Written by: Richie Kock Esq. at Richie Kock Attorneys Aruba
On January 1st of 2017, a spin-off of the centuries old utopian idea of a Basic Income (hereinafter: ‘BI’) (or Universal Basic Income or Unconditional Basic Income or Guaranteed Minimal Income, among others) was launched in Finland. A monthly income of EUR 560 is provided to 2,000 unemployed individuals over a 2 year period. The amount of EUR 560 per month replaces certain basic social security benefits and remains in place even in case the participants find work. The Finnish experiment will determine whether a BI would significantly reduce bureaucracy as well as the effects of the BI on the labor market.
Under the Basic Income, all citizens or residents of a country receive a regular (e.g. monthly) amount from the Government or a public entity. In its purest form, the Basic Income is not subject to any requirements and every citizen would be entitled thereto, regardless of their other income. The poor, the median earner and the rich would be equally entitled to the BI.
A goal of the BI is to eliminate or at least reduce poverty and it is not a recent concept. The 16th Century Humanist, Johannes Ludovicus Vives (1492-1540) worked out a detailed scheme and developed arguments for a guaranteed minimum income. In the 18th Century, Thomas Paine worked out in great detail the idea of a ‘basic personal endowment’ for all whom have reached adulthood.
The Finnish experiment is neither unique nor the first of its kind. Several BI experimental trials have been conducted in the past and BI feasibility studies are currently ongoing. More are soon expected to be launched.
BI feasibility studies
Unconditional cash transfers studies are being conducted in Kenya and Uganda since 2008. India is also conducting a BI pilot study in Madhya Pradesh since 2010. Both programs are yielding similar positive results.
In Utrecht, the Netherlands a pilot study will be launched with the specific goal to test whether the reduction of requirements on welfare benefits would better promote individuals to reintegrate and contribute to society. Pilot projects are also proposed for Groningen, Tilburg and Wageningen.
In 2015, Italy launched a similar policy in which the citizens and foreign residents of Friuli-Venezia Giulia are entitled to financial assistance ranging from EUR 70 to 550 per month over a period of two years, provided they can proof that they are seeking employment.
In April of this year, Ontario Canada announced that it will run its own pilot version of the BI. A total of 4,000 people with a low income will receive additional income based on their current salary for a period of three years.
San Francisco will also conduct a BI pilot study focused on families and children.
Taiwan is also evaluating a BI pilot program.
It is mentioned that the BI constituted a major campaign topic during the latest presidential election in France, after the candidate for the Socialist Party Benoit Hamon proposed a BI of EUR 750 for all French citizens over 18 years old.
‘Free money makes people lazy’
It is generally assumed that giving money to everyone unconditionally would encourage people to do nothing. However, studies show the opposite to be the case.
The results from the BI studies conducted in Kenya were published in a paper. The paper concludes among others that expenditures in food, health and education increased, whilst expenditures in alcohol and tobacco did not! The expenditures (investment) in self employment also increased.
The BI study in India produced similar findings. The findings suggest that households use the cash transfers responsibly and do not spend it in wasteful ways like spending it on alcohol. The lack of conditions did not result in irresponsible allocation of funds, but rather in responsible expenditures in nutrition, health, education and productive assets among others.
‘The BI is too expensive’
Another common assumption is that the BI would be unaffordable. However, inefficient welfare systems and taxation also have a high cost.
The financing of the BI can be realized by means of more efficient taxation at the one hand, and from savings resulting from the reduction of social services bureaucracy, at the other hand. The idea of a flat income tax is proposed.
Ireland has conducted a study on the BI and concluded in a paper that a flat income tax rate of 45% (in conjunction with other changes in the welfare system) would do the job. Hence, the current progressive income tax system would have to be replaced by a flat tax of 45%.
Others also propose the idea of a flat income tax rate as a means of financing a BI. In an article on the introduction of a BI in the UK, a 35% flat tax is proposed whereby the top 55% earners actually pay taxes. The bottom 45% would effectively receive money from the government.
In another article it is defended that the solution to poverty would be a combination of a relatively high flat income tax rate (35-50%) and a BI that corresponds to the poverty line.
The OECD warning
It should be mentioned that the OECD has warned against an increase in poverty as a result of the BI. A policy note has been released in which it is concluded that a basic income financed at the level of current spending would fall far below the poverty line. A BI would require a substantial increase in taxes. And even so, the policy may not significantly reduce poverty and might leave many worse off as compared to existing programs of social welfare. However, it is important to note that the OECD policy note is not based on empirical evidence. It is merely a theoretical study.
BI for Aruba?
Is the introduction of a BI in Aruba feasible or even realistic? The results from the Finnish experiment will determine whether the BI effectively reduces bureaucracy. The results from the pilot studies in Utrecht, Groningen, Tilburg and Wageningen would also matter. If a BI would proof effective and feasible in the Netherlands, then why not in Aruba? Aruba seems to be well on its way to reducing its budget deficit to an acceptable level. Once this is accomplished, and awaiting the results from the ongoing and proposed pilot studies, Aruba should at least start to entertain the idea of improving social equality by reducing poverty via the introduction of a Basic Income for all its (legal) residents.