Think tank floats 'basic income' idea for all citizens

Children would also get a basic income under the RSA proposals

A think tank is calling for fundamental change to the system of tax and benefits in the UK.

The Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) is recommending a basic universal income.

In a new report, the author calls the approach the best alternative "to help people improve their own lives".

The RSA estimates that its proposal would cost about an extra 1% of annual national income (GDP).

The idea is in principle fairly straightforward: a standard payment is made to every citizen. The report illustrates how it might work using data for taxes and benefits in 2012-2013.

The basic income for people aged between 25 and 65 would in this example be £3,692. There is a pension of about double that amount for those older than 65.

There would be a basic income for children too: for the first child it would be higher than the working age adult basic until they reach school age. Above that age, and for all children after the first, it would be below that level.

Radical change

The proposal does involve some cost, but it does replace many existing benefits and it would eliminate the personal income tax allowance. The basic income would mean there would not be the need for the first slug of earnings to be tax-free.

It would clearly be a radical change - so why does the RSA think it necessary?

Anthony Painter, its director of policy and strategy and author of the report, says: "The welfare state has become incredibly complex whilst locking those it seeks to help in a vicious circle of low pay, insecurity and an intrusive state."

The RSA's plan picks up an idea that has gained popularity in recent years. Finland is undertaking a pilot scheme, although it will not report its results until 2019.

Some cities in the Netherlands are also looking at the idea. There is also a debate in Switzerland about introducing a basic income.

In the UK, the idea is being promoted by a group called the Citizen's Income Trust (CIT) and the RSA proposals are based on their ideas.

The potential advantages include simplicity of administration given that you only need to establish that the person receiving it is a citizen.

There is a nod in the RSA proposal to the political debate in the UK about European migrants and benefits. They would be eligible only after contributing for a number of years.

Welfare trap

One of the aims of the proposal is to reduce the disincentive to work - or to work more - that comes with the withdrawal of means-tested benefits.

As a recipient's income rises, entitlement to most benefits declines and they can be left with only a very small amount of any additional income. It's known as the poverty trap or welfare trap.

If there is no means testing, the disincentive would come from income tax and national insurance.

The RSA does also include some means-testing in the basic idea. For people with incomes over £75,000, their entitlement would be gradually withdrawn, completely so for any with an income of more than £150,000.

There is also a complication in these proposals: the treatment of housing costs. They vary so much around the country that it is difficult to build them into a single national basic income.

The RSA proposal does not cover housing costs, and it suggests investigation of various possible reforms of housing benefits that are means tested.

The RSA suggests further work on three options for housing costs. Two of them would involve withdrawing the benefit with rising income, and one would not, although it would be linked to local housing market conditions.

Losers

Tim Blackwell, writing in the New Statesman, identified housing benefit and council tax as a major weakness when he looked at the CIT proposals. He said that the combined effect of tax, national insurance and the withdrawal of housing benefit and council tax support was to leave the individual with just over 10% of any additional income they might earn.

In terms of how wins and who loses, much depends on the precise of levels chosen, but is certainly possible that there will be groups who lose out. Under the CIT scheme, Mr Blackwell wrote that "lone parent tenants in need of childcare would do very badly".

This general approach has been supported by the Green Party in the UK. It is also advocated by Sam Bowman of the Adam Smith Institute, a think tank that is not party political but is vigorously pro-free market in its outlook.

But the approach does have its critics. Some argue that if there is a guaranteed basic income, some people will choose not to work. For many the idea of simply giving people cash is very unpalatable.