Financing Basic Income in Switzerland

The article below, which is reprinted with permission of the author, is a working paper  currently being carried on the website (USBIG.net) of the US Basic Income Guarantee network. It is to be published in a new book being edited by Richard Pereira.

Financing Basic Income in Switzerland – state of the debate before the 2016 popular vote on the Basic Income Initiative

 

Albert Jörimann

albert.joerimann@gmail.com

Switzerland has the honour of being the first country where a popular initiative has been submitted for a vote on the introduction of a Basic Income (BI). This is not difficult to achieve as Switzerland is the only country with an established tradition and practice of popular initiatives within its direct democratic system. Still, it will be interesting to watch the clash of the opposing opinions and of the divergent social and economic interests during the voting campaign, where the financing question will play a very important role, as well as it does in other countries. I will summarise the most important developments within this context and will give some data for Switzerland.

 

Discussions about a BI scheme have come and gone in both political and scientific arenas since the 1980s. In Switzerland, several contributions were made in the middle of the 1990s, and in 2002, the Basic Income European Network (BIEN) Congress was organized in Geneva leading to the creation of BIEN Switzerland. This did not mean that there was a structured discussion of BI for the whole country, as BIEN-Switzerland in reality meant at that time above all BIEN-Geneva. This lasted until 2006 when a new impetus came from a new generation of anthroposophists based in Basel, which started discussions not only throughout Switzerland, but was active in Germany as well. This was the core of the new BI movement which in 2012, launched the collection of signatures for the popular initiative and handed over more than 126,000 signatures to the Federal Chancellery in the autumn of 2013.

In 2010 BIEN-Switzerland published a book about financing an unconditional BI with articles from Germany, France, South Africa and the UK as well as three articles from Switzerland. Although the latter are relevant for my purpose, the other texts gave most interesting insights into the different approaches of financing within Europe, both about the existing systems of social security and the methods themselves. The contribution of Pieter LeRoux of South Africa illustrated in a fascinating way how a BI system could be established in an emerging economy. The attempts of various groups to introduce a similar scheme in neighbouring Namibia, the obstacles and the pilot project in Otjivero, give further evidence of the paths of such proposals to introduce the system in a developing society and economy.

Part I: The gross cost

Preparations for the book revealed one thing – the cost of BI is easy to calculate according to the principle of one man/woman, one Basic Income. Multiply the number of adult residents by the BI, the number of minor residents by 50% of the BI and add together. (For Switzerland in 2012 there were 6.6 million adults and 1.46 million minors aged under 18 years.) Obviously, the final total depends on the actual amount defined as the BI, as well as the definition of a minor (under age 21, 18, or 16). Some proposals even subdivide the amount allotted to minors, giving 50% BI to those between 10 and 20 years of age and 25% BI to those younger than 10 years. Usually, we speak of a monthly BI of €1,000 per adult/€500 per minor for the two biggest neighbouring countries of Switzerland, France and Germany.

For Switzerland we propose an adult BI of CHF 2,500 (which at current foreign exchange rates, is more than double the French and German values, but this is another issue). For minors, contrary to the approach in our book published in 2010, we recommend a BI of CHF 625, (25% of the adult level) in line with the latest view of the promoters of the popular initiative. In all three countries, the sum of €1,000/CHF 2,500 is considered to be high enough to allow a single adult to have a decent standard of living without any luxury, but still be above absolute poverty.

Table 1: Gross cost of the Basic Income in Switzerland (2012)

Residents, adults (18 y. +), 6.61 mn., CHF 30.000 pa​  = 198.3 bn. CHF
Residents, minors (–18 y.), 1.43 mn., CHF 7.500 pa​    = 10.7 bn. CHF
Total:​population of 8.04 mn.​​​​                                              = 209.0 bn. CHF

Just one remark as to how we arrived at this figure of CHF 2,500 per month for each adult. The Swiss Conference of Social Assistance (SKOS) calculated that one person needs approximately CHF 1,000 per month for basic needs (defined as food, clothing, energy, communication, transportation etc.), another CHF 1,000 per month for accommodation rental charges (this can vary depending on the local housing market), plus money to cover the medical charges that are not assumed by the cantons within their programme of subsidising healthcare insurance. All in all, this adds up to something less than our figure of CHF 2,500. However, the BI is not intended as a programme to minimise expenditure for living costs. We believe that CHF 2,500 is an amount that can be argued as representing the “minimum that can be called decent”.

The amounts can be related to a country’s economic activity by comparing the BI costs to the GDP (which makes sense because as well as making a fundamental change to the organisation of society today, the BI would also become an important element of the overall national economy). In both Germany and France in 2014, the gross cost of BI would more or less equal one third of GDP (Germany GDP €2,735.80 bn/BI between €880 and €885 bn; France GDP €2,113.8 bn, BI €709 bn). The figures for Switzerland more or less confirm the ratio, with GDP of about CHF 600 bn and BI about CHF 209 billion.

And finally a comparison with Canada. If we take Canada’s 2014 population to be about 28.5 million adults (those over 18 years as in Europe) with about 7 million minors, and assume the BI to equal the Low Income Measures at Market Prices which was CAD 18,000 pa per adult, this would give a total BI cost of CAD 576 bn (adults CAD 513 bn/minors CAD 63 bn). Comparison with the 2014 GDP of CAD 1,827 bn again gives a proportion of about a third.

If we further assume that about two thirds of GDP consists of salaries on the production side and two thirds of domestic consumption on the spending side (the other third encompassing investments etc.), we have quite a precise picture of what the BI is supposed to mobilise within developed countries. It is clear that in emerging and developing countries, the proposal must have a different face.

