A number of comments following my blog last week, on the adaptation of a Universal Basic Income in New Zealand, reinforced the essential problem; that even simple new ideas can be extremely difficult to communicate. So I would like to have another go at saying what New Zealand should do and can do.
New Zealand should adopt the basic income flat tax system that integrates taxation and benefit payments. New Zealand should, initially, adopt this system with a flat income tax rate of 33% (plus an extra 1.45% as an Accident Compensation levy), and with the payment of an annual universal basic income of $9,080.
That’s it. Hope it was clear. The universal basic income represents a minimum – not a maximum – level of publicly-sourced income.
I would also like to comment on some specific points raised by readers.
Reader comment: “What Keith seems to have missed is that unless you have a system that fairly distributes the wealth that is produced in an economy then you inevitably end up with large imbalances which are caused by wealth condensation.”
My response: The whole point of the ‘basic income’ part of the basic income flat tax system is to “fairly distribute the wealth that is produced in an economy”. While a basic income of $9,080 per year may be insufficient to achieve a dramatic and immediate equalisation of the income distribution, at least it provides a mechanism through which appropriate and substantial reduction in future inequality becomes possible.
Reader comment: “I suspect it’s the sort of thing that would be better explained with pictures/diagrams or maybe some kind of animation.”
My response: There are no shortage of explanations of basic income flat tax (or similar concepts) that use graphics. My experience is that, when new concepts are explained that involve any amount of maths, many people engage with graphs even less well than with language. I think the problem is that too many people resist engaging with new perspectives, even though the new ideas are generally much simpler than the hodgepodge systems we feel a sense of familiarity with. Part of the problem is that we are much more comfortable criticising things than we are in offering alternatives; cynicism is intellectually easier than becoming open to new ideas. It’s why it often takes a new generation to inject even small amounts of intellectual dynamism, which is what happened after the great depression of the 1930s.
Reader comment: “I prefer a UBI well integrated into a progressive tax system, rather serving like a basic tax credit for all that earn other income, and as minimum, tax free income for those that are not able to earn income through employment business or else. There will also need to be appropriate and decent, sufficient top up components for sick, disabled, sole parents caring for children, those caring for a sick or disabled child or partner.”
My response: That’s precisely what I was arguing for; a new way of accounting for public finance that gives us all of those things.
Reader comment: “[UBI] would get rid of the incredible, costly, contradictory bureaucracy that we have in place.”
My response: Yes, up to a point. But a basic income should never be seen as a maximum level of social assistance. An agency such as Work and Income will always be required, but hopefully on a much smaller scale than at present.
Reader comment: “$174 a week is definitely in the ‘serious scrimping’ category.”
My response: Once again, a basic income should never be seen as a maximum level of social assistance. rather it’s a universal safety net, with no cracks to fall through.
Reader comment: “Where does the $9,080 come from?”
My response: Once we treat 33% as a flat rate of tax, then the present rates that apply to annual incomes below $70,000 come to be understood as discounted rates. There are three discounted rates. From the point of view of someone earning $70,000 or more: there is a 22.5% discount on the first $14,000 of income (equal to $3,150); there is a 15.5% discount on the next $34,000 of annual income (equal to $5,270); there is a 3% discount on the next $22,000 of annual income (equal to $660). Totalling those three discounts adds up to $9,080.)
Reader comment: “Some sort of redistributive steps will have to be taken. Do you want a peaceful of bloody way for it to be done?”
My response: The twentieth century welfare state produced more redistribution than many people can stomach. There is much resistance from people who could never contemplate spending all their income in their lifetimes. What the basic income flat tax system does is it sets two clear principles that even the rich cannot disagree with: (1) that incomes should be taxed proportionately; (2) that public equity should be distributed equally.
Reader comment: “This is awesome. An article in TDB that is focused on solutions and realistic proposals.”
My response: Thank-you.
Finally, I would like to clarify the central formula that I gave last week.
I noted that for people earning over $70,000, the basic income flat tax system is a reality right now, and has been for the life of the present government. I said that, for a person earning over $70,000:
after-tax income = (0.67 times before-tax income) plus $9,080
This is strictly true only is we disregard ACC employee levies which are presently set at 1.45% of before-tax income. If we add the 2014/15 ACC employee levy of 1.45% to the 33% statutory tax rate, we get an actual tax rate in New Zealand today of 34.45%. This becomes the flat tax rate for our basic income flat tax system.
The more correct (ie allowing for ACC) ‘basic income flat tax’ formula at present for a wage/salary earner receiving more than $70,000 before tax is:
after-tax income = (0.6555 times before-tax income) plus $9,080
If you are an employee earning more than $70,000 per year, then I suggest that you apply this formula to determine your present annual after-tax income.
Reform of the systems that give us so much grief is not difficult if enough of us are willing to understand those practical and politically credible alternative ways forward that enable us to steer past the icebergs. If 20% of us can get to grips with an idea such as this, then the 20% can engage with and teach another 40%. That may be enough to avert the creeping (though accelerating) disaster of increasing financial inequality.