Covid19 Cries Out For Basic Incomes
This article is a self-contained beginning to a forthcoming small book by Perce Harpham. It is entitled "Why are the Poor poor?" and is expected to be available in ebook and book form from Amazon as well as in ebook form from Smashwords about the end of June.
This pandemic has, for the time being, totally invalidated much of the arithmetic and data on which the analysis in this book relies. However the results of that analysis will remain largely valid whatever the "new normal" becomes. So I will leave that analysis and reasoning unchanged and in this separate stand-alone section will show that the Basic Income ideas for reform of our systems are immediately applicable to our recovery from this shock.
As usual it is the poor who are most affected by any disaster. This disaster will force many changes to the world's established systems. It is my hope that some of the "fringe" or "wacky" ideas will now prevail to lead us from the present confusion, inequality and uncertainty into a new normal which gives the poor the dignity which is their human right.
Since Covid19 has indirectly caused the collapse of the economy there are suddenly many people and businesses without work .The 2020 Budget was announced shortly before this was written. It is boldly planning to take advantage of the opportunity to build much of the infrastructure that we badly need for the future and thereby to get companies operating and many people back into work. It is also providing for temporary payments to many displaced workers, for free training and many other well thought through provisions. It is an emergency response to get us through the immediate economic collapse.
Instead of seeking a multiplicity of modifications to many of our present systems in order to recover from the Covid19 disturbances I will show that Basic Incomes will contribute to the success of these plans.
There are otherwise intelligent people who refuse to think about Basic Incomes saying things like "Basic Incomes are either too large ( they talk of $22,000/yr) to be sustainable or too low to be useful". If that were true then we should immediately cease all Job Seeker benefits which are now up to $13,000/yr. This is the figure chosen here for the Adult (18 to 65) Basic Income.
Descriptions of various matters in this suggestion will be repeated or elaborated in the main body of the book.
This Budget Foreshadows Major Change In Our Financial System
Government has done a great deal to improve the functions of Government while working within the "neo-liberal" constraints such as keeping total Government expenditure within a nominated percentage of GDP. I have never found a coherent reason for such a choice but somehow it has become sanctified in the minds of many. Government has now budgeted to abandon this concept and to do what a Government should always do – namely to use taxes and finances for the long term so as to use the various resources available to accomplish what is required for the physical and well-being of its citizens. This is a major change to make the economy serve the people rather than vice versa.
This is being done in a way that holds hope for the future. Without the pandemic change it was clear that there would soon be a financial crash brought about by the same financial systems which have produced such crashes with monotonous regularity and which have increased the inequality between the many and the few in terms of income, wealth and power. This inequality has been creating the conditions for failure of the democratic systems and the emergence of authoritarian "leaders". Many thinkers have been proposing changes to our financial systems to control and reverse these conditions.
Amongst the changes being discussed are two which are closely related. These are "Positive Money" and "New Economics". Both seek to restrain the power of the banks and big corporates.
At root is the peculiarity that banks are allowed to lend many times more than they could pay if all their promises to pay were to be called up. If an ordinary company gets into this position its directors can be liable to the company's creditors for "trading while insolvent". This difference means that banks are able to effectively "create money" up to the "bank ratio" multiple of their assets. And then to lend this money and create debts which have to be repaid with interest. Many of the financial thinkers consider that such creation (mistakenly still referred to as "printing money") should be a prerogative of Government only.
One of Geof Bertram's recently delivered papers
provides an easily understood understanding of the
complexity and practicality of these issues. Particularly
for a small exporting nation such as ours. See the video https://www.youtube.com/watch?v=TQ24nnwb_8I&feature=youtu.be
Or the slide presentation which Is readily readable https://docs.google.com/presentation/d/1djAK_gZOH0O3P5VMRzozf-zmHNLTAXxAljPx0Nfq4JY/edit#slide=id.p1
Another major change is an apparent demonstration that the new financial ideas are being applied in an intelligent fashion by the RBNZ and Government. .