It is obvious that the reshuffling of such amounts within the economy and society in general would create a whole range of political debate and action, as it would activate all instruments of the political theatre. The left wing would try to finance the BI by raising the taxes of the rich and introducing levies on capital gains. The neo-liberal side would try to abolish the traditional social security and protection system and replace it with a BI that would barely cover the cost of food and housing. Alongside these positions, one would find a universe of proposals to redefine the tax system; e.g. by abolishing all income tax and replacing it with a Value Added Tax of 100% (an idea proposed by the German entrepreneur and anthroposophist Goetz Werner in 2006) or by financing the whole BI by levies on energy. Generally speaking, more or less every interest/pressure group would try to strengthen its position within the distribution process during the introduction of a BI (as is the case with every other attempt to change any element of modern society and the state – in my view the main reason why modern states tend to be rather inert).

These political and ideological controversies are inevitable. Now before they start in earnest, we have to know what they are all about. First, we have to calculate how much the introduction of BI in Switzerland would cost at current value, i.e. by replacing what can be replaced without changing the current system of social insurance/social security – and furthermore by compensating the BI payment with salaries above a certain, decent level which, I hope would be the case for the majority of salaries, at least in Switzerland.

Part II: The clearing system


As a matter of fact, the following “clearing” model is based on the assumption that every person earning an average income would finance their BI themselves. This assumption by the way, is also valid for other models, although they use different, indirect models of compensation, mainly within the taxation system. In my proposal, I am talking about a clearing payment that does not leave space for any misuse of tax income that would have been levied for one purpose and afterwards be employed for another. It is a direct, personal “refunding” of the BI, which is levied on the salary and paid by the employer to the Basic Income Fund. Full clearing/repayment starts at a level somewhat higher than the BI amount which I have proposed for two reasons: 1) the BI is a real basic income and should not be considered as a target value at any socio-economic level. Full re-imbursement starting at the level of the BI itself would establish it as such a target value. 2) Practically all who deal with the situation of low and basic incomes, state that it is essential that individuals maintain the potential to develop additional financial activity on top of a basic income. Therefore a clearing scale should be adjusted accordingly and start with the full clearing on a level beyond the BI.

This clearing system is to my knowledge, the simplest and most radical approach to establish a purely static evaluation of what BI would really mean in supplementary costs. In addition, we have to propose a scheme which allows both of these revenue sources (clearing payments and transfer of existing social benefits) to be used to finance the BI. This is what we did during the development of the clearing model. It is obviously tailored for the specific Swiss circumstances, but could easily be adapted to other situations. As said before, the clearing system leaves everything unchanged in the first step. The contributions from salaries to the old age pension (AHV), invalidity insurance (IV), accident and unemployment insurances continue to be levied, and the respective budget positions of the federal state, the cantons and municipalities are maintained and redirected to the BI Fund. (In Switzerland, the cantons and municipalities are the main recipients of direct taxes and social aid is the responsibility of the municipalities.)

Clearing payments and scale


In order to make the system work smoothly, a system needed to be developed to allow increases in income for those with lower monthly salaries (in our view less than CHF 4,000 per month). Without this, there would be no incentive to improve performance (and therefore pay) at the lower salary levels and it avoids any income traps for those whose income could increase, for whatever reason. People obviously should not be punished for their efforts, above all in the sensitive area of low, “sub-decent” income. (Some people in this category are part-time working partners of those with a full income – but this is another chapter). The scale we established is shown below.

Table 2: Earned income/month with BI at CHF 2.500/month and clearing payment scale

Income/month.  Basic              Clearing.          Clearing     Effective    Income/Month
before BI.              Income.        Percentage.     Amount.     Variation.  After Clearing
A.                              B.                      C.                      D (BxC).      E (B-D).   Payment F(A+E)
CHF.                       CHF.                 %.                        CHF.             CHF.          CHF
50,000.                  2,500.              100.0.              2,500.                0.              50,000.
10,000.                  2,500.              100.0.              2,500.                0.              10,000
5,000.                    2,500.              100.0.              2,500.                0.                5,000
4,000.                    2,500.              100.0.              2,500.                 0.               4,000
3,500.                     2,500.                86.5.               2162.5.            337.5.            3837.5
3,000.                     2,500.               73.0.                1825.0.           675.0.           3675.0
2,500.                     2,500.                59.5.               1487.5.         1012.5.             3512.50
2,000.                     2,500.               46.0.               1150.0.         1350.0.            3350.0
1,500.                      2,500.               32.5.                  812.5.          1687.5.            3187.5
1,000.                     2,500.                19.0.                 475.0.         2025.0.            3025.0
500.                         2,500.                 5.5.                   137.5.          2362.5.            2862.5
300.                         2,500.                 0.0.                     0.0.          2500.0.           2800.0
0.                              2,500.                 0.0.                     0.0.          2500.0.           2500.0

The approach for implementing this scheme in Switzerland was to follow the most important institution within the social security system – the mandatory public old age pension scheme. This is not only well established with an excellent reputation among the whole population, but also already covers all residents in the country (including children), so that on the administrative/technical level nothing needed to be re-created or changed. The AHV old age pension scheme is often cited as a kind of a BI for the retired, which is largely, but not entirely correct (but this, again, is another chapter).

