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UBI: Addressing Inequality

Written By: - Date published: 2:15 pm, January 22nd, 2014 - 31 comments
Categories: benefits, Economy, tax, welfare - Tags: ,

Flip (now at FlipNZ) has been continuing his investigations into a universal basic income (also UBI) by looking at the impacts on income and tax to see how we could use a UBI to create a greater income equality. He has allowed us to reprint the post

Income equality is one measure that can be used to indicate the equality of a society. I have analysed the 2011 income distribution and show how a UBI (Universal Basic Income) can create greater income equality. The details of the UBI and its benefits are detailed in other places. Quite a lot of discussion has occurred regarding the benefits and pro’s and con’s of it as well.

2011 Income Distribution

In the graph below the red line would be what the income distribution would be, when 50% of the income earning population received 50% of the income, 10% received 10% etc. In other words, if the income was evenly distributed among the population.

The blue line represents the actual NZ distribution of income in 2011.

The stepper the blue curve and the less area under the curve the more uneven the distribution of income. The closer it moves to the red line or the greater the area under the curve the more even the distribution of income. The steeper the curve the more income is earned by less of the population and less even the income distribution. By measuring the area under the blue line and subtracting it from the area under the red line you get a measure of inequality. (The area shaded in red). An index if you like.

Table of % of Population earning less than the income band per annum.

% of Population  Approx Income Band
 20%  $11k
 40%  $19k
 50% $25k
 60%  $34k
 80% $54k
 95% $93K

2011 Income

UBI Income Distribution

Applying a UBI of $9080 and a flat tax rate of 33% the curve looks like this. This has been selected based on analysis done by Perce Harpham and details can be found here. Alternatives schemes can be selected and various options are possible. This spreadsheet enables the experimenting with different levels of UBI and assumptions. Further comments are here.

UBI Income

Other Scenarios and Comparisons

The table below offers a comparison of other scenarios. The closer the Equality Index % is to 100% the more even the income distribution.

The 2007 scenario shows historically what the equality index was.

The 25K scenario is what would happen if the first $25K of income was tax free.

The UBI scenario gives people a UBI of $9,080 tax free and sets the tax rate at 33%.

The Flat scenario is what would happen if all income was charged at 33%.

Note the change in government tax income and the equality % change between the different scenarios.

The 25K and  UBI scenarios alter the government funding so would need to recover that by other means assuming no loss of government service.

For the UBI an asset tax is proposed to fund it and savings would result from the simplified system. There would be less bureaucracy in the administration and management of benefits.

Equality Index Income ($m) Tax ($m) Tax take change from 2011 ($m) UBI Cost ($m) Government Income Change from 2011
2007 52.37% 106,085.50 25,192.10 1,039.60 1,039.60
2011 53.00% 121,153.40 24,152.50 0.00 0.00
25K 57.21% 107,525.15 13,628.25 (10,524.25) (10,524.25)
UBI 64.69% 112,441.12 39,980.62 15,828.12 31,268.34 (15,440.22)
Flat 53.00% 81,172.78 39,980.62 15,828.12 15,828.12

From the graph below it can be seen that the 25K tax free scenario reduces inequality a little and benefits middle to high income earners more than low income earners. The UBI has a much more significant effect spreading the benefits more evenly among the population.

Scenario

For more details on the UBI scheme refer to this post.

Some actual real thought has gone into this UBI proposal. It is practical, simple and would actually work. It includes thoughts on the impact and how it would be paid for and actually removes complexity from the system unlike the fiddles by previous governments. I have not explained all the details but they can be found in the links. There are still some issues to resolve and it is impossible to assess all the impacts but nothing exists that amounts to a show stopper. The consequence of increasing the UBI is that it will increase the taxation level but the proposed amount is a start and can be sold politically and allows for further adjustments in the future once the benefits begin to accrue.

If a party sees inequality and its consequential social issues as a major issue and I think lots of people do, then here is something practical that can be done to address it with some real benefits and would improve the quality of life for most New Zealanders.

