As the idea of different versions of UBI continues to gather support among the public, attention is turning to specifics at how UBI would work and how it would be financed.
By: Mark Bryan
As the idea of UBI continues to gather support among the public, attention is turning to specifics such as what level a UBI would be set at and how it would be financed. But alongside this discussion of design and implementation, another term is increasingly being heard: ‘Minimum Income Guarantee’ (or alternatives such as ‘Guaranteed Minimum Income’ or ‘Guaranteed Income’). For example:
- In the recent Scottish parliamentary elections, the SNP promised to work towards a ‘Minimum Income Guarantee’
- Former Shadow Chancellor John McDonnell called in February for a “minimum income guarantee” to protect people during downturns.
- The recent trial in Stockton, California, where 125 people in low-income neighbourhoods received $500 per month, is called a ‘guaranteed income demonstration’ by its coordinators.
- In Spain in May 2020, the government introduced a ‘Minimum Living Income’ aimed at households with insufficient economic resources.
So what is a Minimum Income Guarantee (MIG) and how does it relate to UBI?
The distinction is not always clear from references to MIG and UBI in the media or more specialist policy literature. Sometimes the terms UBI and MIG (or similar) are used interchangeably, for instance media reports have referred to both the above-mentioned Stockton and Spanish schemes as UBI. At other times, the terms are clearly separate: the SNP manifesto distinguishes between UBI and MIG, suggesting that MIG is less ambitious and falls somewhat short of UBI. And John McDonnell has separately advocated UBI pilots and a MIG. In the US, the term Guaranteed Income (GI) is more common than MIG, but again there is disagreement about whether it means the same thing as UBI.
What is a Minimum Income Guarantee?
So how can we understand MIG in the current debate? To start with, it is important to realise that a MIG has long been a standard component of traditional welfare systems. In its purest form, a MIG is a scheme to ensure that nobody’s income falls below a minimum threshold: if income without the MIG is below the threshold, it is topped up. This also implies that any additional income received (under the threshold) leads to a pound-for-pound reduction in the MIG amount. As such MIG is a means-tested benefit with a 100% withdrawal (or taper) rate.
As will be seen, the ‘new’ MIG schemes being proposed are more complex and nuanced than this narrow definition. But the basic idea is clear: rather than an equal payment to all as under UBI, MIG is a payment targeted on those in need.
MIG and UBI compared
The philosophy of needs-based targeting has a number of implications for the design of MIG, and therefore how it compares with UBI in practice. To gain a better understanding of the differences, this article takes the standard definition of UBI – a payment to all individuals, without conditions or means-testing, and sufficient to meet basic needs – and considers how MIG would look under each of these headings. This exercise is partly speculative, because there is as yet no agreed specification for a broad-based MIG. But we can already draw some conclusions based on existing proposals, pilots and schemes. In particular, a very helpful contribution is the recent report by IPPR Scotland, Securing a Living Income in Scotland: Towards a Minimum Income Guarantee. It presents a detailed preliminary outline of what a MIG for Scotland might look like.
UBI is paid up front to everyone. With MIG, while the ‘guarantee’ applies to everyone, its targeted approach means that only a minority of the population (those deemed to be in need) actually receive a payment. The IPPR describes its proposal as a “universal guarantee, delivered through a targeted payment.” As will be discussed below, targeting can be based on household types but is mainly based on income.
Some guaranteed income pilots (in the US) focus on particular demographics, for instance on African-Amercan mothers, young people leaving foster care, or post-incarcerated Black people. It is not clear whether this kind of demographic targeting is used for the pilot only or whether it would also apply to a broader rollout of these schemes. If so, a MIG could end up being targeted on low-income members of particular demographic groups.
A UBI has no behavioural conditions attached – everybody gets it whatever their employment status, and there are no other requirements such as training or job search activity. Similarly, MIG is also likely to be free of behavioural conditions – if it were not, it would make little sense as a guarantee. Behavioural unconditionality is probably the respect in which UBI and MIG most resemble each other.
A UBI is not means-tested, that is people receive it whatever their income. MIG is different: following the principle of targeting, it is only paid in full to people on low incomes. As income from other sources (e.g. earnings) increases, the MIG payments are withdrawn. In the spirit of targeting, and also in order to contain costs (discussed in more detail below), the withdrawal or taper rate is likely to be quite high. In the IPPR Scotland proposal, the taper rate is 62% (meaning that MIG is reduced by 62p for every £1 received from other sources). This is almost the same as the 63% taper rate associated with the existing Universal Credit scheme. In addition, there can be complicated interactions of mean-testing with the income tax and National Insurance system. With Universal Credit, the effective marginal rate is as high as 75% for some low earners (those subject to the UC taper on top of income tax and NI). Similar perverse effects would be likely in a MIG system.
