What you need to know
Universal Basic Income provides economic stability and is believed to address social inequality, but Dr. Chieh-Chi Hsieh makes a case against the idea to launch such a program in Taiwan.
The idea of a universal basic income (UBI) has generated substantial interest among the public in the past year, thanks, in part, to U.S. entrepreneur Andrew Yang’s bid for the Democratic presidential nomination in 2019.
UBI is not a novel concept. English radicals such as in the 18th century, and the late Dr. Martin Luther King, Jr. also advocated for “a guaranteed income” in his 1967 monograph shortly prior to his assassination.
Although these ideas were proposed against different historical backgrounds, most of them agreed that UBI is a solution to , and hence, . What is the appeal of implementing the scheme, and more importantly, could it be implemented in Taiwan?
UBI and its criticisms
Unlike the existing social welfare system implemented by governments, which aggregate financial resources via taxation, and in turn, articulate various means-tested benefit programs, such as child support, unemployment benefits, and survivor benefits, a narrow definition of UBI a life-long monthly grant without any conditionalities for all members of a given community.
Proponents argue that it is people, not the government, who best understand what they need. While the government collects tax revenue, UBI asks officials to offer a fixed amount of income to its recipients, allowing them to make their own decisions and, its proponents argue, .
However, some are skeptical of this policy, stating that UBI poses negative effects on labor productivity and may lead to high inflation rates and capital flight.
With regard to the reduction of labor productivity, critics posit that UBI discourages people from working hard, especially if the amount provided is higher than their current wages. It creates a vicious cycle as a reduction of labor productivity decreases tax revenue and GDP growth.
To prevent this, prominent economists supporting a guaranteed income, including Milton Friedman, proposed to replace UBI with , allowing those below a certain income level to receive subsidy payments from the government.
This argument seems to assume financial incentives to be the only factor that drives human behavior. This is not always the case. The debate regarding drivers of self-interest is beyond the scope of this article. Yet, it would be difficult to disagree that life goals are not homogenous. People can be equally driven by self-respect, dignity, and ambitions.
Another argument against UBI is that it increases liquidity in the economy, resulting in high inflation rates. It is based on the quantity theory of money, which states that the price level of goods and services positively correlates with money supply. In response, monetary authorities would attempt to control inflation by raising official discount rates.
What follows is higher costs for acquiring corporate financing and a reduction of economic output. To reduce costs, companies may start to lay off employees and hire temporary workers. In both scenarios, it is working-class people, or in Marx’s words, the proletariat, who are subject to exploitation.
Yet this economic model the transactional demand for money for goods and services and excludes the precautionary and speculative demand for money. In simple words, people use money not only to buy and sell goods to meet personal expenditures, but also to save for the future and invest in financial assets. Thus, the increased liquidity under a UBI scheme would not necessarily lead to a rise in the inflation rate, at least in the short run.
Is UBI feasible in Taiwan?
Although UBI is a fascinating idea, I believe it will be difficult, if not impossible, to implement in Taiwan — due to the country’s unique political and economic situation. From the perspective of risk management, Taiwan has to maintain both fiscal discipline (a state of balance between government expenditure and revenue) and high levels of foreign exchange reserves to soften the impact of financial instability resulting from the volatility of international capital flows.
It is noteworthy that maintaining fiscal discipline and accumulating high levels of foreign exchange reserves are imperative for Taiwan’s economy, given its insufficient international recognition as a de jure sovereign state. This denies the country participation in international and regional financial safety nets, such as the International Monetary Fund’s lending facilities (e.g. ) and the under the ASEAN Plus Three Framework.
With fiscal discipline maintained, Taiwan would avoid accumulating high levels of sovereign debts through international borrowing like , while possessing high levels of foreign exchange reserves would reduce Taiwan’s vulnerability to speculative attacks by international investors to reap the benefits of shorting the New Taiwan Dollar. This is a hard-learned lesson from economies such as Thailand, Malaysia, and Indonesia
Implementing UBI in Taiwan should not be at the cost of fiscal discipline. The government should avoid an expansionary fiscal policy that comes with high levels of sovereign debt. Neither should adjustments be made to Taiwan’s current export-driven economic growth model, which is the most prominent source of Taiwan’s GDP (64.05% in 2019) and how the country accumulates foreign exchange reserves.
To maintain fiscal discipline, Taiwan’s tax revenue has to be no less than its expenditure. According to in 2019, Taiwan’s annual GDP comprises exports of goods and services (64.05%), private final consumption (52.30%), domestic fixed-capital investments (23.45%), and government investments (13.99%). Given that Taiwan’s tax revenue mostly comes from income tax (46.5%) and business tax (17%) in 2019, there is only one option to achieve this — cancel all means-tested benefits, including unemployment and housing benefits.
In practice, it means, for example, UBI would replace the NT$491.9 billion social benefit programs for . Accordingly, every Taiwanese adult over the age of 18 would receive approximately NT$ 25,000 every month from the state, an amount higher than the . In theory, this way, Taiwan would not risk causing inflation by adopting UBI, given that it redistributes income rather than increases the money supply.
However, if the Taiwanese government is no longer responsible for providing means-tested programs, free-market mechanisms would have to be introduced into the social welfare sector, leaving many uninsured and vulnerable. The political backlash would be severe, given the outbreak of Covid-19 has underscored the importance and effectiveness of Taiwan’s national health insurance.