The application of this scheme to the statistical realities of the Swiss economy would produce an amount which is transferred directly from salaries to a Basic Income account – the former Old Age Pension Scheme now obviously becoming the Basic Income Fund (some 38 bn. CHF, see table 4 below). It should be stated up front that for Switzerland, the calculation appears to be relatively easy because a large majority of the population is employed, producing a relatively concise picture of the income landscape. In other countries where there are large proportions of self-employed or black-market workers, this approach would be difficult.

Nevertheless, we have to work with some assumptions, since the indications differ according to the statistical base used (BESTA, Federal Statistics Office etc.) and do not give clear indications for some aspects that would be important for a correct evaluation of the situation, for instance like the level of employment etc.

Thus, for Switzerland, the following numbers are for the year 2010

Table 3: Income classes in Switzerland (2010)

Gross Annual.    Full.    Workforce.     Part.    Workforce.   Total    Workforce
Income                Time    (2,836,000).  Time.   (1,474,000).                (4,310,000)

CHF.                      %.                                      %.                                     %.
0.                             0.3.           8508.            2.0.       29480.              0.9.    38900
0–26,000.             2.1.          59556.            34.3.     505582.           13.5.   581000
26,001–52,000   11.2.        317632.            29.7     437778            17.7    762870
52,100–78,000   32.0        907520             15.5      228470           26.2   1129220
78,001–104,000 21.9.       621084               6.3        92862            16.4    706840
104,001 +              22.7        643772               3.1         45694            15.8    680980
No indication        9.9        280764               9.2      135608              9.6    413760
Source: Federal Statistics Office, table je-d-03.04.00.01.xls

To calculate the clearing amounts we have to make several broad assumptions to bring together the data from the above two tables as follows:

About 620,000 earn less than CHF 26,000 pa (2,167/month)​
Assume a clearing payment percentage of 20% of BI
Calculation 620,000 x CHF 2,500/month x 12 x 20%​                      CHF 3.7 bn

Assume 650,000 earn between CHF 26,000 and CHF 48,000 pa (2,167-4,000/month)
Assume a clearing payment percentage of 70% of BI
Calculation 650,000 x CHF 2,500/month x 12 x 70% ​                     CHF 13.65 bn

The balance of 3,060,000 people earn above CHF 48,000 pa
Clearing payment percentage is 100% of BI
Calculation 3,060,000 x CHF 2,500 x 12 x 100%​​                                CHF 91.80 bn

Total sum based on 2010 workforce​​​​​ ​                                                    CHF 109.15 bn

Table 4 below is based on figures from 2012 so the 2010 sum needs to be adjusted in line with the growth of the workforce from 2010 to 2012. Assuming this is in line with the general population increase of 2%, the 2010 total needs to be increased by 2% resulting in a total sum of the clearing amount for 2012 to be CHF 111 bn.

Then, it is generally agreed that the parts of the social security or social insurances that cover the basic needs are to be put into the service of the BI. This means for example that for jobless benefits, only the parts corresponding to the basic amount can be transferred to the BI financing. (In Switzerland, the aim of the jobless benefit is to guarantee a certain standard of living for a limited time, usually two years, so the income is in practice higher than the BI.) In Table 4, we have detailed which amounts of the national accounts on social security and the different social insurances we would take into account for the BI budget.

Table 4: Social Insurances, Total expenses and part of expenses creditable to the B.I. Account : Year 2012
Sources: various statistics and editions of the corresponding offices and insurances, notably pocket statistics of the Social Insurances in Switzerland 2014, pocket statistics of Switzerland 2015,

Title                                    Operative Expenses       Part creditable to B.I.     Amount
CHF                                                                             CHF

Old age pension AHV.            38.6 bn                                 100%                             38.6 bn
Invalidity insurance                 7.4 bn                             Pensions                            6.2 bn
Complementary Benefits       4.4 bn                                    50%                               2.2 bn
Accident insurance                   5.8 bn                      Pensions, 30%.                        2.0 bn
Military service and

maternity                                      1.6 bn                                   100%                             1.6 bn
Jobless insurance                        5.1 bn                                     50%                             2.6 bn
Child benefits                               5.3 bn                                   100%                            5.3 bn
Social Assistance                         4.1 bn                                   100%                            4.1 bn
Total                                                                                                                                   62.3 bn

There are several other items of state expenses at all levels that can be added to this figure, e.g. part of the agriculture subsidy relevant to the farmer’s salaries, scholarship funds, minor subsidies and aids under various titles and obviously economies at the administrative level. We do not suppose that they will be much higher than 5 bn.

Healthcare is usually considered as an important part of the social insurance system. In Switzerland, it is mandatory as in most other countries, but the contributions are paid by the individual and cost between CHF 400–500 per month per adult. A good half of the population (e.g. far more than those regarded as poor) receive canton subsidies for these expenses. Because this would somehow exceed the considerations in the context of the substitution for the BI Fund, we have left this aside.

Coming to the abolition of a large part of the bureaucratic structures of social assistance and social insurance (a long-term desideratum of the liberals), we confirm for Switzerland that part of the administration would disappear, mainly at the federal and cantonal level. We would expect fewer economies at the municipal level where the practical social work is done, since the introduction of BI would not solve all the problems of the people from one day to another. It might even be that during a certain period, more human resources would be needed to support and guide those who otherwise have been monitored (at least marginally) during their periodic visits to the municipal offices.

Thus, the sum that can be transferred from the existing social security system to the BI Fund is at current value and for the year 2012, about CHF 68 bn. Adding the CHF 111 bn from the clearing payment calculation, we arrive at a global amount of money which can be transferred from existing systems to the Fund to be CHF 179 bn. The gap between this and the calculated gross cost of CHF 209 bn is about CHF 30 bn per year.