In practice, the mean-testing difference between MIG and UBI may be less than it first appears. The reason is that a UBI is likely to be (partly) funded through increases in income tax rates. So as income rises, some of the UBI is effectively ‘paid back’ through higher taxes.
This amounts to a ‘mean test’ via the tax system, as opposed to an assessment up front (a distinction which has been called back-end versus front-end means testing). One recent UBI costing, delivering payments similar to the IPPR Scotland MIG levels, proposes an income tax of 50% on net beneficiaries (those whose UBI exceeds the tax). While this appears high, it is still lower than the likely MIG taper, resulting in higher net payments (for a given base level of benefit). The tax rate at low earnings could be reduced by shifting taxes to higher incomes or substituting other progressive taxes, and clearly this would increase the redistributive effects of UBI.
For the same taper or marginal tax rates, both back- and front-end methods lead to the same net income – but there are important differences in the framing and mechanics. With a back-end system (UBI), the emphasis is on the same payment delivered to everyone, with any clawback occurring afterwards (and possibly with some delay if taxes are assessed annually); while with a front-end system (MIG), the payment differs across people right from the start.
As such, there is a risk that MIG may perpetuate the stigma, stress and bureaucracy currently experienced by people on means-tested benefits. In contrast, with a UBI plus income tax clawback, stigma disappears because the means test is merged into the tax system and applied to everyone.
There would also be administrative savings from integrating taxes and benefits, which would reduce the net cost of UBI (that is the cost after subtracting any benefits replaced by UBI and tax payments due to the back-end means test). Estimates of the relevant DWP administration costs range between £6bn and £8bn, and a recent estimate of UBI net cost is £67bn. Thus savings could amount to 10-12% of net cost (although some separate administration of payments such as disability benefits would still be needed, in addition to more resources for tax collection).
Individual or household based?
UBI advocates are always clear that, as a matter of principle, UBI would be paid to individuals, not households, and that all individuals would receive the same amount (except for some variation by age, for example lower payments for children). In this view, everyone is entitled, as a matter of right, to a basic level of income that provides them with the economic foundation needed to flourish as a citizen.
MIG, in contrast, appears to be motivated by more technocratic considerations and a narrower focus on standards of living. Since people in households can, up to a point, share facilities and space (such as kitchens and bedrooms), those living together require less income than a single person for the same standard of living. For this reason, official poverty thresholds vary across types of households, as do the JRF Minimum Income Standards (MIS). The MIS specify the levels of income deemed necessary (by the general public) for a minimum acceptable standard of living.
Following this household needs approach, MIG would be set at different levels (per person) for different types of household. For its scheme, IPPR Scotland proposes a core amount of £792 per month for a single person but only £1,244 for a couple (£622 each). The couple payment would be made separately to each person (with additional payments for children going to the primary carer), but this still represents a significant departure from the individual-based principal of UBI (to my knowledge, the only UBI proposal to take on board the household-specific dimension is UBI+, which includes an specific ‘home allowance’).
Amount of payments
While in principle UBI should be sufficient to cover basic needs, in practice there is much debate around what the right amount is, especially for a UBI that could be seen as an introductory measure. Amounts proposed in the UK for working-age adults range from around £50 per week (sometimes termed a ‘partial UBI’ or ‘dividend’) to more than £200 per week. Since almost by definition a decent amount paid to everyone is costly, most detailed policy proposals have been strongly influenced by cost considerations – in particular there is often a desire to limit increases in marginal income tax rates, which are politically unpopular and can be economically distortionary (including via a ‘poverty trap’ at low incomes).
With MIG, the constraints are less severe because MIG is explicitly targeted on low incomes. That implies, by design, high taper rates. A MIG with a high taper rate will have a lower net cost than a UBI funded by more evenly spread tax increases (because a taper on low incomes affects everyone on that portion of their income).
Thus for a given budget, MIG can ‘afford’ to be more generous than UBI – and the higher the taper rate, the higher the basic level of MIG can be (offset to some degree by the higher administrative costs of MIG).