31 comments on “UBI: Addressing Inequality”

  1. Draco T Bastard 1

    It includes thoughts on the impact and how it would be paid for and actually removes complexity from the system unlike the fiddles by previous governments.

    IMO, the simplicity of the UBI and the fact that it will reduce complexity overall is one of its biggest selling points. Why? Because the present highly complex system can be used to hide rorts and other inefficiencies.

    The consequence of increasing the UBI is that it will increase the taxation level but the proposed amount is a start and can be sold politically and allows for further adjustments in the future once the benefits begin to accrue.

    Actually, having the UBI start out as a full replacement of the pension is a major selling point because that major demographic bulge referred to as the Baby Boomers don’t want to live on less than what they’re getting now and the UBI will be replacing the pension. It doesn’t work otherwise.

    If a party sees inequality and its consequential social issues as a major issue and I think lots of people do, then here is something practical that can be done to address it with some real benefits and would improve the quality of life for most New Zealanders.

    QFT

    Now if there was a major NZ political party that expounded such principles.

    • Flip 1.1

      “Actually, having the UBI start out as a full replacement of the pension is a major selling point ….

      I agree as there is no good reason for making the super different to the UBI for adults and would bring it into the UBI. One reason might be that they are unable to get work which is not true in some cases. If they had opportunity, been responsible during their working life and had reasonable luck then they will have sufficient resources to supplement a UBI.

      The UBI Perce proposed includes at making the pension tax free and setting it at the married couple rate for all then taxing extra income and assets.

      One would need to see how this worked as the SS separates superannuation out.

      • KJT 1.1.1

        My starting point for an adult UBI would be the present super married rate. About $14000 after tax.

        Then set the flat tax rate at a level which pays for it.

        Though I would like to see more of a move away from income taxes towards financial transaction taxes, land/wealth taxes and resource use taxes.

      • KJT 1.1.2

        My starting point for an adult UBI would be the present super married rate. About $14000 after tax.

        Then set the flat tax rate at a level which pays for it.

        Though I would like to see more of a move away from income taxes towards financial transaction taxes, land/wealth taxes and resource use taxes.

        The most pressing need at the moment, however, is child poverty.
        Making a UBI (universal family benefit) for children the place to start.

        • Flip 1.1.2.1

          You want to keep the tax rate the same for all income to avoid dodges. Up it too far and it will cause companies to go overseas and discourage them coming here losing jobs etc. So it is a balance.

          I’ve worked out the necessary asset tax just on the housing stock value in NZ and it is about 0.65% which is $3,250pa on a $500K house. There may be other assets that can be taxed but not so easily.

          Obviously tax rates can be adjusted and tax can be got from elsewhere but it still has to be sold politically. I think there is still work to be down on what the sweet spot is.

          Arguably a target could be set that says we want 66% equality of income in NZ and the UBI and tax rates could be adjusted to achieve that?

          “Though I would like to see more of a move away from income taxes towards financial transaction taxes, land/wealth taxes and resource use taxes.”

          Agree but I have not figured out how to do that yet without a bunch of fish hooks. THe only straight forward one is on rateable properties.

          But just quickly the risk to a transaction tax is the loss of capital/jobs and a lowering of the exchange rate and overseas investment. Not a bad thing at the moment providing you got it right but very open to government fiddling.

  2. A Political Party that promised to tax the capital gains on property and assets plus a financial transaction tax, to pay for a universal living UBI, would get elected by a landslide.
    In fact in the Shaky Isles, that’s the sort of landslide we badly need.

  3. McFlock 3

    oh wow, I just got a stats hard-on.

    Um – I’m gonna have to think on it for a few days, and it still thinks “flat tax”, but in five minutes it’s gone a long way to persuading me.

    • Flip 3.1

      Flat tax without a UBI increases inequality as it increases the effective tax on everyone except the richest. The benefit of flat tax is it reduces scope for tax dodging and simplifies things.

