A Modest Basic Income Could Lead Our Recovery
To quick-start the economy there are various advocates of different approaches to give a temporary boost and hope that it will then continue. These vary from scattering money from a helicopter to funding the banks. All involve considerable expenditure.
Basic Incomes have the merit of injecting money into the economy by giving it to people. Their spending will then inevitably work its way through to businesses, banks and the like. Trying to get the same effect by injecting the money into the banks and companies directly requires people to enter into debts in order to spend and stimulate the economy.
It seems to have escaped notice that following the GFC when banks were financed by "Quantitative Easing" the total of personal debts skyrocketed.
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 will remain for the long term in order to provide the security that is needed for recovery.
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 below
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 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. What is more many will realise that they may, without warning, suddenly join the ranks of the 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. And at almost all levels of employment there is now the risk of sudden redundancy. The shock of suddenly having no income at all is devastating.
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 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 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 does at least something for Children and Teen Agers. Getting BIs to the carers for children on behalf of the children would help many.
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. A basic principle to observe in any transformation is not to reduce the income of any present beneficiary. So reducing present benefits in order to pay for the Adult BIs is not tenable.
To begin with we can continue Working for Families and superannuation effectively unchanged either as to funding or delivery
A Modest Basic Income for Adults to Get Started.
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.
There are many ideas on what taxes should be used to pay for BIs. My choice is for making Income Taxes fair as noted above and for a Resource Tax levied as a percentage of improved property values through the local bodies. This would take a little while to get into place and for the Resource Tax receipts to start to arrive. So, in the beginning, we need to look at what can be done solely with receipts from modifications to the Income Tax.
.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 with no duplicates and no omissions. Those who don’t fill in required forms and identify themselves or accept the identification process don’t get the BI.
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 returns to IRD 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 who would be eligible for the Adult UBI. They will also have addresses and ages.
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 3,200,000 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. .
Stage 1 Adult BIs only
In order to get money into the economy quickly before Resource Tax returns start to flow in our aim should therefore be to start with a smaller Adult BI than I have previously suggested 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 if we are to have substantial rate of unemployment then, at the current top rate of "Job Seeker" benefit then there will be many currently getting $9,950/yr so making them 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.
So I suggest that $9,950/yr should be the initial adult BI with the Uniform Income Tax rate at 33%. At this stage we would make an adjustment to superannuation payments to compensate for superannuation being taxed at 33%so that superannuitants with no other income would not have their income changed by the 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 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 $9,950/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 and the 33% Income tax.
Stage 2. BIs for All
We can then realistically talk of going up to an Adult BI of $11,000 or $12,000 at some few months in the future when we have the local bodies setup to collect the Resource Tax at the same time as their local body rates. We would also then make superannuation payments tax free and, free of any marital arrangements, 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 additional payments at the same time as the Resource Taxes (around 0.5% of improved property valuations) )start to bite. Inequality of 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. Financed by around 0.5 % of the improved rateable value and 33% on income taxes up to $100,000/yr and more thereafter.
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 $100,000/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 raise some 25bn in normal times..
But the cost would be much more certain . With 3,200,000 people in the 18 to 65 age band the cost at $9,950 each is 32bn. A difference of some 7bn if the rates were raised on higher salaries as suggested. But if unemployment reaches 10% then 3.2bn will be required to pay them anyway. Where might the remaining 4bn come from
There would be, perhaps, 2bn of saving from the reduction in existing benefits other than Job Seeker.
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. It 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.
The remaining gap of 3bn might well be nearly closed by revisiting Company Tax and raising it to 33% or even higher. At 33% many tax avoidance issues might disappear from small companies.
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 a big ask to think that raising the company tax rate would yield very much the same amount as reducing it – namely 2.4 billion.
The uncertainties in the future tax take from Income Tax are great so the net cost at stage 1 might well be 5bn or more. This may well be less than any other way of getting the same effect on the economy and well being.
I once asked Jas Mckenzie ( he had a distinguished Treasury career as an economist and then as Secretary of Labour – sadly he died 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. 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.
Government Might Get Some of its Money Back.
So there is the possibility that some of the money paid out as BIs will be returned to Government very quickly. If all the $32billion is spent then GST at 15% will return $4.8 billion to Government. And if the remaining $27 billion or so is also then again spent more GST will return to Government and so on.
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.
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 any errors in these calculations.
Note that I have only taken the change in Income Tax rates and the Resource Tax into account in my present or earlier arithmetic and have not assumed any return to Government as discussed here..