(The flipside is that MIG is disproportionately financed by the very people it is targeted on, who pay back large proportions of their MIG when their incomes rise, redistributing less from higher earners than UBI).
Since there is a strong focus in MIG on household needs (using MIS as a guide in the UK), and since costs can be contained using a high taper rate, it seems likely that MIG will be near the high end of amounts suggested for UBI. The Scottish proposal is for a core MIG to an individual of the equivalent of £168 per week, accompanied by a steep taper of 62%. NEF has proposed a MIG of £227 per week during the Covid crisis, and their ongoing work on a Living Income draws heavily on MIS, suggesting similar levels for a longer-term payment.
Other support measures
Finally, both UBI and MIG exist in a wider socio-economic context of issues such as low wages, inadequate public services, and a lack of affordable housing. Proposals for UBI recognise these issues, but generally focus on the case for UBI itself, while arguing that a UBI can have wider beneficial effects – for example a UBI can give low-paid workers more bargaining power. The main focus in UBI is also on the core payment, rather than any additional payments to cover, for example, the costs of disability or variable housing costs (an exception here is UBI+).
In contrast, a MIG is likely to be part of a broader package of labour market measures. One reason is that with a high taper rate, MIG may provide little support for those in employment; moreover the taper will disincentivise people from taking low-paid jobs. For the MIG to work, it needs to be accompanied by wage levels sufficient to ensure that everyone in full-time employment earns well above the MIG level.
A MIG also specifies variable payments as part of the core model. These account for different family types, as already seen, but can also include support for housing costs, disability and informal care responsibilities. Finally, a MIG might be linked to a broader Social Guarantee including access to public services, which some MIG advocates argue is a more cost-effective solution to basic needs than monetary payments alone.
As UBI moves from concept through to design and implementation, it is important to understand whether MIG is just another flavour of UBI or an alternative policy offer. Returning to the definition of UBI – an individual payment, without conditions or means-testing, and sufficient to meet basic needs – how does MIG compare?
Two aspects of MIG are UBI-like and should find favour among UBI proponents. The first is that MIG does not impose behavioural conditions – so whatever somebody’s employment or other activity, they are guaranteed to be above a minimum income threshold. The second is that MIG is likely to be set relatively high, comparing favourably with the amounts suggested for UBI.
But in other respects, MIG diverges significantly from UBI. MIG is means-tested and varies across household types. It segregates people into recipients and non-recipients, with the attendant risks of stigma which are a feature of existing benefits (as well as being more costly than UBI to administer). And its high taper may have significant disincentive effects on employment. By comparison, while UBI may be subject to a ‘back-end’ means test via the income tax system, the marginal tax rate on low incomes will almost certainly be less than the MIG taper. Moreover, depending on the taxes chosen to finance it, UBI will also be more redistributive.
Means-testing and household-level assessment will be strongly opposed by UBI supporters. In the UK context, MIG may look too much like an expanded version of Universal Credit (albeit with less conditionality). Nonetheless MIG will be attractive to others as a pragmatic extension of the traditional UK approach to income security. And the technocratic aspects of MIG will appeal to those who consider UBI to be overly utopian or too much of a radical departure from the current system. So to finish, it is worth considering whether there is any room for combining the two approaches. A couple spring to mind:
- A Negative Income Tax (NIT) is a form of UBI financed by income tax but delivered as a single net payment combining the UBI and income tax. The payment falls as income rises, similar to MIG, but since income tax is assessed individually (in the UK) the NIT would be individual-based (with the same basic amount for all). So an NIT could be seen as a halfway house between MIG and UBI.
- A ‘partial’ UBI could be at the core of a broader MIG system – it would deliver a base level of income to all, with additional MIG payments subject to needs- and means-testing. This could be a step in the direction of a full UBI if the additional components were converted over time into universal payments.
There are no doubt more possibilities, and others will emerge as more detailed MIG and UBI proposals are developed. Ultimately there may be more than one route to economic security.
About the Author:
Mark Bryan – @M_L_Bryan. Mark Bryan is a Reader in the Department of Economics at the University of Sheffield. His research investigates people’s experiences and outcomes in the labour market and their links with health and well-being.
He is particularly interested in how a UBI might change the operation of the labour market. As well as carrying out academic research, he has worked on policy-related projects for government and private-sector organisations, and is an expert on statistical techniques to assess the impacts of policy changes on the economy. He co-authored the UBI Lab Sheffield proposal for a UBI pilot.July 23, 2021