Simplifying our Tax and Benefit Systems - Part 1

Simplifying our Tax and Benefit Systems

Part 1 in a series of articles from a paper available at https://perce.harpham.nz

Summary and Conclusion of the 4 Parts

Because of the interlinked nature of our benefit and taxation systems I will start this article with conclusions in the hope that discussion of the reasons for these conclusions will then be easier to understand. The benefit and taxation systems impact one another as well as health, economy and much else. The ideas laid out here will have to be refined, updated and to have careful transition arrangements made before they could be put into operation. I hope that the two separate Government reviews now in progress will consider jointly the virtues of Basic Incomes as a means of achieving their tasks.

An overriding objective is to reduce poverty as well as the inequality of income and wealth. This overall objective leads naturally to the idea of Basic Incomes simplifying both the Personal Income Tax and the Benefit systems.

Our Superannuation system has essentially removed poverty from the elderly for nearly 80 years. Superannuation, along with other parts of the Social Security Act (1938) was funded by a new tax of one shilling in the pound”. That was 5% of ALL income. The Superannuation “trial” is taken as a model for a new system. The only requirement to get this payment is that one must be 65 years old or older. Bureaucracy, surveillance, stand -down periods, poverty traps, requirements to seek work or do anything specified are almost non-existent. So too is stigma for the recipients.

There is one aspect of Superannuation which needs to be modernised to comply with Basic Income concepts. This is the difference in payments for different living arrangements. It is proposed that all superannuitants receive the same payments and that this be set at the after-tax level currently applying to those who are single and living alone.

The superannuation model could be extended to all ages. A Basic Income to replace Working For Families is not explored here because it will partly depend on the size of the payments decided for 18 to 64 years (inclusive).

All citizens and permanent residents could have payments depending solely on their age. There could be different payments which I will refer to as Child, Adult and Elderly Basic Incomes. The term “Universal Basic Income” is commonly used for these payments but “Universal” implies that the latter two are the same which is economically unrealistic and conveys the idea that Superannuation payments will be reduced.

Basic Incomes, including those for the elderly, would be tax free. All other income could be taxed at the same uniform rate for income up to, maybe, $150,000/yr. Then the rate could be lifted 1%. With another 1% each $50,000 thereafter up to some limit. With the new rate applied to ALL the income of those affected. This and other ways of taxing high incomes are not explored here.

The current highest level tax rate of 33% is used an example of the uniform tax rate. More tax is needed than this example will provide. There are many new and existing taxes which could be used to complete the financing of Basic Incomes. An Asset Tax levied as a percentage on the improved value of ALL property and collected with the rates is suggested as an example. It is important that there be no exemptions. Exemptions for Family Homes are unfair because of the range of the value of homes and those who do not own a home would face increased rents since it is only these homes which would be taxed.

With an Elderly Basic Income as above and an Adult Basic Income of $11,000/yr the necessary Asset Tax would be about 0.5%. If the Adult Basic Income was raised to $13,000 the Asset Tax needed would be about 1%. In both cases with the Income Tax rate at 33%. Both tax and benefit systems would be enormously simplified.

The effect of the combination of tax with Basic Income for individuals with different properties and different incomes is illustrated and discussed. Read on to see how these conclusions have been arrived at. And see some political comments at the end - such as the importance of reporting separately the proportion of GDP which is redistribution rather than the cost of Government services.

Part 1. Why do we need Basic Incomes?

Summary of Part 1

The slogans of the "neo-liberal experiment " promised prosperity for all with benefits for the less well off from “trickle down”. Unfortunately the experiment has left a legacy of increasing inequality and poverty. Some of the economic and human rights arguments for ensuring that the promise of "trickle-down" is actually achieved are discussed.

The idea of a Basic Income to deliver a “trickle down” for everyone regardless of their circumstances has grown over the centuries. It now has proponents across the political spectrum. In fact Basic Incomes are thought by many to be necessary to preserve our democracy.

Some of the many social as well as economic benefits to be expected from properly chosen Basic Incomes are enumerated

Some History

In the early nineteen eighties the whole of the Western world was swept by the neoliberal slogans - user pays, market forces, less government, and trickle down.

“User Pays” has led to increasing inequality. Pope Francis has called inequality one of the greatest threats to our civilization. The OECD has declared inequality to be a threat to economic growth. So both those who worship God and those who worship money want to see a greater distribution of wealth.This objective is given further impetus by other studies which report that policies which put spending power into the hands of those with the least spending power increase GDP the most. So it may well be the case that by increasing equality the increased demand makes everyone better off financially and/or socially.

“Market forces” have clearly become damaging to the environment and to working populations in some countries. A lot of work has been moved to countries where Corporations can harness cheaper labour, avoid regulation, use local resources and externalise their costs by discharging waste into rivers and the atmosphere.

