Finland’s Basic Income experiment fails

Finland’s Basic Income failure is something that every advocate for a Basic Income Grant (BIG) or Universal Basic Income (UBI) needs to contextualise.

https://www.usatoday.com/story/news/nation-now/2018/04/25/finland-basic-income-685-fails/549087002/?utm_source=feedblitz&utm_medium=FeedBlitzRss&utm_campaign=usatodaycomworld-topstories

There are elements of the Finnish exercise that indicate that Finland’s experiment was more about the dole or unemployment benefits than about a BIG or UBI. In fact, Finland did not give everyone a basic income of $685, they randomly selected 2000 unemployed (and probably unemployable) Fins, and paid them $685 per month and then concluded that a basic income was unaffordable and did not achieve any social goals. Being paid because you are not working is a dole. A BIG or UBI system is where a population is universally and unconditionally paid whether working or not. The Finnish experiment was apparently motivated by the expectation that the 2000 unemployed would then go out and find low paid employment thus filling a gap in the labour market, an expectation that was never fulfilled. None the less, even if that had worked, even if the benefit was extended to all unemployed Fins or to the Finnish population as a whole, it could probably be argued that their tax system could not to bear it.

These conclusions are not unexpected for that sort of exercise:

First, when a BIG / UBI is applied universally to an entire community, there are long term benefits to the community members and the community as a whole, which can justify the high cost of a BIG / UBI. These benefits will never be apparent from a randomly selected and widely dispersed small population assessed in the short term, as with the Finnish experiment. The selected Finnish population was not representative of any universal and unconditionally selected population receiving a BIG or UBI.

Second, a BIG/UBI is costly and beyond the scope of any conventional tax system to fund. The exercises done by the Direct Democracy Forum (DDF) (see Teal, The Big Picture), presumed a Gross Domestic Product (GDP) of R2.8Trillion. The DDF hypothesized a BIG of R2.1 Trillion for a BIG of R5000 per month for 35 million adult South Africans. In that exercise the BIG was almost the size of the GDP.

Most economies target tax levels at about 30% of the GDP. The BIG in that context is 2.5 times the tax burden for that size of economy. The tax (R0.84T) + BIG (R2.1T) would total R2.94T, a sum bigger than the entire GDP of R2.8T. You clearly cannot extract more tax from a GDP than the GDP permits.

If Finland’s situation is anything like South Africa’s, the Fins are correct. Using a conventional tax system (taxing the GDP) cannot pay for a Basic Income of $685 per month. Nor can South Africa afford a R5000 per month BIG if reliant on a conventional tax system. What is missing here is a tax system that can accommodate the needs of a BIG. Here TEAL (Total Economic Activity Levy) comes into its own.

Instead of taxing income and profit, Teal levies the economic activity represented by the flow of money through the banking system. This is typically, in SA, about thirty times the GDP, so a R3T GDP represents a cash flow of 30 times and more through the banking system.  The arithmetic is GDP x 30 x 2 x 1.37 where every Rand is both deposited and withdrawn (the x 2) and an additional 37% is drawn on and paid into the same bank and therefore is not included in interbank settlements (the 1.37) which amounts to R246.6T on a GDP of R3T.  

What this levy amounts to is paying a rent for the privilege of playing in the country’s economy. If you are a large player the rent is large, if a small player, the rent is small, but everyone pays the rent, irrespective of who you are or what your game is or how much your profits or losses are. This broadens the tax base. In an example set in South Africa, instead of a tax base of a R2.8T GDP, the tax base is R230T of the broader economy. So the rate of tax or levy can be slashed from about 30% of the GDP to ½% of the broader economy, and achieve the same result.

Applying the same principle (levying the entire broader economy instead of taxing the GDP) one is able to collect the R2.1T needed for a BIG with a 1.25% levy on the broader economy (see Teal, The Big Picture). Suddenly a BIG or UBI becomes attainable.

Then there is the political context of the Finish experiment. The NY Time’s analysis (see the link below) suggests that when the Fins started the experiment the government was somewhat liberal. Then Finland was hit by recession, and a more conservative government came to power whose main platform was cutting expenditure. Bye bye Basic Income experiment!

According to the NY Times, the reasons why the Finnish Basic Income experiment failed are are set out here (see https://nyti.ms/2tiI1bA)

Fortunately the Finnish experiment, however inadequate it is for a BIG / UBI, is not the only BIG / UBI experiment and discussion under way in the world, and far from being definitive, it will merely be a footnote to the art of misdirection on the topic.

Our conclusion from this is that to take the failure of the so-called Finnish Basic Income experiment as an indication of the impossibility of a BIG or UBI, is to be misled by an experiment which was not about a BIG or UBI at all, but about a dole, The two (a dole or a BIG / UBI) are not comparable and the Finnish failure, far from discouraging the DDF from its BIG / UBI objective, merely strengthens the DDF resolve to see the introduction of TEAL and an affordable Basic Income Grant or Universal Basic Income in South Africa. Further, the collective benefits arising from investing R1.75 Billion in the demand side of the South African economy every month, will more than justify collecting that money with a 1.25% levy (TEAL) on the broader economy.

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