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Universal Basic Income – A Swiss case study

Inequality is all the rage, with even Obama resurrecting his campaign themes from 2008 to raise the issue to prominence once again. But few concrete and serious proposals are getting aired in the US or in the EU, apart from the standard – and unhelpful – ‘deregulation’, ‘welfare reform’, ‘education’ suggestions.

Swiss Federal Palace

Will Switzerland adopt radical reforms for class equality?

One country seriously weighing proposals is the temperamentally conservative nation of Switzerland, and among the motions tabled there is:

  1. capping the ratio of maximum salaries to minimum salaries to 12:1,
  2. introducing a minimum wage of 4’000 swiss francs per month (around $4’000), and
  3. introducing a basic income of 2’500 swiss francs per month for all residents.

The first of these was brought to a referendum last month and failed, mainly due to the overambitiously low ratio of 12:1 proposed. Polls suggested that a higher ratio had enough support to pass. The second motion, due to be tabled for a vote next year, is hardly radical given that the effective minimum wage for most sectors of the economy already hovers around 3’700 swiss francs (retail sales assistants being the main exception, earning sometimes only 3’000).

The third proposal, also due to come to a referendum next year, however, is more innovative and untested. The main objection to it that has been mentioned concerns its affordability. But the objectors never actually show the numbers to back up their hazy scare tactics. So here are some back of the envelope calculations:

It is estimated to cost in total: 210 billion sfr. (30’000 per year x 7 million residents)

That sounds like a lot of money for a small country with a small government philosophy. How can that be paid for?

– 90 billion sfr is covered by transfers from other existing welfare programs that will be replaced by the basic income (these include wage subsidies, child support, food programs, rent subsidies, transport subsidies, but, importantly, *not* unemployment insurance and the federal retirement program which is structured much like social security). See “le courrier” link at bottom of this post.

– 60 billion sfr is recovered by taxing workers above the median wage, currently 6’000 sfr/month, for an amount equivalent to the basic income (2 million workers above median x 30’000). Basically the proposal is that only those below the median wage will benefit from the basic income, so you would get the whole 2’500 up to 4’000 in further wages, and gradually have the basic income benefit taxed away at higher incomes.

– 30 billion sfr is recovered by taxing workers just below the median wage in such a manner that the basic income benefit gradually phases out as one’s income approaches 6’000 sfr.

– 10 billion sfr is recovered by taxing families with above median income so that the basic income benefit per child (each child below 18  is given 15’000 per year under the proposal) phases out at something north of median income.

That means, with *no* tax hikes at all, only 20 billion sfr needs to be financed by further federal revenue or savings elsewhere. 20 billion is approximately 3% of Swiss GDP. Of that (and this is purely back-of-the-envelope spitballing), the shutting down of the plethora of other social programs – with heavy administrative costs for verification of qualifications and processing – could lead to savings of 1% of GDP. The stimulus effect of increased incomes for low-income families with high marginal propensity to consume could increase tax revenues (sales tax, etc) by 1% of GDP.

So ultimately, the introduction of a Universal Basic Income of this order in Switzerland would require only added revenue of 1% of GDP. This is hardly unthinkable nor unworkable. For instance, a hike in the value added tax from 8% to 12% would by itself cover this amount (remember that much of the EU already works with 20-25% VAT).

As the debate comes to a head next year, I’ll return to update the state of play, but the proposal itself is both workable, promising and hopefully will build public support as the affordability issue is brought to rest.

A couple of useful links:

Photo by Pazit Polak released under a Creative Commons license.

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