Universal Basic Income Will Improve Tax System
UBIs will improve the tax system
Our tax and benefit systems are not fit for purpose. Its easy to understand why Labour want to change them but don’t want to say how.
Our current systems are hugely complicated. And almost every little patch makes them more complicated still. Without systemic change things keep getting worse. This article will show that we can change some parts of our tax and benefit systems to simplify them, and to reduce our level of inequality and poverty. Such changes lead naturally to consideration of Universal Basic Incomes (UBIs). But it would be unwise to make isolated decisions without considering the alternatives.
Insecurity of employment, inadequate education, poverty and the rise of social media are beginning to lead to increasing concern about inequality - not just of income but of wealth. In 2014 the International Monetary Fund published its conclusion that income inequality “tends to reduce the pace and durability of economic growth.” Hardly surprising, since if the poor have no money they cannot buy things. Pope Francis has spoken of the evils and economic damage of inequality. So, unusually, some who worship God and some who worship money point the same way. Others fear that inequality will spell the end of democracy. Witness the various political upheavals of recent times.
Thinkers for many years have suggested that what is known as a Universal Basic Income (UBI) would help with these problems. The proposals have had many names and various forms. A subtle defect in our Income Tax system leads naturally to the need for different UBIs for different ages.
To understand what a UBI is consider the simplicity of New Zealand’s Superannuation. It is paid to everyone over the age of 65 regardless of wealth, income, health or anything else except (astonishingly in this age) different amounts depending on marital or living arrangements. Superannuation has been a wonderfully successful “trial” of the UBI concept. It has largely solved the poverty problem for the aged since 1938. And one of its great merits is that it suggests the idea of having different UBIs, possibly even different taxes,for different age groups. Some obvious groupings are for children and teen-agers (0 to 17), Adults (18 to 65) and Superannuitants ( 65 and up).
One cannot easily put a value on the many benefits from a UBI – some of which depend on the actual sizes of the UBIs. A list of the benefits to be expected include, reduction of child poverty; empowerment of women and care-givers; a stop to “beneficiary bashing”; removal of “the poverty trap,” reduced cost of Government administration; easy collection of fines and child maintenance; reduced student loan and ACC problems; improved social cohesion; reduced stress; improved health and school attendance as well as many others.
We already have a UBI for Superannuitants and for the sake of simplicity in this article I will take it that their payments and taxes will remain completely unchanged. I will also leave aside consideration of the necessary UBI for children.
Because of our social issues as well as the real and present threat from new technologies for many who have previously felt secure in their ability to work and “pay their way” the Labour Party’s Commission on the Future of Work recommended further study of Universal Basic Incomes and this is ongoing.
There are two problems. Superannuation funding is often said to be a problem - so how can we also afford more UBIs? Secondly how does one make the transition from the present system to the new one? I will not address the transition problems here either.
A cynic might well say that our Income Tax system is an enduring con-trick whereby the poor think they are benefiting from having lower tax rates on lower incomes. But the wealthy benefit more.
National have demonstrated this with their new tax-reduction policy which (surprise,surprise) will actually increase inequality. They propose that the income tax thresholds will increase “to give tax cuts to low and middle New Zealand.” The 10.5% tax threshhold will apply up to $22,000 per year instead of only up to $14,000 per year. The 17.5% rate will then apply up to $52,000 per year instead of only to $48,000 per year. The effect is that those who have no income or less than $14,000 per year get no tax cut but everyone earning more than $52,000 per year gets a tax cut of $1060 per year. Everyone, even if they earn millions per year. Inequality increases.
If the available 2 billion were to be used to make the first $5270 per year of income tax-free then all those with an income above that figure would benefit by $553 per year. And tax cuts do not benefit those with no income.
Both at present and under the National Party’s proposal people will still pay 33% Income Tax on their income over $70,000 . Note that at present people would pay $9080 less than if they paid 33% on ALL their income.This is because they get the advantage of all the lower rates on the first $70,000. In other words they get a discount from the 33% rate of $9080.