This requires an understanding of the Reserve Bank and its operations. The Reserve Bank of New Zealand (RBNZ) is a "Statutory Body" which means that it has powers given to it by its own statute (law) to determine "Monetary Policy" as distinct from "Fiscal Policy" (taxation) which is controlled by Government. . It has no shareholders and exercises its powers independently of any direction from Government although it is part of Government's Balance Sheet and Government gets its profits or losses. Its function is to regulate banks, to keep inflation within the bounds of 1 to 3%, to monitor the exchange rates and unemployment. It does these things by direction in some cases and by lending or borrowing or selling or buying bonds and overseas currency.. The RBNZ sets the interest rate at which it lends " money" rather than this being determined by competitive market forces. In many respects it is the Bankers Bank.
In the same way that Banks are allowed to create "money" by lending up to their bank ratio multiple the RBNZ is allowed to give credit ( issue debt) up to a defined maximum.
This is all a somewhat subtle way of preventing Government from itself creating money without limit or anyone knowing about it. The limitation is clearly intended to prevent the runaway inflation that has afflicted many nations.
My understanding of the details of our complex system.is very incomplete but I see hope for the future in the combined actions of the RBNZ and Government. Reacting to the Covid19 threat to the economy in its own way the RBNZ, alongside Government, has taken the necessary steps to increase the maximum debt it can issue. This means that the RBNZ will be able to buy Government bonds to what appears to be the extent necessary to allow Government to fund its deficit budget with the minimum of overseas borrowing.
Since much of the Government's budget deficit will be spent on imported capital goods and other necessary imports then to the extent that we do not earn sufficient overseas funds by exporting Government will have to borrow overseas funds either directly, through the RBNZ or through the banks which do their own overseas borrowing.
But Government borrowing from the RBNZ, or selling bonds to it, is essentially Government creating its own money as advocated by the new economic thinkers. The balance of Government's borrowing from the RBNZ will show how much new money has been created. But the country as a whole does not owe this amount to outside agencies so that unlike Greece and other countries it is largely sheltered from future austerity demands from the overseas or local creditors. And if the overseas borrowing allows us to increase our net overseas earnings then it will not be a "debt burden".
The "creation" of money by the RBNZ is now known as "Quantitative easing". Who gets the money is then very important. It seems to have escaped widespread notice that following the GFC when banks were financed by "Quantitative Easing" and made credit easily available then this stimulated the economy because people borrowed from the banks and spent accordingly. The total of personal debts skyrocketed. So did defaults - setting the scene for the next crash. But the collapse of our financial system has been pre-empted by Covid19.
Thus it is important that the created money be, in some way, directed to people as individuals thus allowing them to spend and stimulate the economy without them acquiring debt in the process.
I cannot imagine any normal bank lending money with a negative interest rate and cannot understand why, considering the huge advantage they have with their bank ratio multiple, the idea should be entertained. How would a state-owned organisation justify making such gifts to private shareholders? It is just such gifts that exacerbate inequality.
But when loans are repaid they are usually repaid with interest. So, if the rate of circulation remains the same, more money is continually required to keep prices steady. It seems to me that a case could be made for the RBNZ to buy Government Bonds at a negative interest rate approximating the average interest rate so that Government can keep paying for work that it commissions without increasing its notional debt level. Or raising taxes.
When Government distributes money it should give it to everyone equally.
Basic Incomes Would Complement the Recovery Plan
It will take time for many of the budget provisions for Government expenditure on physical and other projects to be carried out and paid for so that the money enters other parts of the economy. Hence the provision of short term assistance to businesses and people alike.
But there is a need to provide for long term security so that individuals can see their future with some confidence, can survive, plan, train and spend, spend, spend. Many need money now and the market cannot function if people have no money.
The Budget provisions are necessarily at a high level. Individuals will still face the possibility, regardless of their wealth or positon in the income hierarchy that they may be suddenly left with no income at all through redundancy or otherwise. This is a frightening prospect. If everyone had even a small Basic Income people could be clear that they would never be in this position.
A Basic Income (BI) is a regular payment to everyone in a particular age group regardless of their income, wealth, sex or relationship etc. Superannuation is a great, if not perfect, example. To avoid misleading people BIs should be tax free and not counted as income for tax purposes.
