A Participation Income

I will be participating in a seminar hosted by Basic Income Ireland this evening at 6:00 with Guy Standing and NERI's Tom McDonnell to discuss the Labour Movement and Basic Income.  I will be putting forward the proposal outlined below.

The pandemic crisis has understandably increased interest in proposals for a basic income.  Both the Programme for Government and the Arts Recovery Taskforce have both called for a trial of basic income.  And the success of the Pandemic Unemployment Payment in protecting people’s incomes has shown what an invigorated social transfer system can achieve.

One problem we face, however, is that the concept of basic income can a multitude of models from partial payments based on certain conditions, to full unconditional payments provided universally (that is, it is paid to all adults regardless of income or employment status).

The National Economic and Social Council have entered this debate with a suggestion:  to trial a version of basic income known as Participation Income.  Participation Income was first proposed by Tony Atkinson as a type of bridge between the current system and a full blown universal basic income.  It was particularly designed to overcome the ‘moral hazard’ objection – the risk that people would drop out of the labour market and live ‘off the state’ – and the issue of cost.

Participation Income is a basic income payment but with certain conditions; namely, that the recipients must be ‘participating in society’.  Proposed categories of participation are:

• Employment
• Caring (e.g. for a child, older person, a family member with a disability)
• Student in full-time education
• Participating or volunteering in community activities

A full Participation Income (i.e. paid at the level of the Jobseekers rate - €203 per week) would probably not be feasible on the basis of cost.  It would require considerable increase in tax revenue which would entail opportunity costs.  However, this doesn’t undermine the idea of a Participation Income.  Any move towards a full basic income would be phased in.

In developing any new model of basic income there are three principles we should be mindful.  First, that the new model is based on, and developed from, a current policy practice.  This provides continuity.  Second, that it is cost efficient.  Third that it addresses a particular issue (or set of issues) in the political economy.

Keeping these three principles in mind I would propose transforming tax credits into a basic payment.

The role and character of tax credits in the tax system is not fully appreciated, in large part because they operate below the radar.  A tax credit is a sum of money that is used to reduce a tax liability.  Here is an example:

• I’m a low-paid workers earning €25,000 per year. I am taxed at 20 percent.  Therefore my tax liability is €5,000.  However, my personal tax credits are worth €3,300 (indeed, everyone in work gets these personal tax credits).  These credits are offset against my tax liability so that my income tax bill is now €1,700.

All those employed get personal tax credits of €3,300 – whether you are low-paid or a senior executive.  However, the tax credit is worth more to the former.  In that sense, it is progressive.

A tax credit is essentially a flat-rate cash subsidy to all people in work.  However there is one major flaw:  people whose income is below the income tax threshold do not benefit from tax credits since they don’t earn enough.  This includes those on low-pay, in part-time work and those on precarious contracts.  How does that happen?

• I’m a low-income worker on €10,000. I am taxed at 20 percent.  My tax liability is €2,000.  My personal tax credit of €3,300 more than offsets my tax bill so I don’t pay any income tax.  However, I have ‘unused’ tax credits – the difference between by personal tax credits and my tax liability.  The unused credit is worth €1,300.  I don’t benefit from this amount.

The main beneficiaries of transforming personal tax credits into a basic payment for all those in work – approximately €65 per week - would be the low-income worker above.  They would get the full payment equal to the tax credit.  They would be €1,300, or 13 percent, better off.  The primary beneficiaries would be those below the income tax threshold (i.e. €16,500) or those with intermittent income such as those on precarious contracts.

Of course, this is limited to those in work.  And you can’t live or €65 per week.  However, once this is established, this Participation Income could be:

• Increased in value over time, and
• Extended to carers, full-time students and those active in civil society

This could be the foundation for the evolution of the Irish social protection state.

This proposal is consistent with the principles outlined above:  it is based on current practice (tax credits). It is cost efficient.  Social Justice Ireland estimates the cost of their refundable tax credits proposals – essentially the same thing as above – at €140 million though this may need to be updated.  It is certainly far more efficient than the Tánaiste’s recent call for income tax cuts. And it addresses a particular issue – that of low and intermittent income.

The great advantage of this proposal is that one does not necessarily have to buy into basic income to support it.  Therefore, it could attract basic income supporters who see it as a first step on the way to a full Universal Basic Income while winning support from those who want a more effective social transfer system.

With the Low Pay Commission due to come up with proposals for a basic income trial, this could be an ideal opportunity for basic income supporters and sceptics to come together and put forward a concrete Participation Income trial proposal.  In doing that, we might find we have more in common than we think.