The tax system we currently have is a relic of the pre-IT age. In the days of manual clerk-handled accounts, it was impractical to reconcile tax accounts more than once a year. The introduction of PAYE in 1958 was welcomed as it eliminated the need for ordinary people to find the cash for a large tax bill at the end of the tax years. It effectively transferred the annual responsibility for paying the tax from the taxpayer, to the payroll dept of his/her employer on a weekly/fortnighly/monthly basis and greatly smoothed the cash flow for both taxpayer and govt.
The advent of IT technology meant that tax could be paid at any interval you wanted; daily even. But the big opportunity missed by almost everyone… tax could not only be paid… but could be equally received with the exact same facility. Receiving tax is a novel concept to many people.. it’s can be thought of as ‘negative tax’.
Such a negative tax paid on a regular basis is usually termed “Universal Basic Income” (UBI). It’s an idea with a long and respectable history and numerous variants, but for the purposes of this article I’ll go with a simple model.
1. Every adult over the age of 18yrs has one single tax linked bank account, into which IRD pays $200 pw… or $10,000 pa. Over the age of 65 the amount is raised to be equal to superannuation around $300 pw. This is the ‘negative tax’ component.
2. All income is taxed at a single flat rate… say 40%. This is the ‘positive tax’ component.
3. All first-tier individual benefits such as the dole and superannuation are eliminated.
4. There would remain a range of smaller and targeted secondary benefits such as sickness/disability/accommodation etc that would be administered by the department most directly responsible for that social function. (eg the sickness/disability benefit is logically a function of Health)
(For a more sophisticated analysis I’d direct readers to this country’s one it’s most stalwart proponents of UBI …Keith Rankin. )
At $25k income total tax = (25,000 * 0.4) – 10,000 = 0. Total nett tax rate = 0/25 = 0%
At $40k income total tax = (40,000 * 0.4) – 10,000 = 4,000. Total nett tax rate = 4/40 = 10%
At $60k income total tax = (60,000 * 0.4) – 10,000 = 14,000. Total nett tax rate = 14/60 = 23%
At $80k income total tax = (80,000 * 0.4) – 10,000 = 22,000. Total nett tax rate = 22/80 = 27.5%
At $100k income total tax = (100,000 * 0.4) – 10,000 = 30,000. Total nett tax rate = 30/100 = 30%
At $200k income total tax = (200,000 * 0.4) – 10,000 = 70,000. Total nett tax rate = 70/200 = 35%
In other words total nett tax starts at zero for those earning $25k and asymptopically approaches the flat tax rate of 40% for those on very high incomes.
Looking at the immediate and practical merits of this reform, first and most fundamental is that it treats ALL citizens exactly the same, everyone receives exactly the same UBI and every dollar earned, whether it’s the first dollar earned by an apprentice, or a bank executive’s ten millionth, it’s taxed at the same flat rate. While at the same time the overall nett tax paid as income increases remains progressive. But the best thing about UBI is what it gets rid of:
1. Eliminates all benefit abatements and high marginal tax rates are inherent in the current system whenever you have any form of targeted benefit or tax rebate.
2. Eliminates all the ‘poverty traps’ that people encounter especially when transitioning from welfare to work.
3. Eliminates the soul-crushing complexity and costs associated with administering social welfare.
4. Eliminates the distortions created when IRD assesses individual’s for tax liability, while WINZ assesses households for benefit eligibility. (In NZ only 35% of people who loose their job qualify for the dole because their partner income is too high, while all earners pay tax regardless of their partner’s)
5. Eliminates the argument for income splitting and empower’s non-earning partners in a household, providing them an income stream of their own..acknowledging the value of their otherwise invisible contribution to society.
6. Eliminates the incentive to game the tax system by manipulating personal income into a lower tax bracket and the distortions this creates.
7. Eliminates ‘fiscal creep’ caused by inflation pushing people into higher tax brackets.
8. Eliminates the needless stigma and shame many associate with being ‘on a benefit’, by the simple fact of providing a living income for everyone.
Perhaps the most deplorable feature of our current system is that it’s just so inefficient which creates all manner of opportunities for both politician’s and taxpayers to game it. By contrast UBI as I’ve outlined it here is simple and almost impossible to game. In any given tax year the Minister of Finance has only two numbers to announce… the UBI income and the flat tax rate. The political and social implications of changing these numbers would be direct and difficult to spin.
Again I have to emphasis the version I’ve presented is not complete. There is plenty of room to debate the numbers I’ve used for this example. With roughly 3m adults in this country the UBI at $10k pa adds up to $30b pa. With the average income at $45k over roughly 2 m wage and salary earners the 40% flat tax rate adds up to $38b… so the numbers do potentially add up. I would suggest the rest of govt expenditure could be funded from existing GST and Company Tax and a widened tax base…especially a Financial Transfer Tax (FTT) and a moderate CGT.
Is UBI too radical to implement? Not necessarily. The efficient flat rate income tax aspect appeals to right wingers while the nett progressive overall rate satisfies the left’s call for social justice.It would be relatively simple to include a universal ‘child benefit’ in the same mechanism, eliminating the need for WFF. The remaining benefit normally targetted at households the accomodation supplement which could perhaps be better administered by a somewhat expanded Housing NZ. Ultimately the entire WINZ organisation costing close to $1b pa in administration costs alone, could be dismantled. As vital as it’s work has been, few would mourn it’s passing.
The Greens long supported the idea, (but seem to have soft-pedalled it in recent times), while Gareth Morgan prominently pushed the UBI idea when he dissented from the Tax Working Group he served as a member of a year ago. It is not an obscure nor innately ‘left-field’ proposal. As every year passes the failings of the current system become more apparent, the more attractive UBI becomes as a sound alternative. Whether it was National or Labour who adopted this reform (and either are capable of doing so) nothing could more clearly signal to the electorate a determination to make a genuine break with the past.
Nothing shows so clearly the character of a society and its civilisation as does the fiscal policy it adopts.
Åsa Gunnarsson, Senior Lecturer in Tax Law, University of Umeå, Sweden; quoting Joseph Schumpeter.