of the poverty analysis which can be carried out with the tax/benefit simulation model, because it is incomes which can be simulated. However, we are particularly interested in the impact of a basic income system or alternative policies on the core poverty group identified by the National Anti-Poverty Strategy’s global poverty reduction target, that is those both falling below relative income poverty lines and experiencing basic deprivation. The direct impact of simulated income changes on the extent of deprivation cannot itself be simulated, but we can see the extent to which this core group are the beneficiaries from the basic income scheme compared with the conventional scenario.
To do so, we simply identify those households which, in the 1994 sample, were experiencing basic deprivation in terms of the set of non-monetary indicators described in detail in Nolan and Whelan (1996) and Callan et al (1996). We then see, under the conventional and basic income systems simulated in 2001, the percentage under the simulated income poverty lines as before who also were experiencing such deprivation in the original sample. Table 6.5 shows that the basic income system alone has lower percentages in that situation than the conventional scenario, and that with the social solidarity fund this difference is more pronounced, but the difference is less than for relative income lines or income poverty gaps. At the 60 per cent line the difference between the basic income and conventional scenarios is smallest, and once again the social solidarity fund then has least additional impact.
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Table 6.5
Projections of Proportion of Individuals Experiencing Relative Income Poverty in
2001 and Basic Deprivation in 1994
Proportion of mean equivalent income
“Mixed tax cuts” scenario
Basic income Basic income plus social solidarity fund compensation
40%
% below poverty line and initially experiencing basic deprivation
5.4 4.3 3.2
50%
60%
10.0
12.6
8.4
11.8
7.5
11.6
The basic income system does not have a greater impact on this group because of the nature of the households who are below the income poverty lines under the conventional system but lifted above under the basic income one. We have seen that these are predominantly not in receipt of social welfare under the conventional system, but mostly in work, home duties or education. It turns out that three-quarters of these households were not experiencing basic deprivation in 1994. This may reflect the fact that their incomes are low at the point when they were surveyed, but they had not been in that position for very long. This in turn could represent a temporary decline - for example, an unusually bad year for the self-employed or farmers- or it could turn out be the early stages of a more prolonged period of very low income.
Evidence from longitudinal surveys does suggest that those on extremely low incomes at one survey point are likely to have moved up the income distribution by the next survey. This is consistent with the evidence from both the ESRI surveys of 1987 and
1994, and cross-section surveys elsewhere, that those on very low incomes at a point in time tend not to have levels of possessions or of deprivation matching those incomes. Thus the households with the largest income gaps - which in a cross-section context a basic income scheme will be seen to benefit most and be more effective than alternatives in assisting - are not in fact generally those most in need.
6.6 Conclusions
This chapter has analysed the first-round effects of the introduction of the basic income scheme on poverty, abstracting from potential behavioural responses.
We first set out projected income poverty rates for the year 2001 under the conventional “mixed tax cuts” scenario: these are higher than poverty rates in 1994 because the underlying assumptions have social welfare rates growing faster than prices but more slowly than other incomes. Poverty rates – in terms of numbers falling below relative income poverty lines - under the basic income scheme in 2001 were then seen to be from 4 to 5 percentage points lower than with the conventional tax/welfare scenario, or from 5 to 6 percentage points lower when the compensation mechanisms of the social solidarity fund were included.
16
These poverty rates would be on a par with or lower than those of middle ranking EU countries like France and
Germany, but above the lowest rates found in Denmark and the Netherlands.
The basic income scheme, as modelled, reduces poverty rates mainly because low-income adults not in receipt of social welfare do receive the basic income
16 This would halve the poverty rate at the 40% line.
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payment. They are generally either at work on low income, or spouses of such individuals. The basic income scheme, even with the compensation mechanisms, still leaves significant numbers below the relative income lines simply because the level of payment examined is often below the 50% income line. The £10- supplement for single person households under the social solidarity fund raises the main payment rate above the 40% line, so that single adults households are not found in poverty. But the payment rates for children are sometimes below what is required to keep families out of poverty even at the 40% line. The basic income scheme has a greater impact in closing income poverty gaps than reducing poverty “headcount” rates, because some of those not receiving social welfare are on very low incomes indeed. However, analysis of non-monetary deprivation indicators suggests that these may not always be the households most in need.
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7.1 Objectives and Methods
The objective set for this study was to “consider and evaluate the economic, budgetary and distributional impact of the introduction of a basic income in Ireland”.