Part III: How to cover the gap

Now we have reached the frontier of the cost neutrality by maintaining all elements as they actually are. We have calculated that there is a gap of CHF 30 billion between the cost of our proposal giving full coverage to all 8 million residents (BI of CHF 2,500pm per adult and CHF 625 for those under 18) and the amount of funds which could be raised from the current system.

From this point on, controversy starts as it is not obvious how to finance the annual deficit of CHF 30 bn and to direct the additional money to the BI Fund. For each adult person, the deficit amounts to nearly CHF 4,500 per year, which is approximately CHF 400 per month. It is clear that we cannot levy this sum directly from the resident population as this would simply correspond to a reduction in the BI, and we have already defined the amount of CHF 2,500 per month to be the minimum that can be called a “decent” payment.

There are mainly three technical possibilities to fill the gap – taking money from earned income, redirecting funds from other sources or printing more money.

We excluded printing money at the very start of our investigation, which may come as a surprise since the printing of money is nowadays the macro-economic measure par excellence and, if money is god, it is the real “deus ex machina” of national and international economic policy. For us, printing money is not an option at this stage.

Redirecting funds from other sources to the BI Fund could be achieved by taxing capital flows or gains or revenues and, particular only to Switzerland, using private insurance funding as follows: In 2025 the 40 year period of initial funding of the so-called second pillar (mandatory occupational pension plans, as opposed to the first pillar, the mandatory public pension plan resp. the AHV cited above) will expire, which means that the CHF 10 to 20 bn pa foreseen to build up capital during these 40 years (1985–2025) will become obsolete and therefore, in some way will become freely available. (According to the “Pocket statistic of the social insurance 2015”, in 2012 the statutory occupational pension system collected CHF 63.5 bn in contributions and spent in the same period CHF 47.5 bn). From a political/ideological point of view, this money “belongs” equally to the employees and employers. From a macro-economic point of view, the money will become a “useless” surplus that will enhance neither consumption nor investment spending and would just build another barrel of liquidity into the nauseatic ocean of global capital markets. Redirecting the cash to the BI Fund would be a far more reasonable measure than letting it disappear into the shadow of general accounts. The balance between wages, profits, prices and savings will not be changed basically by either way of proceeding.

The third possibility is to consider taking the corresponding amounts from the pot of earned income and the two main instruments in how to achieve this are direct and indirect taxes. The originators of the popular initiative from Basel favour the indirect tax route in line with the German entrepreneur, billionaire and anthroposophist Goetz Werner, who in 2006 urged the replacement of every direct tax by indirect taxes, raising Value Added Tax from 20% (in Germany) to 100% which would cover not only the needs of the BI but also the rest of the state’s expenses as well.

a) Value Added Tax


Werner’s main argument is that all taxes, including direct tax, are ultimately reflected in the price of products anyway, so having just one tax at the end of the production-life cycle of goods, i.e. at the point of sale, would be a logical and efficient form of taxation. (This argumentation is still maintained by the group in Basel with their so-called “Caffé Latte Model”.) Such a system has got two other major advantages, at least for entrepreneurs and billionaires. Firstly it abolishes any taxation of what is always considered to be the raison d’être of every enterprise, i.e. the earnings and the distribution of profits to the shareholders. Secondly, abolishing income tax puts an end to the principle (fixed for example in the Swiss Constitution) that every person has to contribute to the cost of the community as a whole (society) according to his/her economic capability. It is obvious that the wealthy would pay more VAT due to their higher level of purchasing, but this would in no way be comparable to the actual level of income tax, even if it were levied at a flat rate. (Actually, instead there is usually a considerable progression of the tax rate for rising revenues; with a sole rate of VAT without direct tax payments their tax duties would become sharply regressive.)

In the meantime, Goetz Werner has revised his proposal and now suggests only a partial hike of VAT, as do his followers in Switzerland (see their model below), and indeed, indirect taxation is a valid instrument for consideration. In Switzerland, VAT in its current form (basically 7.8%) brings in about CHF 3 bn per percentage point (with three different rates and numerous exceptions). Thus, to cover the financial gap of the BI with VAT alone, you would have to raise the rate by 10% to about 18%, which at first glance does not seem too ambitious when compared with the neighbouring countries’ rates of about 20%. Still, such a rise would mean a massive intervention into the political speculation potential and thus in the balance of political interests, VAT being the most important source of income for the federal authorities, “ex aequo et bono” with the federal direct income tax from natural and legal persons. But the redirecting of such amounts leads to massive battles around the balances of political interests. VAT itself can probably provide only a part of the financing of the gap we have calculated. The technical advantage of VAT would be that the decided increase would be possible without further difficulties and without other than expected consequences: when VAT rises, some sectors/goods and services manage to pass on these increased costs to the customers and others don’t – but that is quite normal.

It might still appear interesting that Goetz Werner says in his last contribution to the german internet newspaper “Spiegel online” that, at actual rates for Germany, a Basic Income would be located at the start in the area of the existing Hartz-IV-payments (about 600 €/person/month), therewith matching the calculations done several years ago by the research team around the former Prime Minister of the german Bundesland Thüringen, Dieter Althaus.

b) Other indirect taxes – Energy taxation


There are other indirect taxes which can be considered, such as levies on alcohol and tobacco and on energy consumption. Within the context of climate change and ecological issues generally, energy taxation is one of the major subjects in the political debate. This kind of indirect taxation is special insofar as it does not only have an influence on energy consumption (as is intended), but also touches several industrial sectors whose energy consumption is above the average. These will claim tax exemptions because otherwise they risk having to close down factories, as well as eventually the energy producers themselves because of a tendency of falling revenues. In the first place, it will affect the consumer, again sparing those who have relatively high incomes but supporting the goal of reducing energy consumption, of course. Energy taxation is more or less a VAT on specific goods. It depends very much on the political will of parliament and the people if such funds could be considered for the financing of a BI.