“Less Government” has often meant that services provided to the whole population have been cut, allowed to decay, performed by consultants or subcontracted locally or overseas.

“Trickle down” has simply not worked. With a few exceptions those who have the money have used the power it has given them to maximize their own benefit. The result would be more correctly called “pump up”. Even the “middle class” have become increasingly precarious.

Many of the undesirable consequences of the neo-liberal doctrine would have been avoided if there had been adequate “trickle down”. And this will be essential as the technological and climate change revolutions gather pace. Otherwise, as in the industrial revolution, those who own the new technology/robots will reap the rewards and those who do not will be bereft.

The Labour Party's Commission on the Future of Work reported in early 2016 after two years of intensive consideration of the consequences of advancing of technology and corporatization. They said ( page 38) " In a world where people are more likely to move in and out of work more often and there may be a shortage of full time jobs, we need to reassess the interface between working and welfare".

Variations of these problems are now very visible with "Internships" where (as in Captain Cook's day) people work for long periods without pay in the hope of then having paid work. More and more frequently people have to be on standby - unpaid – in the hope of short periods of paid work. Current examples are zero hour contracts and the plight of some contracted courier drivers. Those affected ( the "precariat") range from the unskilled to the most highly skilled. Consider the hundreds of people displaced by the IRD's new computer system.

The Commission heard from Robert Reich (US Minister of Labour from 1993 to 1997) and others about Universal Basic Income. The Commission then recommended ( see page 37 of the report) that "…the Government continue to investigate alternative income-support models …"

Winston Peters has said "Capitalism must get a heart".

In other words we need to think about making something like "trickle down" work.

The Case for Enforcing a “trickle down”.

The idea that there are “deserving poor” who should be given benefit payments was a development of the first industrial revolution. This idea has persisted but means that bureaucracy is needed to decide whether a person meets the defined target requirements. These have become increasingly complex. The corollary is that there are “undeserving poor”. And today we also have “the working poor”

See the film “I, Daniel Blake” to understand the difficulties with targeting which can drive people and those trying to get help for them to despair. Target requirements become stricter and more onerous as Governments strive to achieve chosen economic indicators rather than to improve wellbeing. And surveillance, sometimes becoming harassment, is needed to ensure that beneficiaries continue to meet the target for being a beneficiary.

There is a huge literature, dating back centuries, suggesting that targets should be abandoned. A recurring idea is that payments should be made to everyone regardless of income or accumulated wealth. Unfortunately, few authors deal in any detail with the problems of how to finance these payments. Let alone the problems of transition. I will not here review the literature or give many references but would be glad to provide particular supporting references if requested.

Keith Rankine argues forcefully that such payments are a human right. ( see http://briefingpapers.co.nz/from-universal-basic-income-to-public-equity-dividends/)

Guy Standing has put this case succintly :

“First, a BI is a matter of social justice. The wealth and income of all of us has far more to do with the efforts and achievements of our collective forebears than with anything we do for ourselves. If we accept private inheritance, we should accept social inheritance, regarding a BI as a “social dividend” on our collective wealth. In an era of rentier capitalism, in which more and more income is being channelled to the owners of assets—physical, financial and intellectual—and in which wages will continue to stagnate, a BI would provide an anchor for a fairer income-distribution system. And it would compensate the growing “precariat”, hit by labour flexibility, technological disruption and economic uncertainty.

In an era of rentier capitalism… [a basic income] would provide an anchor for a fairer income-distribution system

Second, a BI would enhance freedom. The political right preaches freedom but fails to recognise that financial insecurity constrains the ability to make rational choices. People must be able to say “no” to oppressive or exploitative relationships, as women know only too well. Some on the right understand that and support a BI. Meanwhile, the left has ignored freedom in its paternalistic social policies. Welfare recipients are treated as subjects of charity or pity, subject to arbitrary and intrusive controls to prove themselves “deserving”.

BI would enhance “republican freedom” from potential as well as actual domination by figures of unaccountable power. As argued elsewhere, a BI is the only welfare policy for which the “emancipatory value” is greater than the monetary value.

Third, a BI would give people basic (not total) security in an era of chronic economic insecurity. Basic security is a natural public good. Your having it does not deprive me from having it; indeed we gain from others having basic security. Psychologists have shown that insecurity lowers IQ and “mental bandwidth”, diminishing the ability to make rational decisions, causing stress and mental illness. Moreover, people with basic security tend to be more altruistic and empathetic, solidaristic and engaged in the community.

People with basic security tend to be more altruistic and empathetic, solidaristic and engaged in the community.”