Under such circumstances, many may start to save more and spend less, causing the GDP to shrink. An example of how the lack of social welfare programs, including medical care and old-age pension, affects consumption behaviors when enterprises terminated their provisions of these services to their workers during the late 1990s.
While it is possible to implement UBI without canceling all social welfare benefits, the debate on which social benefits to eliminate would entail a lengthy bargaining process as various pressure groups would try to safeguard the interests they enjoy from the current welfare system.
Raising tax revenue for UBI
There are two other options that would allow Taiwan to implement UBI. The first is to increase tax revenue by either raising tax rates or eliminating tax credits.
Taiwan could raise its corporate income tax rate (20%) or sales tax rates, such as the value-added tax (VAT), which is 5%. These taxes are much lower than those in other Asian countries, such as (corporate income tax rate: 23.2 %; VAT rate: 10%) and (corporate income tax rate: 25%; VAT rate: 10%).
Yet, raising income corporate tax drives up costs for businesses, creating a push factor for domestic investments to go offshore and/or deterring inward foreign direct investments (FDI). Using the as an example, it would entail reductions in both exports of goods and services (64.05%) and domestic fixed-capital investments (23.45%) in Taiwan’s GDP.
Raising VAT rate seems to be a viable alternative to increasing tax revenue, but it only works when private consumption remains stable. In most cases, increased prices of goods and services hamper consumption, as shown in .
To boost tax revenue, it is also possible to eliminate tax credits for businesses. Currently, Taiwan’s allows businesses to claim up to 15% of its R&D budget on industrial innovation against their income tax returns. Nevertheless, the risk of eliminating these tax incentives is too high, given these tax credits are aimed to maintain the competitive advantage of Taiwan’s industries in the global market.
Transforming the economy for UBI
The second option is for Taiwan to adopt a new growth model. This could be achieved by developing the capital Taipei into a leading Asian financial center or transforming Taiwan into a consumption-driven economy.
With regard to the former, this means ensuring an increase of the existing ratio of GDP input of 9.51% from the finance and insurance industry to compensate for the reduction of GDP input from the manufacturing sector (52.72%), based on. In this case, this may entail both the number of businesses (21.31% ) and the size of the employed population (40.31% ) in manufacturing to shrink.
Taiwan may be able to capitalize on the opportunity to develop its capital city into a financial center, with foreign financial entities contemplating relocating their headquarters from Hong Kong after the new security law was passed. But Taipei does not possess the competitive edge — know-how, niche — over existing regional financial hubs Tokyo, Singapore, and Kuala Lumpur, let alone the global financial hubs of New York and London.
For example, although the latest ranks Kuala Lumpur one place (41) ahead of Taipei, Kuala Lumpur has risen to become the top three global financial hubs for Islamic finance in recent years. Malaysia is also the world’s largest issuer of Sukuk, the Shariah-compliant bond. Without obtaining such a specific financial niche, it would be difficult for Taipei to compete with other regional and international financial hubs.
To turn Taiwan into a consumption-driven economy, the country needs its private final consumption (52.30%) to be higher than exports of goods and services (64.05%) as a source of GDP, based on . The economy would be driven mainly by private final consumption vis-à-vis other GDP components, such as net exports of goods and services, government spending, and fixed domestic investments. The most notable example is the U.S., whose private final consumption accounted for the largest ratio of GDP input (67.9%) , followed by government spending (17.5%), fixed domestic private investments (17.2%), and net exports of goods and services (-2.5%).
The immediate problem for Taiwan to become an economy driven by consumption rather than exports is an outflow of foreign exchange reserves. For instance, Taiwan lacks natural resources, such as crude oil, and has to import these commodities, which are largely traded in U.S. dollars. In addition to importing natural resources, engaging in international trade with a negative net balance of exports would result in an outflow of dollars, given the as the leading invoicing currency in global trade. As Taiwan depletes its foreign exchange reserves, the economy will be more vulnerable to external financial shocks.
To develop a consumption-based economy, the government would be inclined to adopt lax financial regulations, which poses potential threats to domestic financial stability. One notable example is the credit card crisis in South Korea in . As domestic private investments contracted in the wake of the 1997 Asian financial crisis, financial institutions in Korea began focusing on consumer finance businesses, when abolished administrative ceilings of monthly cash advances and the leverage limit for credit card issuers.
The results were high household debts and the emergence of that pressured households into borrowing money to pay back the interest rates on loans. When households defaulted on loans, a chain reaction kicked in: Financial institutions suffered heavy losses from their credit card lending businesses, panic redemption ensued and curtailed private investments and consumption levels, and GDP growth rate dropped.
The foregoing discussion shows that the problem of UBI is not that it is not desirable, but that it is not a one-size-fits-all solution. In Taiwan, it is possible to cancel all means-tested benefits in exchange for UBI, but the political backlash could be too severe for any political party to back the scheme.
Other solutions, such as raising income corporate tax or VAT and eliminating tax credits, would entail changes to Taiwan's growth model based on exports of goods and services, the country’s main source of GDP. These changes would affect the government’s capacity to maintain fiscal discipline and high levels of foreign exchange reserves to withstand financial instability at domestic and international levels.
For Taiwan, a country that is denied access to international and regional financial safety nets, it makes a case against the idea due to the necessity of maintaining fiscal discipline and accumulating foreign exchange reserves to counteract potential financial turbulence in the age of international capital mobility.
TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)
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