According to the BFE/Federal Office of Energy 2013, the global energy consumption in Switzerland is around 255 bn kWh. Therefore financing the entire gap of CHF 30 billion with an energy tax would cost about 12 cents per kWh.

c) Direct taxes


Before starting the proper discussion, it must be stressed that direct taxation is one of the most important elements of “passive exportation” in Switzerland. With its moderate, if not low taxation level, the country attracts both people and investments from all over the world, not any more the “dirty” money that Swiss banks have been accused of laundering for decades, but just the normal wealth that finds these conditions very welcoming and which in turn allows the tax rates to remain low – a logical consequence of the concentration of good tax payers within this small space in the alps. Thus, Switzerland attracts some of the so-called “tax substrate“(the tax base) from other countries; on the other hand side it is logical that any larger intervention can have important consequences on the said tax substrate. Both capital funds and the rich are shy and fugitive.

Another particularity is that the lion’s share of the income tax goes to the cantons and municipalities, as I have mentioned above. This may be an additional reason for the relatively low tax rates, since at the communal level, democratic decisions about tax rates tend to be strict and severe, and the control close to the establishment of projects which are often subject to popular votes and the budget – and finally the tax payment. Additionally, there is nowadays fierce competition amongst the cantons to attract the wealthy tax payer. As an example, some years ago the canton of Obwalden tried to introduce degressive tax rates for the rich which was ultimately prohibited by a ruling of the supreme court of Switzerland. Still, the race for the rich goes on at full speed leading more and more cantons to cut budgets and expenditure. – In 2010 the Swiss central state, the Confederation spent (*) about CHF 60 bn (of which CHF 18 bn was transferred to the cantons). CHF 22 bn was financed by direct taxes (CHF 9.879 bn from individuals); the cantons spent CHF 75 bn, collecting CHF 39 bn in direct taxes (CHF 28 bn from individuals) and paying CHF 5.5 bn to the municipalities. The municipalities spent CHF 43 bn, of which CHF 19 bn stemmed from individual direct taxation. This means that on all three levels of government, individual direct tax brought in about CHF 56 bn to the treasury.

(*) Figures are from Financial statistics of Switzerland 2012 (year 2010), annual report, Fed. Finance Department

It would be difficult and above all illogical to try to finance the BI gap by taxes at the cantonal or municipal level; already transferring some of the expenses of cantons and municipalities (e.g. social assistance) to the BI Fund will require some ingenuity. Thus only income tax at the federal level can be used to levy the necessary amounts, or indeed one can introduce a separate/special federal tax, a kind of a BI Tax over and above the federal income tax with a contribution sizing of its own. For logical and systematic reasons, this would be a very clean and transparent solution without mixing up all kind of different issues. Here again, financing the entire gap of CHF 30 bn by an additional direct federal tax would require an increase of 150% if the whole tax base of CHF 22 bn was used, or by 300% if only the earned income of individual earners was taken into account (CHF 10 bn). Among the questions that would arise, the first would be whether the BI should be taken into account for the calculation of the tax base. In this case, the BI would become a part of the tax base for those who do not refund their BI within the clearing system. For the others, there would be no imminent change, the BI clearing payments being deductible from the taxable sum. In order to exempt the BI from taxation (which is a logical thing to do), the tax free threshold would have to be increased to the amount of the BI. Based on figures from 2011 taxation year, this would cause losses of some CHF 40 million, a sum not relevant for our considerations.

Currently, the direct federal tax allows relatively high tax free amounts. For instance in 2014, the tax free amount is CHF 14,500 CHF for singles and CHF 29,300 for couples. Then there are tax free sums for professional expenses (around CHF 5,000), a special exemption of CHF 13,400 if both in a couple are working, another exemption of CHF 6,740 for private pension plans and obviously an exemption for children of CHF 6,300 per child. Thus, a single person could claim a tax free amount of up to CHF 20’000 pa and a married couple with 2 children, up to CHF 50,000 pa. Furthermore, the tax rates up to the middle income levels are quite modest, so that an increase as described would not significantly affect the tax payment and therefore the tax revenue.

The following calculations are still approximations, not because of the increase of the tax free threshold, but because of the current system based on the taxation of couples instead of individuals, whereas individual taxation forms the base of our entire considerations in accordance with the principle of the BI being paid unconditionally to everyone. Anyway, the payment of an individual and unconditional BI would later on entail a revision of the tax system at some future time, abolishing the taxation of couples and replacing it with the subsequent levying of taxes of individuals only (thereby satisfying an old request of parts of the liberal wing as well). But for the argumentation in this paper, we try to work with the “distorted” figures of individuals and couples as well as possible.

Let us have a look at the picture that would result. According to Table 3, out of a workforce of 4,310k people, approximately 750,000 earned less than CHF 30,000 pa (approx. 620,000 people earning up to CHF 26,000 pa plus a sixth of those in the next band up to CHF 52,000 pa). That means that 3.6 million people, the balance of the workforce, would in this scenario need to cover the CHF 30 bn gap by income tax alone, giving a per capita contribution of some CHF 8,500 pa/ CHF 700 pm, which is obviously too high, especially for those with lower incomes. Even when trying to weigh the contribution according to the income level, the results are somewhat shocking. Table 5 below shows a hypothetical range of contribution considered for each band, together with an average contribution used to calculate the results. The total of CHF 20.9 bn is still only two thirds of the gap. We can add some CHF 3.5 billion for those who have not indicated which band they are in, but this is purely speculative.