Under the National Party’s proposal people will still pay 33% Income Tax on their income over $70,000. But if they paid 33% on ALL their income they would pay $10,140 more. They will have a discount of $10,140. And someone on $52,000 gets a discount of $9,600 from the 33% rate and on $22,000 their discount would only be $4950. Is this fair? The more you earn or the more tax is cut in this way the more discount you get.
Steven Joyce has said that future National tax cuts will follow the same form. They would continue to use the present flawed system. This raises the intriguing possibility of pushing the $22,000 threshold up to, say, $52,000.. Those below $22,000 would get no cut because, following the first cut, they would already be on a 10.5% rate but when that rate is extended to $52,000 those on $52,000 and above ( even into the millions) would have their rate on the part of their income between $22,000 and $52,000 cut from 17.5% to 10.5%. That would be a further tax cut of $2,100 giving them a “discount” of $12,260.
Superannuation shows us how to fix this part of the system.
Make it simple. Pay all adults the same amount such that most of their current benefits can be abandoned. And, to pay for this, take away from everyone the same percentage of what they have both in terms of other income and wealth.
With the first tax cut proposed by National we would then pay every adult a “UBI” of $10,140 tax-free per year and charge them 33% on every dollar earned. Those with no income would be better off by $10,140 per year with progressively less up to $70,000 as the 33% bites. For those on $70,000 and above there would be no change in their net income.
Consider that if we went a little further and made the UBI high enough to completely replace benefits like Job Seeker etc there would be considerable savings to be made in administration and bureaucracy. We would still need some hardship allowances and a small part of the current bureaucracy unless we made the UBIs unrealistically high. So let us work on an adult (18 to 64) tax-free rate of ,say, $11,000 per year for the moment. With a tax-free UBI of $11,000 per year we can remove the Job Seeker benefit as well as various other benefits. The security of knowing that the UBI is always paid regardless of whether one is sick, in or out of work or training etc would relieve a lot of stress for those who currently have to struggle or may be thrown into that position.
There would be no steps or conditions which must be met for adults to be given their UBI and which must be adhered to or their payment would be withdrawn. There would be no need for bureaucracy to judge whether a person meets the specifications to “deserve” the payment or not.
There would be no need for surveillance - which sometimes becomes harassment and causes great stress for those already stressed by their poverty or disability - vote Social Development for 2016/17 had “a total of over $49 million on services for investigation of overpayments, fraudulent payments and collection of overpayments”. IRD currently budget over $300 million for all of their investigations some of which concern social payments that they administer. Desperation makes ordinarily honest people into liars.
Nor would there be stand-down periods or “claw-back” if more than a certain amount was earned - the “poverty trap” would disappear.
However, the cost of the adult UBIs is then (2015 figures) 11,000x 2,816,960 = $30,986,560million. Say, 31 billion. Ouch!
As I noted above I am here excluding Superannuitant and Child UBIs so I will assume that the Adult UBIs have to be paid for with taxes from Adults alone.
The Income Tax take from Adults only will increase with the uniform 33% rate by roughly $18billion. Remember that, apart from recovery from those on less than $70,000 per year, all those on or over $70,000 per year will be paying an additional tax of $10,140 on their salary up to $70,000. (I will deal below with the difference from their receipt of an $11,000 UBI)
We are then looking at a difference of $13 billion between the adult UBI costs and the increased Income Tax . The savings from removing other benefits which pay less than around $11,000 per year and reducing the administration costs may be something like 6 billion per year. Many decisions are needed before the latter figure can be accurately determined. Will ACC payments be reduced by the UBI? Will the Child UBI and the Adult UBI make DPB redundant? What about Working for Families etc. And where will the extra $7 billion come from?
By now you will possibly begin to understand why Gareth Morgan is taking a cautious approach to UBIs, the Labour Party are “continuing to investigate UBIs” and other parties don’t apparently dare to think about them.
There are many alternative funding methods possible either separately or in combination - financial transaction tax, what is known as Positive Money, Capital Gains Tax, GST, Carbon Tax, Asset Tax, increased Company Tax, Stamp Duty, and many others. The problem with some is that they bear proportionately more heavily on the poorest. And new taxes must cost some of the population more than they receive so that the reverse is true for others. A good target would, possibly, be to have 70% of the population with a net benefit from the combination of tax and UBI. I will comment on some alternatives to give some feeling for the problems of choice in this area.
