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Economic Outlook - Basic Income

Professional and daily economic press abroad has recently mentioned the concept of basic income several times. It is not a new concept at all; originally, it was credited to Thomas Paine, one of the Founding Fathers of the United States. However, today the idea comes to the fore due to technological progress and worries that the digital technological revolution will replace a large portion of human labour with machinery.

Basic income should be a social benefit of the same amount for everyone irrespective of his or her level of income or assets, which would replace the existing state social systems. This idea has its supporters on both the left and the right wing of the political spectrum. Left-leaning economists like the opportunity to restrict the income inequality in society, especially in a moment when the gap between income arising from capital ownership and wages grows deep. On the other side of the political spectrum, different attributes of the basic income score, such as administrative simplicity and elimination of high (sometimes more than 100-percent) marginal taxation in a switch from unemployment to employment, in which situation one usually starts to receive wages but loses his or her unemployment benefits and other social benefits under the current conditions. 

Several experiments with basic income have been made across the world. For example, governments in Alaska and Macau make single-amount transfers to their citizens every year. Namibia underwent an experiment with basic income in 2008-2009. Other pilot projects have been ongoing in India since 2011. In Europe, the first pilot project of this type is being prepared in Finland. From a certain point of view, a number of countries, including the Czech Republic, have introduced at least a partial basic income. To some extent, the tax relief per taxpayer may be considered an equivalent of basic income. 

What would be the consequences of introducing basic income in the Czech Republic? If we replaced all social contributions and benefits, added the total amount of the tax relief applied and divided the result by the number of people in the Czech Republic, we would arrive at an amount of CZK 79,554, which is CZK 6,630 per person per month. 

If we aspired to eliminate the risk of poverty, the basic income would have to be substantially higher. The poverty threshold is usually defined as 60% of the wage median. Today, this percentage equals to CZK 13,423 per person per month, which is approximately twice the basic income of the current budget possibilities. With such high basic income, the total expenses would increase to CZK 1.7 billion per year and the total taxation should be increased to 54 percent of the gross domestic product from the current 34 percent to cover the expenses. For your information, Denmark now has the highest total taxation in the world with the tax-to-GDP ratio being 49 percent.

David Marek, Chief Economits, Deloitte