Guest Post: UBI by stealth
A guest post by Tavita:
Lindsay Mitchell draws attention to the increasingly relaxed approach to beneficiaries Lindsay Mitchell: No better time to be a beneficiary. What we are moving towards is a sort of universal basic income system (UBI) by stealth. Our current social benefit system is based on need. A needs-based social benefit is fine if people apply it and use it responsibly in the manner it was intended, but that doesn’t always happen. What we have now is a paid alternative to work that gives little or no incentive to getting a job. But what to do about it? Most people who are on benefits do need the money. The situation becomes worse the closer the benefit comes to the living wage. Two solutions – at opposite ends of the spectrum – are to substantially reduce / get rid of all benefits or make them universal. We will never achieve the first so are we are left with the second? Instead of introducing it in a haphazard way by stealth, should we look at a rationally designed UBI scheme?
The problem is that UBI are expensive and thus electorally difficult to sell. Treasury modelled a UBI of $300 weekly for 16+ year-olds in 2010. They estimated the cost (net of existing benefits) and calculated the flat tax rate required to raise this additional amount to be 48.6%. They then modelled (in addition) abolishing Working For Families and replacing this with a weekly $86 payment for 0-15 year-olds which pushed the flat tax rate up to 50%. https://www.treasury.govt.nz/sites/default/files/2018-07/oia-20180164.pdf
You can see the problem if you plot the ‘proposed’ tax rate plus UBI against the current tax rates. It looks like this:
It is immediately obvious that taxpayers earning more than $50,000 per year are worse off – some significantly so. I estimated (based on Treasury’s 2010 figures) that there is a transfer of $10 billion from tax payers to non-tax payers.
Where does the money go? The Treasury scheme does not appear to be any more generous to those on benefits. Some money is going to people who are working but earning less than $50,000 per year but they may well be receiving benefits anyway. The rest must be going to people who are currently neither earning income nor on a benefit. What if we excluded people who are currently not working but do not qualify for a benefit? Ah – but then the basic income would not be universal.
The Treasury analysis asked the question – what tax rate would be needed to provide a universal basic income. They concluded that a universal basic income was unaffordable. But was that the right question? What we are trying to do is address the perverse incentives presented by the current benefit and income tax regime – trying to find a welfare safety net that does not take away the incentive to work. Ideally the system should be tax neutral (not system neutral as the Treasury model aims to be) and that replaces the current benefits, rather than expanding them.
The Treasury analysis was correct that if we have a UBI, we don’t need a progressive tax system – they are two ways of achieving a similar goal. Currently we have a progressive tax system such that lower incomes – and the first $50,000 or so of higher incomes – are taxed at a lower rate. You can approximate the tax payable under our progressive scheme by a flat tax of 32.9% and a tax rebate of $7,600 as shown below.
To make this tax neutral you would have to weight the incomes by the number of people at each income level – I haven’t done this but something like these figures can be made tax neutral. However, $7,600 per year is not going to cut the mustard as an UBI. What say we tweak the figures a little? So what I tried was a flat tax of 39% – the new top rate – and a UBI of $18,000 which is the benefit rate paid to married pensioners, You get the following picture.
This is definitely not tax neutral, but it could be ‘tax minus benefits’ neutral if the entitlement to benefits is also considered. Currently most low-income earners get some form of additional assistance. Looking at the figure, it seems that a flat tax plus a tax rebate or some form of UBI could replace the current regime of a progressive tax plus benefits.
Currently benefits are only available to a subset of the population. The Treasury model makes the UBI available to everyone, greatly increasing the cost which is why it is not feasible. Two possibilities are to introduce the UBI but at a much lower rate or to drop the ‘universal’ bit and limit the availability of the UBI to those who qualify for benefits currently – or are in employment. The former would be a hard sell – it would be seen as taking money away from people who need it and giving it to people who don’t.
The second option could largely be achieved by leaving the benefits system as it is, but allowing beneficiaries to work at the maximum tax rate. The latter is similar to what happens in effect now with the Government Superannuation. Since superannuation is taxable income, it puts the recipients into the higher tax brackets – so all income is effectively taxed at a high rate. Currently about half the benefit is clawed back by treating the income as secondary. If it were all taxed at the maximum rate, the entire superannuation would be clawed back in full for incomes over about $120,000.
But if that works for superannuation, why not apply the same rules to other benefits. In other words, allow the benefit recipient to return to work but on a high tax rate. Problem solved.