Table 5 Hypothetic model for additional income tax for incomes above CHF 30,000pa

Gross annual                     Total               Conttribution        Average                     Result
income                                Employed     Range                       Contribution
Per month              Per month/year
CHF                                                                 CHF                           CHF                            CHF

30,000 – 52,000               650000           30-300                     200/2400                    1.5 bn
52,000 – 78,000              1130000           300-600                  400/4800                    5.4 bn
78,000 –104,000              707000           600-900                  700/8400                   6.0 bn
104,000 +                            681000           900-5000                1000/12000               8.0 bn
Total                                                                                                                                      20.9 billion

No indication:                   413,760                                               700/ 8,400                 3.5 billion

This shows that covering the financing gap of CHF 30 bn exclusively by direct federal taxation is technically possible, but in practice not really feasible because the additional income tax would be quite high for the middle income earners. A steeper progression might help, but we would then be at risk of damaging the whole construction of the direct federal taxes where the wealthy pay substantially more than the middle income earners, and the lower income earners pay no tax at all.

So, it is clear that only a part of the gap of CHF 30 bn. could be financed by additional income taxes. And not to be ignored is that for the time being, the Swiss Constitution fixes a maximum tax rate for high incomes of 11% which would be exceeded with this proposal – but these aspects are rather secondary in view of the whole change proposed.

Part IV: The models in discussion

In our book “The financing of a Basic Income” (Seismo, Zurich 2010) we have presented three models for Switzerland of which one is the clearing model at the centre of this article. The other two models are from Bernhard Kündig, Vice President of BIEN-Switzerland in 2010, and Daniel Häni and Enno Schmidt, co-founders of the Initiative Grundeinkommen, the driving force behind the start of the popular initiative.

Bernhard Kündig


In addition to the substitution of existing social security payments, Bernhard Kündig proposes the replacement of the duties/contributions on the salaries that finance the social security programmes by a so-called “social Value Added Tax” of about 23%. VAT would be the main financing source of the BI and would be used only for this purpose. All the services of the public administration and public enterprises would be exempt from VAT. In addition, he urges the reform of income tax by replacing it with a flat tax of 22.5% with a high tax-free threshold, abolishing the large majority of possible tax deductions. This would cover the remaining financial needs of the BI Fund as well as the normal expenses of the Confederation.

Häni and Schmidt


As I have mentioned above, Häni and Schmidt advocate in principle a solution based on VAT, arguing much like their mentor Goetz Werner that the different taxes an enterprise has to pay end up in the price of the goods sold anyway (and ignoring like Goetz Werner profit or wealth taxation etc.). As I have done in this article, in practice they advocate the transfer of existing social security payments into the BI Fund, as far as it is appropriate to transfer them. Their numbers in this context are very much the same as ours. Furthermore, they propose some compensation with salaries as I have presented above. However, they do not foresee any particular mechanism to provide this compensation but leave the development to the forces of the labour market (with some assumptions that do not exactly correspond to the price building mechanisms of an average labour market, but this is not that important). Finally, they achieve similar figures as ours for the compensation effect, for the replacement of social security payments and for the gap that would have to be covered. They give no concise solution as to how to fill the gap, because in their eyes, it is far more important to understand the principle of the BI than to provide the details of a financing regime that anyway would be overthrown in the political process. Consequently, the Initiative Grundeinkommen resp. the forces that proposed the popular initiative do not give specific indications about these questions, starting with the amount itself; the text of the popular initiative only states “…the financing and the amount of the BI is governed by the law”. At this very stage of the public discussion, I think this was a wise thing to do.

Müller and Straub


During the launch of the initiative, Christian Müller and Daniel Straub published a booklet entitled “Die Befreiung der Schweiz” (The Rescue of Switzerland) with the following estimates: gross cost CHF 200 bn covered by CHF 128 bn transferred from earned income and CHF 70 bn from existing payments of the social insurances/social security, leading to a financing gap of CHF 2 bn. The difference to our estimates concerning transfers from earned incomes stems mainly from the fact that they did not use a scalable “clearing” but instead calculate with full reimbursement/transfer from the very first franc above the BI amount. Otherwise, it seems obvious that they have overestimated the potential transfers of the actual social security into the BI Fund.

Others


In the course of the campaign for the popular initiative, various other attempts and proposals have been given birth, amongst others a micro-taxation of financial transfers or a mix of the systems mentioned above, according to the creative potential of the respective authors. It is not the aim of this article to discuss these valuable contributions, since they have not yet matured into a coherent form, which might very well and hopefully succeed in the moths to come.

Part V: The opponents

After the work “Solidarität neu denken” of Martino Rossi and Elena Sartoris in 1996, there were practically no further publications dealing explicitly with the financing of a BI. In 2004 and 2005, Christoph Schaltegger and Michael Gerfin/Robert E. Leu discussed the introduction of tax credits resp. of a negative income tax, and Tobias Müller presented a model of a participation income, mainly dealing with the possible effects on the labour market in Switzerland. Otherwise, the book of BIEN-Switzerland in 2010 about the financing was the first attempt to visualize the financial side of the BI proposal.

