Comparing Guaranteed Minimum Income and Universal Basic Income: The Importance of Household Structure

Proposals for various forms of Basic Income, including Guaranteed Minimum Income (GMI) and Universal Basic Income (UBI) have received increasingly broad attention in recent years, both globally and in Australia. If all existing payments and taxes are applied on a purely individual basis (or entirely on a household basis), the distributional impacts of the introduction of GMI and UBI are equivalent. The key concept here is the effective marginal rate of taxation (EMTR), which is the combined effect of taxes paid on additional income and welfare payments withdrawn as income rises. This equivalence between UBI, GMI and Negative Income Tax (NIT) breaks down if, as in Australia, taxes are levied primarily on individual income while benefits are paid to households and means tested on a household basis. The purpose of this paper is to use micro-simulation to illustrate how this distinction changes the distributional effects of Basic Income schemes and the magnitude of the EMTR required to finance them. Modelling is completed through microsimulation using Treasury’s CAPITA model.