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How Would A Basic Income Work?

Thomas More, in 1516, published Utopia in which he proposed that everyone should have a Basic Income (BI). Many advocates have done the same thing since. Note that our Superannuation is just a limited version of that. And it has almost eliminated the ancient affliction of extreme poverty for our aged.

We now have a desperate situation emerging with Corvid19. In spite of the great, short term palliatives being put in place many people are recognizing that the confusion and concern for both people and businesses cries out for transformation of much of our benefit and taxation structures. If only we had Basic Incomes in place already the future might not look so menacing.

There are three main problems. How big should Basic Incomes be, how do we pay for them and "how do we get there from here". Let me, somewhat timorously, suggest that I have possible answers to all these issues.

I say "timorously" because last time I googled Basic Income I got 766,000,000 "hits". But in over ten years of thinking about this I have had a lot of encouragement and help from others including several Labour Politicians. What I have advocated is the establishment of a Working Group to work through all the complexities, get public input and carefully stage the introduction of Basic Incomes for all. There is now a need to fast track this whole process and to hopefully get a new system into operation by the end of this year.

Most of those who are at the front of thinking about the problems of BI have dropped the term "Universal" because that implies to some people that all adults will be paid the same so that either Superannuitants will be paid less or adults will be paid the same as Superannuitants. Both options are untenable. Different BIs should be available for different age groups.

I think the divisions should be 0 to 18 for Children and Teen-agers, 18 to 65 for Adults then, as now, 65 upwards. Superannuation has different rates depending on living arrangements. These are another artefact from the past – when married women were regarded as property of their spouse. But I wont go into Superannuation in this article.

Nor will I go into the replacement of the current Child/Teen allowances which are so much more complicated than the straight-forward Child Benefits which my mother welcomed some 70 years ago and which were abandoned some years ago. There was no means test. Every child had its allowance paid to the mother or other parent. Freedom from any sort of means test is a fundamental of BIs. Instead of complicating all sorts of benefits and student loans etc with means tests for the individual or someone associated with them the various individuals should be taxed appropriately on their means whether they, or their children or partner are getting the benefit or not.

I do note that this Government has instituted the Best Start payment for children in their first year without any means test for the parents. They have also made the winter payments for Superannuitants free of any means test. So a minimal bureaucracy has been needed.

The biggest part of the BI issues is with the payment for Adults. Some people think it should be the same as the Living Wage. In this case there would be some merit in worrying about layabouts. Why would one incur all the costs and hassles of going to work if one could live without it? Again, some think the BI should be the same as a forty-hour minimum wage. Same answer. So what should it be?

A starting point comes from considering our personal Income Tax system. Here is one of the greatest "Con-tricks" ever played on an unsuspecting populace. We have a "stepped" system whereby those on $70,000/year up to many millions pay 33% on the income over $70,000/year. But those in the 0 to !4,000 bracket only pay 10.5%. This is portrayed as being to help the poor. And so it does. They pay $3,150/yr less tax than if they had to pay at the 33% rate. But it also helps those above $70,000/yr. They get the reduction on the first $14,000 of their income. Then another reduction on the next 14,000 to 48,000 step. And another on 48,000 to 70,000. It all adds up to $9180 for them even if they earn millions.

It is always the case that tax exemptions only help those who have enough or earn enough to benefit from the exemptions. Exemptions are a great way to promote inequality. Surely Governments which are giving money away should be doing the same for everyone. In this case charging everyone 33% on every dollar and giving everyone $9180/yr! This would be a Basic Income! BIs should all be tax-free.

Those on incomes of $70,000/yr and upwards would be no worse off and those with no income would be $9080/yr better off with the benefit diminishing proportionally as people have higher incomes up to $70,000/yr.

Note that everyone with an income would then be making a contribution to paying for this level of Basic Income. I would also increase the tax rate for incomes above, say, $150,000/yr by 1% and another 1% for each additional $50,000/yr up to a rate of, perhaps 60%. But each new rate would then apply to ALL the income so that there was no benefit to the high earners from the lower rates further down.

However one of the objectives of the new system has to be simplification so that savings can be made from a reduced bureaucracy with the elimination of the costly, oppressive surveillance which causes a great deal of concern for beneficiaries. There will always be a need for hardship and disability allowances with a reduced bureaucracy.