(Gerfin/Leu, Die Volkswirtschaft Nr. 6/2005; Schaltegger, Fed. Tax Administration, 2004; Müller, Die Volkswirtshaft 7/2004)

Recently, two reactions from opponents of the BI were published, presenting more or less detailed calculations.

Economiesuisse


Six months after the start of the collection of signatures for the BI popular initiative in 2012, the Swiss entrepreneurs’ PR organization Economiesuisse published an article on the BI. The arguments were presented under the sarcastic title: “A Basic Income?––Unfortunately not”, and as an introduction, Economiesuisse stated that an excessive increase of VAT would be inevitable and that the BI would notably weaken the economic performance and the competitive potential of the country. Thus, it is immediately clear that the authors were even not aware of the existence of our book with the three models, published in 2010.

However, Economiesuisse had no problem with calculating the gross cost of BI per year. They assigned 25% of BI to minors in accordance with the numbers proposed since 2012 by the promoters of the initiative, and arrived at the slightly lower amount of CHF 202 bn (compared with our CHF 209 bn). Like all other authors, they integrate the substitution of the most important parts of the current social insurance (public old age pension AHV, unemployment, child benefits, social aid etc.), calculating a figure of CHF 62 bn, slightly under the estimates of the promoters of the popular initiative.

Up to this point, the differences are minor. From here however, the assumptions start to vary considerably. Economiesuisse works with a modelling of economic parameters, an issue not tackled here, but which is of course of interest to those dealing with the subject as such, and as well the subject of a variety of papers at different levels. The calculations within the model are based on a “simple neoclassical growth model” (Solow, Romer and others) and deliver quite negative results for the advocates of a BI. In order to cover the CHF 140 bn difference between gross cost and substitution effects, Economiesuisse foresees an increase of VAT to more than 50% (which obviously is a consequence of not taking into account any financing model other than the one proposed by Goetz Werner). According to the model, we would have the consequences of a shrinking of the GDP of 17%, and a decrease of capital stock (2011) from CHF 1,378 bn to CHF 985 bn. The latter is due to the formula applied when calculating the value of the capital stock where the tax rate plays the decisive role for the decrease.

As shown above, there are other models to be considered for a more accurate analysis of the financing question. Even the authors of the popular initiative do not speak of such a spectacular increase in VAT (or of direct taxations, otherwise), leaving the way of transferring the salary sums that would be substituted by the BI to non-specified market forces. But even within the model of Economiesuisse, there is a grave mistake. It bases the whole model on the cost side with the deficit of CHF 140 bn while the corresponding sums do not appear on the other side of the balance sheet, neither as salary substitution nor even simply as popular income. According to my numbers, CHF 110 bn should show up in the balance sheet as a kind of salary increase. If you take the compensation mechanism as a taxation on one side, you have to compensate the balance of the national economic account by a salary increase on the other, which would be the payment of the BI. Economiesuisse has forgotten to enter the detail of CHF 110 bn into its own models and equations!

The “message” of the Federal Council


For every popular initiative that has been successfully submitted, the Federal Council establishes a “message” for the attention of parliament. Within the context of the Basic Income popular initiative, the message is based on the numbers put forward by the promoters of the popular initiative, i.e. those in the booklet of Müller and Straub – gross cost of CHF 208 bn (again with 25% of BI for minors), whereas the effect of the substitution of social security on the other side is valued at CHF 55 bn (as opposed to the CHF 70 bn of Müller and Straub). The “absorption of earned income” would be CHF 128 bn, as put forward by Müller and Straub. The absorption transfer would be done by direct taxation and would exclude the first CHF 30,000 of all earned income, and the gap would be covered by VAT (CHF 25 bn). The message mentions eventually establishing the direct tax in a progressive way, but does not enter into details.

Now this kind of presentation is all but clear. It contradicts all rules, even in the case of full absorption by income tax, in that according to this mechanism, the taxpayers with the lowest incomes should pay the highest rates. Even if this assumption has only been taken for analytical purposes, it should somehow allow the chance to explore the possible mechanisms which the authors of the initiative had in mind. Obviously, it would have been preferable to feel a thorough understanding of a proposition, even if the Federal Council does not agree with it. It looks like the Federal Council does not even know exactly what it does not agree with.

Conclusion

Financing is not the core question of the BI concept. Still, certain calculations have to be done to produce some ideas about what would occur, and what would be needed if BI were to be introduced in the future. Independent from any speculation about possible effects on different parameters of the economic and social activity, our aim was to establish a set of numbers that afterwards could be embellished with any desired side or main effect. It is something like the base for more speculative deliberations, like for instance about the inclination to assume, abandon, increase or reduce a salaried activity, as is and has been the subject of various scientific enquiries and papers. Our investigation has shown amongst other things, how little attention the opponents of the scheme have paid to the fundamental ideas and elements of the financing of a BI in Switzerland, which led to some miscalculations. On the other hand, the errors in the calculations of the advocates of the scheme have rather been forgiven, for they have always insisted that the most important thing is the principle, not the money: if society agrees to introduce the scheme, the specifications of the introduction will follow and will have no devastating consequences on modern life. The campaigners make the effort of doing all these somewhat strange calculations only because they have to furnish some indications, not yet grown to scientific values.