Basic Incomes let us escape from the horror of "targeting" and classifying some people as "undeserving poor''. The latter get denied any Government benefit. What are they supposed to do in order to live?
To quick-start the economy there are various advocates of different approaches to give a temporary boost and hope that this will then continue unchanged. These approaches vary from scattering money from a helicopter to funding the banks. All involve considerable expenditure.
As an example of what can be done quickly I will use the system we have developed and advocated for some years. This, based on 2015/16 figures arrived at a BI for adults in the 18 to 65 group of $11,000/yr funded by Income Tax of 33% on all income up to $150,000 per year and increased above that plus a Resource Tax which I will describe later. Scaling up from 2015/16 to 2020 would increase the Adult BI to about $13,000/yr paid for by the same inflation as required in the BI .
Basic Incomes have the merit of injecting money into the economy by giving it to people directly. Their spending will then inevitably work its way through to businesses, banks and the like. "Trickle down" has failed the poor. "Trickle up" will let the market work and allow people to make their own judgments on what is the best use of money for them. They will get a new level of freedom.
Providing loans, while useful temporarily, does not necessarily provide a satisfactory long term effect. It has the danger that businesses and people continue until the owner of the debt calls it in, for whatever reason. Many, particularly struggling small businesses, might be well advised to sell-up while they can get something for their assets . Even an interest-free loan could result in them continuing into bankruptcy. There could be a bankruptcy "pandemic".
I and others have long advocated a careful lengthy approach for Basic Incomes. In this approach one would set up an expert study group to engage the public in considering the level of payments to be made, the benefits to displace, the taxes to levy, and the problems of transforming both the tax and benefit systems. Select Committees and all the usual Government procedures would then follow.
But recovering from Covid19 is urgent and we need to get a good system of BIs for Adults into operation at some level quickly. And to evolve them from that point. The arithmetic is complicated by the uncertainty in census information and future economic health affecting the tax take.
It is important that the changes to be made now will remain for the long term in order to provide the security that is needed for recovery.
Our Unfair Income Tax System Helps Create Inequality.
One key to the long run success of BIs (and for social acceptability) is to make our Personal Income Tax system fair. If we believe that the better off are paying their fair share of tax then we do not have to worry about means testing and all the funny little rules that currently surround any payment by Government to people. And if the wealthy are getting the same payments from Government as the poor they should understand the fairness of correcting the structure of our Income Tax system. Many will realise that they may, without warning, suddenly join the ranks of the poor, or the relatively poor.. For example a person with most of their wealth in Air New Zealand or other companies which will by-pass dividends in order to survive.
Unfairness in our personal Income Tax systems stems from the fact that all tax exemptions favour those who would otherwise pay the exempted taxes. One of the grossest of these is the string of exemptions for Income Tax. The exemption up to $14,000/yr is from 33% down to 10.5% which means that someone on $14,000/yr benefits from the exemption by $3150/yr. But those on $70,000/yr, or any higher amount, get this benefit too. They also get the benefit from all the other steps so that they benefit by a total of $9080/yr. Is this fair?
If we paid all those in the 18 to 65 group $9080/yr the higher paid people would be no worse off and everyone on a lower income, or no income, would be better off. So I take this as the starting point for exploring Basic Incomes (BIs).
Superannuitants already get what, after tax, is essentially a Basic Income at about double the $9080/yr for the good reason that they are beyond working age for the most part. And Working for Families has been improved for Children and Teen Agers. Getting BIs to the carers for children on behalf of the children would help further.
The Adult group is some 4 times larger than the Superannuitant group. So the immediate pressure is to get something to the Adult group and to correct various unfair anomalies in the other two groups at a later stage. I refer here to such peculiarities as paying different rates of Superannuation depending on marital or other relationships.