The Positive Money approach, supported by Modern Monetary Theory is a very exciting possibility but with many conceivable transition problems including opposition from the world-wide financial industry. I do not think it would be wise to attempt two major changes at the same time. However, if we funded KIwi Bank properly we could build it up to at least the same level as the old Bank of New Zealand which was Government owned and had 45% of the NZ banking market. We were once 45% of the way to the Positive Money ideal of having Government issue debt instead of the Banks.
Consider just increasing Income Tax. Remember that I am here considering Adults only. As noted above I have suggested the adult UBI be $860/year higher than the $10,140 “tax discount” so that many benefits can be discontinued. This extra $860/ year advantages all those on incomes above $70,000 as well as those below that figure. We could eliminate this advantage by increasing the Uniform Income Tax rate to 35.6%. This would still leave those with no other income better off by $11,000 per year tapering off to no net benefit for those on $70,000 per year and dragging in some money from those on higher incomes. But it only represents some $3.7 billion still leaving us wanting some 4.3 billion.
To recover the whole required amount we need to have a uniform rate of nearly 39%. And having lost the discounts of the proposed tax regime the $11,000 UBI would be eaten up when the total income for a person exceeded $63,467. They would be worse off with the UBI and the 39% tax rate instead of getting to $70,000 with the 35.6% tax rate. So it would be much better for those on lower incomes to recover this last 4.3 billion with some completely new tax.
We could also increase the tax rate for higher incomes.We should avoid re-creating big steps which give more benefit to those on higher incomes. For example take an extra 1% at an income of $150,000 and a further 1% on every additional $50,000 but with the higher tax charged on ALL the income. This would yield over $700 million more in tax. Other percentages could yield more. Moving company tax up to 33% from the present 28% would yield about $750 million.
More promising is the idea of having Local Bodies collect for Government a levy added to local body rates ( as is done by Regional Authorities) to yield the whole of the extra $6billion required. And property is a good proxy for total wealth. Local Bodies have always been financed by taxes (rates) on properties. Such a tax would be easy to collect and hard to avoid. The total NZ rateable value at March 2017 was $1,330billion. A 1% tax would yield$13.3 billion. But some of this property belongs to superannuitants. I do not have the required data so I will not here pursue this possibility here. But the UBI would compensate up to some level of property value and income. People sharing a house would each get their UBIs. Overseas owners would not get the UBI at all and those with more than one property would only have their one UBI but multiple Asset Tax components.
I hope that I have made it clear that there is at least one way of financing a UBI but that there is a lot of thought required before finalising the UBI amounts and all else, including the transition arrangements. It is not something to be undertaken lightly and it is understandable that no responsible politician wants to discuss the issues on the hustings before the major detailed work has been done. Nonetheless the time for UBIs has come.
There is nothing sacred about any of the numbers that I have used here. One of the decisions to be made is the level of UBI for adults, minor changes to Superannuation to have a single rate for all and another UBI for children to replace Working for Families. The form of tax required may well depend on these choices. There is a great deal of work to be done and some form of Commission is required to explore the possibilities, consider the possible side-effects and make the decisions. There has never been such a Commission charged with considering benefits and taxes at the same time. Yet it should be transparently obvious that both should be considered together. I hope that the Labour, Greens and The Opportunities Party will work together to make our tax systems work for our society as well as our economy.
Lets do this!
Perce Harpham B E(Chemical), M Sc, FNZIITP. Started NZ’s first computer software company in 1968. Progeni had branches throughout NZ and Australia, Los Angeles, Chicago and Beijing when, in 1989, it was destroyed as collateral damage in the failure of the Bank of New Zealand. Perce has since run a small business. He has solo-sailed a 25 foot yacht to Sydney return as well as other places. A short video on UBI and some of his papers on UBI, personal history and a sample of his sailing book are on the Web at perce.harpham.nz.