Saturday, 11 October 2014

Welfare reform margins: income or wealth?

As I understand it the main reason we need welfare reform is to 'encourage' people back to work.

We think that if these people just applied themselves a bit, they'd find work alright. But they don't so we need to encourage them.

Let's assume this is correct. It is basically an attitude problem - right? 

The economic logic of the target group goes like this: why bust my balls in a nasty jobs market if I can survive OK and keep the bureaucrats off my back with much less effort. This is just our old self-interested friend, homo-economicus. Which makes these people the smart ones, aware of and responsive to the incentive structure.

There is another group who are actually incapable and vulnerable, not ruthless calculators. We want them to have a reasonably OK life, so we set benefit levels that achieve that. 

But then the ruthless bastards pretend to be incapable/vulnerable. So we get angry at them and spend money hassling them, which also hurts some of the really vulnerable. Welfare reform basically involves more spending on hassling beneficiaries.

It's only 'needed' because of the incentive traps built by welfare targeting. As the 2001 tax review(pdf) put it:
More targeting means more people facing high effective marginal tax rates as they try to move out of benefit dependency.
The alternative is some kind of universal basic income (UBI) support. This was considered by the 2001 tax review and rejected on grounds of excessive cost. Gareth Morgan later argued otherwise. I'm not sure where this argument lies currently.

But I suspect we have not thought enough about the U in UBI. The motivation for universality would be to reduce the effective marginal tax rate (EMTR) faced by beneficiaries contemplating work options. These tax issues are entirely income-related: a UBI is a government guaranteed income level for all adults irrespective of their income.

Why couldn't we cut or abate the UBI according to wealth though? That would eliminate payments to a large number of well-established people who have no need of a state subsidy. It would allow people to collect the UBI until they had accumulated wealth of some agreed amount, such as $250,000. Maybe it'd abate after that point. Perhaps it'd become a point of pride to be having one's UBI abated away.

The economic rationale for this approach is that the elasticity of labour supply is likely to be much higher relative to income than wealth. If this is true, we should allow people to collect all their wages at the margin (keeping EMTRs low), but wind back that privilege as they become more wealthy. Then we have pretty much zero need to hassle people into the job market.

We would of course need to monitor asset levels more closely, as we currently do for old folks

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