To begin with we can continue Working for Families and Superannuation effectively unchanged either as to funding or delivery
Stage 1 A Basic Income forAdults
In order to get money into the economy quickly before Resource Tax returns start to flow our aim should therefore be to start only with the Adult BI in order to give time to get the local body collections of Resource Taxes in place. The fairness argument regarding Income taxes advanced above suggests setting this initial Adult BI at $9080 /yr with a 33% tax rate on all income for everybody but not on Superannuation itself or on working for Families payments..
A basic principle to observe in any transformation is to at least retain the income of any present beneficiary. So reducing present benefits in order to pay for the Adult BIs is not tenable.
But if we are to have a substantial rate of unemployment then, at the current top rate of "Job Seeker" benefit there will be many currently getting $13,000/yr after tax so making such people into BI recipients would have no cost if we make this figure the Adult BI. We could stick with an Adult BI of less than this but would want to reduce the Job Seeker benefit accordingly. We would then have to maintain, or possibly increase, the administrative burden for this and other groups. And we want to remove the surveillance, form filling and complexity for those who have lost their jobs.
It would be desirable to find another name for the Job Seekers (the euphemism for unemployed). This name would apply to all, including the ordinary citizens, as they move on to BIs and the new tax base. And, as they register, include the "missing people" such as house-partners who currently are denied benefits because they have a partner with a job..
The current unemployed should be able to be started almost immediately on the Adult BI and 33% tax rate on other income ( which has also increased since 2015/16). These people are already being identified. Once started on the BI and new tax rate they would remain on both thereafter. There would be no stand down, reporting requirements or means testing. Income would be reported by employers and, possibly, monthly by the recipients. This would be for tax collection purposes only not for any reduction in the Tax-free BI.
So I suggest that $13,000/yr should be the initial adult BI with the Income Tax rate at 33% and higher for incomes above$15,000 . Superannuitants would not have their after tax Superannuation income changed by this change of rate. Any "other" ( non-super) income would all be charged at the new rates.
The Working for Families payments would also be adjusted for the fact that the carers were getting the adult BI.. The claw back for earning would be abandoned as the income would be taxed at 33% anyway.
The effect of these two changes would be that there was about the same cost for Superannuation and Working for Families as at present and payment arrangements would not change,.
Other benefits for adults which are below $13,000/yr would be simply replaced by the Adult BI. And those above the Adult BI would be reduced by the amount of the BI
See below for the cash flow situation with this Adult BI as well as the 33% and higher Income tax.
In my earlier work I have assumed sufficient time to study the problems and to put in place solid safeguards against mistakes and misdemeanours. But the urgency now means that risks need to be taken in the implementation of a robust system which can then be modified at leisure.
The current unemployed should be able to be started almost immediately on the Adult BI and 33% tax rate on other income ( which has also increased since 2015/16). These people are already being identified and paid. Once started on the BI and new tax rate they would remain on both thereafter. There would be no stand down, reporting requirements or means testing. Income would be reported by employers and, possibly, monthly by the recipients. This would be for tax collection purposes only not for any reduction in the Tax-free BI.
Before we can do this we need to find the number of people who would receive the Adult BI. This is a difficult issue. Such people need to be properly identified. We are fortunate that Internal Affairs have their Realme identification system operating and proven at a reasonable scale. It should be progressively enhanced with facial recognition systems, voice prints and fingerprints. But to begin with we need to make use of all the existing databases to establish a close to perfect and complete database of all those who qualify for the Adult (18 to 65) Basic Income - hopefully with no duplicates and no omissions.
At present there are many Government Databases – the Electoral Roll, Inland Revenue, Social Welfare Department, Internal affairs (passports, civil unions, births, deaths and marriages etc) as well as many others in Corrections, Customs, Transport and the like. Ultimately these should all use Realme as the primary identifier and be crosslinked in many cases using this identifier. The many duplicates, multiple names and addresses will need to be purged. And decisions will be required on the treatment of those on working visas and the like with continued payment of the BI possibly being dependent on their continued return of Income Tax to IRD as well as still being alive and remaining in the country.