      • McFlock 3.1.1

        Ok on the dodging re: rebates and the multitudes of exemptions, but I’ve never understood why say 0% to $10k, 25% on 10k to $30k, 33% on 30k to $50k, and 40% on >$50k is terribly more complicated to figure out than a flat tax.

        • Flip 3.1.1.1

          I’m guessing you mean as it is currently done where each portion of the income is charged different rate.
          What is your effective tax rate? It is none of the numbers you just mentioned. It differs for every different salary.

          30K actually pays 16.67% tax as the first 10K is tax free 20K at 25%
          50K pays 23.2% as 10K is tax free 20K is at 25% and 20K at 33%
          100K pays 31.6% as 10K is tax free 20K is at 25% and 20K at 33% and 50K at 40%

          • McFlock 3.1.1.1.1

            pretty much, with the obvious proviso that my figures were not carefully calculated, but merely illustrative examples created ex derrière :)

            The point is that calculating a progressive tax from a known income is just as easy as calculating a flat tax. And as you point out, the effective rate for poor people is lower than the effective rate for the wealthy – so the ubi can actually be lower, as less of it is returned straight back to the govt.

            • Flip 3.1.1.1.1.1

              You could leave the current tax structure in place but it’ll leave a bigger hole to fill from somewhere else.

              Upping the tax rate at the top end is one answer and I’ve already listed the risk of doing that.

              • McFlock

                what, tax dodging?

                Half of ‘em would do it anyway. All of them would think twice if punishments for white collar crime were proportional to, say, the few occurrence of welfare fraud that occur in real life.

  4. Lanthanide 4

    So just remember that IRD are re-doing their computer system and it’s expected to last until 2016 or something like that.

    I saw an article on stuff a couple of months ago talking about it and how it effectively acts as a break on politicians wanting to propose much in the way of tax law changes because the existing system simply won’t be able to cope with the changes. I went looking for this article the other day but unfortunately couldn’t find it.

    So it seems like we won’t be able to have a UBI in the near-term, even supposing there was a government that thought it had the political capital to implement it.

    • Flip 4.2

      I had a look at the IRD transformation project EOI on the governments GETS system last year. The analysis was very much based on assumptions about the current system. In some ways it was poor analysis. It also cost a fortune and went to an overseas organisation. The following is summary of the list of issues sent to the Minister.

      Issues
      • No plan (available or visible?) in place to deliver the transformation
      • A failure to decompose the work properly has led to an excessively large project with poorly understood requirements that are specified such that they are excluding NZ organisations.
      • It is a project that is vital for improving NZ’s ICT capability and capacity and will provide real value to NZ which will be lost if it goes to a single organisation or multi-national.
      • No measures of success in the TOM. It is aspirational but nothing exists about how it is going to be known that the aspirations are meet.
      • There is an assumption that previous success in a different environment is an indicator of ability to do the work in NZ. This can be false.
      • No evidence is visible that allows for change over the duration of this project.
      • A commercial vendor supplying this project has no incentive to share expertise, or divest itself of dependency by the IR and by extension the NZ government and people. There is a serious risk of vendor lock-in from the way this project is being approached.
      • There is an assumption that professional services require large scale.
      • A desire to outsource functions without evident risk analysis and mitigation.

      “So it seems like we won’t be able to have a UBI in the near-term, even supposing there was a government that thought it had the political capital to implement it.”

      It could well gain political capital to the party promoting it providing it is done well.

  5. weka 5

    Just went to Flip’s blog, and also KJT’s linked in the RSS feed. Dudes, seriously, white text on dark backgrounds is hard for many humans to read. Please make this really important work more accessible.

    http://blog.tatham.oddie.com.au/2008/10/13/why-light-text-on-dark-background-is-a-bad-idea/

    http://www.codinghorror.com/blog/2005/07/code-colorizing-and-readability.html

    /aside

    • Flip 5.1

      Thanks for the advice. I quiet liked it (no accounting for some tastes :-)). I’ll look at some others.

      • karol 5.1.1

        It can depend on people’s eyesight.

        I quite like dark backgrounds and lighter text.