The terms of reference gave particular emphasis to three factors:
1.
the taxation provision necessary to finance the basic income scheme
2.
the impact on poverty and the distributional implications of a basic income
3.
the gender dimension of the scheme.
In order to answer the questions set by the terms of reference, we first constructed carefully the benchmark and basic income policies, as set out in the terms of reference and clarified in subsequent meetings and correspondence. This work is documented in
Chapter 3. A detailed projection of a consistent scenario for population, employment and incomes in the year 2001 was also undertaken. SWITCH, the ESRI tax-benefit model was extended, revised and recalibrated to allow it to analyse the key questions of interest. This work is described in Chapters 2 and 3.
7.2 Main Findings
Taxation Needed to Finance Basic Income
The key issue of the taxation required to finance the basic income scheme was then addressed in Chapter 4. The main finding here is that a tax rate of close to 51 per cent is required to finance the basic income scheme. Sensitivity analysis suggests that the tax rate required to finance the scheme might be up to 2 percentage points lower or 1.5 percentage points higher than this estimate, depending on judgements as to the elements which might be included in the tax base, the potential for retaining EU funding of certain schemes with an income support element, and the size and nature of certain additional expenditures associated with the basic income proposal (the social solidarity fund). When the social solidarity fund was specified more precisely, the tax rate required to finance the scheme was calculated at close to 53 per cent.
A useful way of thinking about the costing issue is that the tax rate required to finance a basic income is made up of two elements: the income guarantee as a proportion of average income, and a contribution from the tax/transfer system to the
Exchequer (which may be used to fund other government services). The target income level in the scheme analysed here was about 37% of average income. A higher income guarantee would, other things being equal, require a higher tax rate.
Distributional Impact
Analysis of the first-round or “cash” distributional impact of the basic income scheme shows a complex pattern of gains and losses. On average, there are gains for
49

the bottom six income deciles, and losses for the top four. But for each income decile, and for almost all family types, there are substantial numbers of gains and losses.
Most of those who gain or lose from the proposal would see their incomes change by more than £10 per week.
Our analysis also considered compensation mechanisms for low income losers proposed by the Working Group. These mechanisms significantly altered the balance between the numbers of gainers and losers, making gains more likely than losses.
Under the basic income scheme with compensation mechanisms about 70 per cent of those in the bottom 4 deciles would gain, as against 12 per cent who would lose,
17 with the remainder seeing little change in their incomes. Those low income individuals most likely to gain included couples dependent on welfare payments
(gaining from the payment of a full basic benefit rather than a qualified adult addition; single employees on low earnings; and low-earning couples with children, including those not taking up an entitlement to Family Income Supplement. Some significant losses at low income levels remained, principally due to the reduced payment rates for young adults aged 18 to 20, and basic benefit rates which were less than the welfare rates for certain categories of widows and other lone parents.
Gender Impact
The basic income proposal considered here is an individualised payment.
Thus, it would involve a separate payment to many women who currently do not have an independent source of income. We examined how the individual and family incomes of men and women would be affected by this change. We found that about
40% of women would experience a large gain (more than £10 per week) in individual income, compared with about 20% of men. Correspondingly, about 50% of the men would see a fall in income of more than £10 per week, compared with about 25% of women. But the impact of a basic income on family incomes was much more similar across the sexes, with somewhat more men experiencing a gain of more than £10 per week.
Impact on Poverty
The first-round effects of the introduction of the basic income scheme
(including compensation mechanisms) would be to reduce income poverty rates – in terms of numbers falling below relative income poverty lines - in 2001 by between 5 and 6 percentage points compared with the conventional “mixed tax cuts” scenario.
Poverty rates would nonetheless remain above the lowest EU rates, found in Denmark and the Netherlands, but would be similar to or somewhat lower than those in middleranking countries such as France and Germany. The basic income scheme reduces poverty rates mainly because low-income adults not in receipt of social welfare do receive the basic income payment. They are generally either at work on low income, or spouses of such individuals. The basic income scheme still leaves significant numbers below the relative income lines because the level of payment examined is often below the 50% income line for non-elderly individuals, and sometimes below
17 For an outline of those most likely to lose, see Section 6.4.
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the 40% line, for children and young adults aged between 14 and 19. The basic income scheme has a greater impact in closing income poverty gaps than reducing poverty “headcount” rates, because some of those not receiving social welfare are on very low incomes indeed. However, analysis of non-monetary deprivation indicators suggests that these may not always be the households most in need.
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