Short run, the IRD's database is likely to be
the closest approach to having a comprehensive list of all
NZ residents who would get the Adult BI. The 2018 Income
Bands table from IRD lists 3,860,180 "customers". Statistics
Dept gives the NZ population as at December 2019 as
4,951,500 with about 3,200,000 adults in the 18 to 65 age
So it seems to me to be likely that the IRD will have a very large proportion of the Adult 18 to 65 group which would be eligible for the Adult BI. IRD will also have addresses and ages on record. More recent figures put the total population at 5,000,000 so let us increase the number of adults to 3,250,000 for current calculation.
The logistics of setting up this Realme database and the associated payment systems will largely determine the time needed to start BIs. With payments from IRD channelled through KiwiBank, as I have suggested elsewhere, then Kiwibank will have to produce and distribute some 3,250,000 bank-cards as well as to coordinate with IRD, Internal Affairs and others. There is therefore a possibility of getting a substantial Adult BI into place quite quickly using the IRD database as a starting point for the data matching leading to the full Realme database and then to add to it over a few months as missing people register. This database would be expanded by cross matching with others and in all cases there would have to be validation by email or otherwise (as is done with electoral rolls) and similar cross checking as with passports.
For those who were still missing they would have to enrol with IRD by getting their Realme identifier. This responsibility would be advertised and they would be entitled to have their payment backdated to the start of the BI . Existing Realmes, subject to not having been recorded as dying or migrated etc, would have to be renewed in perhaps 9 months, and again, maybe, every 3 years. There are currently 86,130 people listed by IRD as having no income. There are also many who, as a human right should get payments from Government but who currently do not. An example is a woman bringing up children but who is not eligible for a benefit because she has a working partner.
Those who don’t fill in required forms and identify themselves or accept the identification process don’t get the BI..
Stage 2. BIs for All
When we have the local bodies setup to collect the Resource Tax at the same time as their local body rates we could then make superannuation payments tax free and, free of any marital arrangements, as well as set all of them at the same rate as the present living- alone rate after tax. And abolish the present Working for Families by having a different BI for all children and teen agers.
Thus there would be some additional payments at the same time as the Resource Taxes (around 1% of improved property valuations) start to bite. Inequality of accumulated wealth would start to be reduced..
At this point the whole system becomes the one that I have earlier envisaged – probably with less difficulties of transition from the old systems.
The Cost In Stage 1.
Note that all cost calculations need to be reworked. Forecasts will be needed of the new situation that will exist with increased unemployment, possibly reduced wages and salaries, reduced taxes and property valuations.
However for what they are worth the available numbers are interesting.
The IRD 2018 taxable Income bands (which are not quite finalised) show 3,860,180 people with a total assessed tax of 35,706million dollars. If, as I suggest, the income tax was levied at a uniform rate of 33% on all income the assessed tax would be $58,201m. so this change would net roughly 22.5 billion more. This could be increased by another 2.3billion by raising the rate for higher earners –raising the rate at $150,000/yr by 1% and increasing by 1% for every additional $50,000 per year without limit and charging the new rate on ALL income with no benefit from the lower rates for lower incomes. So these Income Tax changes would have raised some 25bn in 2018. Because incomes and taxes will be reduced with the pandemic let us ignore the inflation from this 2018 figure which would normally have occurred and take off another 3bn so that we are expecting the gain from the increased taxes to be, say $22bn.
But the cost would be much more certain . With 3,250,000 people in the 18 to 65 age band the cost at $13,000 each is some 42bn. A difference of some 20bn if the rates were raised on higher salaries as suggested. But if unemployment reached 10% then 4bn would be required to pay the unemployed anyway. Where might the remaining 18bn come from?
There would be, perhaps, 3bn of saving from the abolition or reduction of existing benefits other than Job Seeker. That still leaves a discrepancy of 15bn
There would be some saving in the cost of bureaucracy at stage1 but this would occur gradually and not be fully realised until after stage 2 was completed. It might then be of the order of 2bn but I would not take it into account at this point. The bureaucracy will be needed to set-up and stabilise the transition. Also making a large number of civil servants redundant at a time of high unemployment is not attractive.