      • weka 5.1.2

        I’ve been meaning to do some research on this. From the quick google I did, I think there are varying issues. The bit about half the human population have astigmatism that makes white text on black harder to read was interesting, but there are also issues for the elderly, and people with visual and cognitive disorders. I’m surprised that IT and webculture hasn’t produced much easily accessible work on this yet. And what is available to web designers will be different to what is available to people using platforms like wordpress.

        Grey on black is apparently easier to read if you really want to go with black, but I think overall the reverse is easier still. Re karol’s point, you can also de-brighten the background when you have black text on white too, so there isn’t so much glare.

        Just seen you’ve updated your blog. It’s definitely easier for me to read. I think that theme is using a kind of mottled pink tinge rather than bright white for the background too.

        thanks! :-)

        • Tim 5.1.2.1

          Just as an aside …
          I think you’re suggesting an issue of conrast.
          Interestingly I used to have 20/20 until a series of heart attacks – one quite nasty.
          Result: long sightedness.
          (Also used to be able to multi-task readily – not no more).
          I heard that for those on certain medications such as blood thinners it can be an issue – which seems plausible sicnce forgetting to take the damn stuff results in improved vision for me.

        • KJT 5.1.2.2

          Just changed mine. See if it works better?

          Interestingly, I made it white on blue after sort of a poll I did with various people, on the colours they found both attractive and easy to read.

  6. Colonial Viper 6

    Good work. The UBI/flat tax rate system also has the added advantage that, finally, ordinary voters will be able to understand how it is all supposed to work and why indeed it is fairer and will lead to far better outcomes for the vast majority.

    That simplicity means far more effective public scrutiny of any future modification proposals, with concomitant ease in identifying rorts and BS that politicians might try to introduce over time.

  7. tricledrown 7

    CV to stop the right from undermining UBI or the dole.
    The govt could guarantee all beneficiaries 20hrs a week for an extra $100 and WFF more than the dole get rid of all abatements including secondary tax,There are more partime jobs than ever why should those on the lowest incomes pay the highest taxes.
    This would end the poverty trap that is caused by abatements.
    given in the future their will be less work as robots technology and overseas cheap manufacturing do that work.
    this will also lift self esteem and upward mobility.
    UBI is very expensive and can have unintended consequences like funding gangs and criminals.
    +as we have seen in the past the right always undo universal benefits.

    • Colonial Viper 7.1

      Yep. Echoes the ‘jobs guarantee’ idea and the ‘full employment policy for 25’s and under’ that has been mentioned previously.

      The UBI in itself is a revolutionary idea, but its true power comes as part of a total package of initiatives which makes superb sense as a whole.

      It also fucks the Tories, greatly limiting what they could do with the system in future.

    • KJT 7.2

      Actually the right have struggled to remove universal benefits. Just ask Key about super.

      Removing the universal family benefit was not very popular at the time.

      Neither are the present sneaky cuts to health spending. (When the media bother to tell us about them).

      They, and Labour, are trying to remove super by stealth.

  8. aerobubble 8

    I would not vote for Labour if they introduced a flat tax policy. For the most part lower and middle income kiwis are overtaxed, yes, yes, some say they also pay no tax but that misses the obvious problem that in the present market they aren’t getting fair wages. The goal is to provide as many citizens with their value, how is a shrinking share of growth supposed to be an even better outcome?

    A flat tax rolled into the debate is just dumb, and should have been laughed out since its also obvious that a UBI is about the tail end, not about the top end and how its the top end having to give up their growing unfair share of the nations wealth. Which it should be because its not in their interests for the pool of wealth to keep contracting into the hands of a global elite, they don’t want it.

    Recently I have been listen to how putting herd back on savanna increases greenery, how having birds on fish farms increases fish numbers, how putting wolves back into a National Park meant the depth and breath of the park boomed. Funny how having enough predators does that, I mean why wouldn’t it, that the plants would not maintain them unless they get something much better out of it (churn of the system).