With BIs solely dependent on age there should be no complicating conditions such as stand-down periods and continual reporting requirements etc. But in this case we need to ensure that those presently on benefits are not worse off by the saving in cost to be made by replacing the benefits with BIs. For example the current job-seeker benefit is $11,387/yr tax-free. So the BI needs to be higher than that. For adults, leaving Superannuation and Working for Families unchanged a Basic Income in the $12,000 to $13,000/yr tax-free range seems about right. It would be nice to make it higher, perhaps temporarily due to something like Corvid19 but it has to be paid for.

To get consistent data I have done most of my arithmetic on 2015/16 data but for the present day I will extrapolate roughly from the results of that arithmetic.

With Income Tax as set out above, the saving from replacing current adult benefits with the BI and the saving from consequent reductions in bureaucracy we would still need an additional tax of some $8 billion/year. This could be gathered by boosting the 33% tax rate above to some 38% but the BI would have to be boosted (in the case of someone on $70,000/yr by $3,500/yr) requiring an increase in the BI and therefore a still higher tax rate. I don’t want to go there.

I discuss the choice of the additional tax as well as the other BI problems on my website (see the reference below) and conclude that a levy on the improved value of properties should be added to all local body rates. Regional Councils already make such levies. It would be easy to collect and hard to avoid. Whoever paid the rates would have to pay the levy. A good name for it would be a Resource Tax since the development of land and buildings as well as their maintenance and necessary infrastructure make demands on the earth's resources.

An Adult BI as set out above would then require a Resource Tax of about 0.5 % provided that there are no exemptions. Remember that one person's exemption has to be another's tax. Exempting family homes sounds like a good idea until one realises that to obtain the same income the rate would have to roughly double and that those who do not have a family home will, inevitably, have to pay the tax through rent rises.

A $1million home would then attract a Resource tax of $5,000/yr. With a BI of $12,000/yr and no income the owner would then be $7,000/yr better off. A couple would be $19,000/yr better off but a single person with an income of $70,000/yr would have to pay an extra $9080/yr compared to the present as they would no longer benefit from the current lower tax rates on the first part of their income and they would have to pay the Resource Tax. The result would be 12,000 – 9,080 – 5,000 making them $2080/yr worse off.

It is easy to calculate the effect for people in different situations. There needs to be a Government operated reverse mortgage for those who are income poor but asset rich. This would mean that anyone who could not pay the Resource tax without genuine hardship could allow the charge, plus interest on it, to accumulate until the property was sold. It would be sold when the accumulation nearly exceeded the property value but this might be 100 years in the future. Alternatively the owner could "downsize" , rent a portion of the property or similarly.

The choice of BI amount and consequent tax needs should be worked through in detail so that, perhaps, 70% of people will be better off.

There is a lot of work to be done and the need for simplification of our tax and benefit systems has been highlighted by Covid19. It may be that there will be a side benefit from this disaster if we can then escape from the outdated notion that there should be benefits only for the "deserving" poor with its consequence that the state then washes its hands of the "undeserving" poor and spends huge sums on police, court and correction systems in trying to detect and punish the actions that many of the undeserving have to perform in order to survive in their hostile environment.

If you are a youth who has been imprisoned for some kind of offence then, on leaving prison, you may need the support and succour of an organised gang. They get a kind of Mana and security. And so we create many social problems.

Transition from our present system to the new one – whatever choices we make – is a non-trivial task. To my knowledge there has been no "trial" anywhere in the world of a BI system which includes the "elephant" of having to collect taxes as well as paying BIs. We have a superannuation system which has done just that for some 80 years. Yet some people want to spend 2 or 3 years on a trial. This would just be an abrogation of responsibility – just "kicking the can down the road".

We need to make many detailed decisions and to plan carefully. I contemplate choosing to implement the transition by starting with a small identifiable area (West Coast or Gisborne ??) and implement both the BI payments and the Resource Taxes there then, when all the system bugs have been fixed move on to other provinces.

There is a great deal more detail on my website (http://perce.harpham.nz) on all aspects of the BI problems. There will be more in a book that I hope to publish before too long – if I don’t get clobbered by Covin19. The need for change is great and the time is small.

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