There is another issue which disadvantages the poor. This is their inability to profit from moving some or all of their affairs into a company or trust with the tax advantages they would then be able to access. One of the most obvious issues here is the 28% tax rate for companies. The only obvious reason for this being less than 33% is the power of companies and their shareholders.
The Tax Working Group Discussion Paper for Session 8 explored the complexities of Company Tax and at 2.4 say "The reduction in company tax from a 5% drop in the company tax rate is $2.4 billion per annum " They go on to "..assume that profits are paid out and shareholders of New Zealand companies pay higher tax at the shareholder level."
The future will not be the same as the past and modelling shareholder behaviour is extremely difficult. I observe that in difficult times overseas companies tend to repatriate money and investments. Also that the NZ investors who once invested to gain dividends are increasingly investing, as in the USA, for capital gain. Witness the ever increasing share prices of companies like Xero (which paid no dividends at all for over 10 years), Fisher and Paykel Health Care, Ryman and the like. Investors are often not greatly interested in company tax rates so long as they get imputation credits matching their dividends.
So it is perhaps not such a big ask to think that raising the company tax rate to 33% would yield very much the same amount as reducing it – namely 2.4 billion. There would then be fewer tax avoidance issues than those created by having companies taxed only on profits and at a different rate from those for individuals who have to pay on income. But there would still be a discrepancy of perhaps $13bn/yr, - a little over 1bn per month at the start of the recovery and diminishing as incomes and employment improve.
Increasing the base Income Tax rate beyond the 33% could be counterproductive in the current circumstances. Another tax or taxes are required
Allowing for changes to bring in BIs for children and teenagers as well as desirable changes in Superannuation the total cost would be recovered by something like 1% of improved rating values by a Resource Tax which would be collected for Government by local bodies as described earlier.
The effects of this on individuals is discussed in more detail in Chapter 6 but for someone earning $70,000/yr they will be paying $9080 more per year with the 33% Income Tax on all their income. But they will receive $13,000/yr so would have a net gain of $3,920 per year. But a 1% Resource Tax on a $1,000,000 property at $10,000 would leave them $6080 worse off. The alternatives for such a person are discussed further in the book.
The payments in BIs could well be seen as if Government was investing in the business of gathering taxes and therefore paying citizens so that they could later continue to pay taxes. Indeed that repayment will start immediately the money starts to be spent.
Government Will Get Some of its Money Back..
I once asked Jas Mckenzie ( he had a distinguished Treasury career as an economist and then as Secretary of Labour – sadly he died on 19 April 2020) how much Government would get back if it gave away more money. To my surprise he answered promptly that a study had been done and concluded that Government would get back 1.6 times what it paid out. He quickly pointed out that this was on the assumption that there was unemployment and productive capacity. These are, of course, the very conditions we fear will apply in the immediate future.
So there is the possibility that some of the
money paid out as BIs will be returned to Government very
quickly. If all the $42billion is spent then GST at 15% will
return $6.3bn to Government. And if the remaining $35
billion or so is also then again spent more GST (5.2bn )will
return to Government and so on. Also as the spending
restores the economy people will become employed taxpayers
once again with a further return to Government.
However, if all the BI is deposited in banks then, unlike ordinary businesses, the banks are able to lend more than they have without being declared insolvent. If the operative ratio is 8 then they are able to "create money" and lend 8 times more than the deposits. This could give Government 8 times as much GST as they would have got from the taxpayers initial spending.. But that depends on people being prepared to take on the debts needed for them to get the money from the banks in order to spend it and restore the economy As noted above the personal debt burden.will lead to further financial crashes.
This is, of course, a great simplification especially as present benefits are either spent or saved and many of such benefits would be subsumed into the BIs. Nonetheless any full study could make some estimates of how much of what is paid out would be returned to Government both through the mechanisms above and the boost to economic activity – especially in times of a downturn in activity. It should be enough to cover the 7bn shortfall noted above and any errors in these calculations.
The time for transforming our Tax and Benefit systems by moving to Basic Incomes has well and truly arrived. The need for them has been exacerbated by Covid19.
The community and other benefits noted in Chapter 3 below will follow.