An enforced “trickle down” may be essential if we are to preserve capitalism in democracies as we know them. There is increasing concern at the agglomeration of companies and their increasing power. A book has just been published entitled “Can Democracy survive Increasing Globalisation?”. A large corporation can already have financial, political and, if we are not careful, the legal power to successfully threaten countries into changing their laws. We have already seen examples of this.

The New Zealand Scene

We are fortunate that our Social Security system dates back to 1938 and our “trial” of Superannuation has largely solved the problem of poverty amongst our elderly. It is an excellent model being almost entirely dependent only on age. From 65 onwards it is paid automatically without regard for wealth or other income. It has one blemish in that the amount paid depends on the marital or living arrangements of the recipient. At the end of this paper I will suggest how that could be remedied.

We used to have a Universal Child Allowance paid to the Carer until the 1990s. It has been replaced by the heavily targeted Working For Families. Instead there could be a Basic Income for “Children and Teen-agers” aged 0 to 18 paid to the Carer. This will depend in part on the levels chosen for Adults and I will not deal with it here.

Ideally Tax and Welfare should be considered together as they are inexorably intertwined as will become apparent as I now develop an approach to providing a viable Basic Income for Adults.

Benefits to be expected from an Adult Basic Income.

There are many potential benefits which, if the Basic Income is set at the right levels, could include:
• A stop to “beneficiary bashing” and official intrusion into people’s lives·
• Easy collection of fines and child maintenance
• Reduction of child poverty
• The empowerment of women and recognition of mothers and carers
• Possible repopulation of rural centres with retired and seasonal workers.

• A large saving in the administration costs of benefits
• A reduction in problems associated with ACC.
• A reduction in student “Living Allowance” problems.
• Easier rehabilitation of prisoners
• Improved feelings of security and reduced stress for many
• An improved worker/employer power balance
• Improved social cohesion and a more resilient economy
• An improvement in health and school attendance

If the Adult Basic Income is set at a level that allows most existing benefits to be abandoned then the accompanying bureaucracy can be shrunk to dealing with hardship only. And if Income Tax is set at a level or levels which are felt to be really equitable then there would be no need for all the things which depend on the income earned. For example student living allowances are not granted if the parents have incomes at a given level and benefits are “clawed back” or stopped at different levels of income giving rise to “poverty traps”. There can be great simplification if the income tax rates are appropriate. Other grants etc need not then be income dependent. It is particularly important that income is properly taxed rather than setting targets trying to vary the Basic Income or anything else with Income. There should be one Basic Income level of payment for all in a particular age group.

With the certainty that the Basic Income will continue regardless of whether one has a job or not there will be no disincentive for getting a job with all the costs of travel and clothing etc which that brings with it. Stand down provisions also disappear. There is a reasonable expectation that innovation and small start-up enterprises will be promoted as they can then survive with little income from the enterprise.

The 2010 Penguin book by Wilkinson & Pickett (The Spirit Level - Why More Equal Societies Almost Always Do Better) bears testimony to these expectations, some of which have the result of trials to support them.

In terms of Health & Welfare there is evidence that a Basic Income approach can be expected to be a great improvement over our present stressful targeted system. And Basic Incomes may well be good for the economy when measured in purely financial terms. The factors chosen for these measures should be considered - both wealth and income have to be taken into account.

Equality is, of course, a matter of more than money. Other non-monetary factors (such as gender, ethnic identity, disability and so on) can lead to very significant inequalities. Also, if the same facilities and services were provided free of charge to everyone (using public funding) then there would be equality with respect to such offerings. I think of the availability of free swimming pools, healthcare, education, transport, school meals, parks, childcare and so on. There are many such things which are not currently fully publicly funded. Thus income and personal wealth play a very significant role in people's ability to lead the lives that they could live, and in the shaping of society as a whole.

To reduce inequality there will have to be redistribution of both wealth and income. Clearly great care is needed to decide on how great this distribution should be and how we could change to a new paradigm.

There is a huge amount of work needed to get up to date and accurate data as well as to make all the detailed decisions required. But enough is available to determine that such a system of Basic Incomes for different age groups is practical. First let us do a little analysis. Part 2 of the paper asks "Why are the Poor poor?".

The full paper is available on Scoop at http://www.scoop.co.nz/stories/HL1807/S00171.htm or at https://perce.harpham.nz

About the author

Perce Harpham B.E., M.Sc.,FIITP, Dip Bus Stud. Is best known for establishing the first computer software company in New Zealand. Progeni built most of the software for the Wanganui Computer Centre, largely developed the NZ Poly computer system, worked with Boeing on the software for the RNZAF Orion aircraft and much else. In 21 years it grew to have branches throughout NZ and Australia as well as in Chicago, Los Angeles and Beijing. In 1989 Progeni was "collateral damage" in the failure of the Bank of New Zealand.

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