The calculations discussed within this article give the following results: For 2012, the gross cost of introducing BI in Switzerland is approximately CHF 209 bn pa, based on a resident population of 8 million, of whom 1.5 million are classed as minors under 18 years. BI would be CHF 2,500 pm per adult (at a cost of CHF 198 bn pa) and CHF 625 for minors (costing CHF 11 bn pa). Total compensation would be CHF 179 bn pa made up of CHF 111 bn from the earned income from the clearing model (or other mechanisms of transfer/absorption); CHF 63 bn from the social insurances and CHF 5 bn from other economies, for instance at the administrative level, with subsidies for the agriculture, scholarship funds etc. So – contrary to the hopes I had for a short time after my initial calculations – there is a gap of some CHF 30 bn pa to fill. This is a considerable number – not as big as some opponents pretend, but far more than Müller and Straub assume. If the CHF 30 bn were borne equally by all 6.5 million adult residents, it would be CHF 4,500 per person per year, about CHF 400 per month.

There are several possibilities to deal with this and I have discussed some technical approaches for filling the gap. The smoothest way would appear to be an increase of Value Added Tax, because somehow it hides the shocking reality of the sheer amount to pay and the increase of VAT would not translate in a linear way into price increases. In practice, parliament would probably choose some mixed method of financing. An increase of VAT by 5% would cover half the cost, reducing the average contribution of income tax per year shown in Table 5 by 50%.

This would be affordable, but still a considerable amount – corresponding to a tax hike of about 5% of the earned income, leading to an increase of the tax rate of 20% and more – and it is more than questionable if this is politically feasible. Voters anyway and above all need to understand what changes they would pay for, otherwise the proposal would never succeed in a popular vote and in parliament. They have to see that this is not another financial raid by the poor on the purse of the middle class (which is currently the mainstream political discussion in Switzerland), but the introduction of a basic new and fair way of managing society which requires a long overdue adjustment to both legal and actual living conditions. The main beneficiaries would not be the poor and/or the lazy, but primarily couples with children.

Just one remark about this. According to practice and ideology, the labour market in our modern society is what it is. It has never been questioned that the same salary for the same work should, in one case, be enough to satisfy the needs of a family of say two adults and two children and in another case of one single person. (The compensatory factors of tax allowances and child allowances do not really make a significant difference, at least not in Switzerland.) This is funny, in a certain way, and shows how the public opinion accepts the most evident inequalities, if not injustices without turning an eyelid, just because it is what it is. The introduction of BI puts an end to this obvious and basic injustice without even changing a comma in how the labour market functions. I am convinced that voters are ready to pay something for improvements to modernise our society and the BI is going to become one of the important institutions of this modern society. But I am not sure if they are ready to pay the entire bill as presented here. There are other options to be considered.

The most interesting option to me seems to be the evaluation of the financial possibilities arising from the end of the capital-building period of the second pillar of the old age insurance. The potential saving of CHF 10 to 20 bn pa could reduce the gap (and thus all the working hypotheses mentioned above) by half, starting from the year 2025. To be fair, I admit that the politicians dealing with pension plans have probably already reserved these funds to cover deficits arising from the democratic evolution with the increasing share of the old age population. But since the BI covers the basic payments of the mandatory state old age pension (AHV) in the first place, this could work out even within this kind of endeavour.

The introduction of a BI has got to be conceived as a process. Once the initiative is approved by the people, parliament could consider different options to minimise the cost. For example by starting with a slightly lower level of BI than we have used above, (a BI of CHF 2,100 pm per adult/CHF 625 pm per minor would cost CHF 177 bn pa and be cost neutral), meaning that some parts of the social security system would need to be maintained for longer, or the BI for retired people would need to be higher to equal the level of the former AHV or complementary benefits would need to increase. Another option could be a gradual introduction of a BI, for instance starting with a BI for children (see for instance the contribution of Ingmar Kumpmann and Ingrid Hohenleitner in our book), apart the coverage of those retired.

When it comes to a macro-economic view of the introduction of a fully-fledged BI, we state that the financing of the CHF 30 bn gap would not take funds from national consumer spending (which rather, is strengthened by BI because it tends to give more to those with less spending power); it would finance the gap from the savings pot. And here we come back to some basic questions in the context of savings and finance. Goetz Werner commented at the Basic Income Congress in Munich 2012 on savings as one of the reasons for the global financial crises. For him, there were indications that from time to time, massive levels of saving appeared to be the enemy of the real economy – the economic apparatus that guaranteed our daily lives – because savings were directed less into productive investments and increasingly more into capital markets which at a given point could collapse because of savings overload, amongst other reasons. This meant that from time to time, our attempts to prepare for the future were damaging (maybe even structurally and inherently) our present lives. There are many discussions about the continuous dislocation from earned income towards capital revenue etc. In this sense it is quite superficial to say that the middle classes are always bound to finance the poor – the problem is a different one. By accumulating ever more wealth, the middle classes are feeding an ever growing capital market to an increasing degree, alongside the financial tycoons we usually blame for abuses and greed etc.; but that is another discussion.

Finally, I should like to quote a macro-economic reflection that in a way, illustrates the dimension of the venture. Martino Rossi and others say that the BI ought to be considered as a third, constitutive element of modern national economies. Up to now, its harvest has been divided between capital and wages, and in the future, it should be divided into three parts – capital, wages and BI. Another view concerns not the macro-economic dimension, but a simple and illustrative mechanism of how financing BI could work within the taxation of earned income and is one of the models presented by the German party “Die Linke”. According to this proposal, every single earned Euro would be taxed at a rate of 30% (linear, but it might as well be slightly progressive). Instead, the BI (financed by these direct and other indirect taxes) would be paid tax-free alongside the earned income of everybody. I think this model captures the financial/technical essence of the proposal very well in a systemic form.
17

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