    So that’s where the debate should start, on the tail. What does the tail get out of all these predators? Oh, yeah we can just suck up the idea of trickle down, but damn it nobody can fathom the idea of burden up, that for predators to exist the base must get much more than it would of had the predators not been there.

    Now of course, would we have the population we have now without capitalism, no. But of course individual wealthy capitalists aren’t owed for that, we all maintain capitalism. No. The correct way of looking at it is about access and use of resources. Does everyone have access to grow, to learn, to take risks. And if the system crushes them, then harms the economy, if the cream is taken and exploitation is increased.

    So a UBI debate starts with the idea that instead of a unemployed person being paid to not work, they are paid whether they are working or not. Now how does that harm taxes? If people who already are being paid benefits now increase with the introduction of a UBI their productivity rises.

    So its simply unbelievable that there is any need to compensate the wealthy, unless you are a dipshit. A flat tax is a totally different beast that involves discussion of how inefficient it is to have a wealth class that cannot loss their wealth and so has no incentive to innovate. Take copyright, how is it that copyright holders, not creators who are dead, keeping it help innovation? It doesn’t, it does the opposite, instead of adapting to the new reality of information transfer, they block the new economic ecology.

    Now okay, lets say we do need to pay for a UBI, how about having a inverted lottery, the more wealth you have the more tickets you have to hold, and the winner gets their wealth cut by 10%
    (the religious would have no problem with this). Now the lottery will only be called when the measure of inequality is high, the higher the inequity, the more lotteries are held a year.
    The incentive therefore would be to cut back on the help the rich get rich policies of Key.
    And nobody can say its unfair, because even the tramp on the streets with a dollar would be hit if they won, losing 10c. It would teach everyone to save some but not too much (save to cover the lottery and have money to cover expenses, and not to much as they’d lose more!!).

    • Colonial Viper 8.1

      It doesn’t make much sense to look at major initiatives in isolation. A UBI (or alternatively a negative tax rate bracket for low incomes) plus a higher flat tax rate at all other income levels works fine.

      It greatly simplifies the administration of both the taxation system and the benefits system. Working in tandem, it creates a highly progressive taxation system, but in another format.

      Overall, the wealthy will get net taxed at a similar rate to that of today, but with less chance of avoidance and gaming the system.

      What’s not to like?

  9. Flip 9

    “So a UBI debate starts with the idea that instead of a unemployed person being paid to not work, they are paid whether they are working or not.”

    Actually it starts with everyone getting an income regardless of your employment status. It would be set at a level that provided a basic living. Hence the title.

    Everybody who earns income pays more tax but it is offset by the UBI to lesser or greater extent. Everybody gets more income if you are earning. Cannot see how that is not an improvement. What is more the equality gap is reduced.

    “So its simply unbelievable that there is any need to compensate the wealthy,…”
    The scheme would not “compensate the wealthy” as it includes an asset tax to fund the shortfall from income tax. Most wealthy people have assets that would qualify.

    As I said further up you could leave the tax structure as is but the hole in government revenue would get a whole lot bigger. It does that when you up the UBI to $14K as well. I’m working on showing the funding model but it will hurt single people on a benefit. A couple will be better off.

    I wouldn’t die in a ditch over the flat rate but you still have to fund the UBI. You will die in a hole politically if you cannot show how to fund it without trashing everybody’s standard of living.

    The lottery idea is interesting but do not think it would fly. Happy to look at other options that will be seen as reasonable. That is the majority of the electorate can be persuaded.

  10. blue leopard (Get Lost GCSB Bill) 10

    Hmm not sure whether I got this link from The Standard or not – but are people aware that Perce Harpham is doing a lecture on UBI in Wellington?

    DATE: Friday, 31 January
    VENUE: Rutherford House, Lecture Theatre 3, Institute for Governance and Policy Studies, Victoria University of Wellington
    TIME: 12:30pm – 1:30pm

    I would love to hear about it if anyone is going and could report back here on The Standard :)

    …will put this link on open mike too…

    http://binews.org/2014/01/wellington-new-zealand-reducing-inequality-through-universal-basic-income

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