Tag Archives: basic income

It’s not all about tax

Who do so many people assume that the only way to pay for a guaranteed basic income for all is by having a flat rate of income tax, pitched at an unacceptably high level?

For example, when the New Zealand Treasury was asked to model a basic income guarantee for Kiwis in 2010, it calculated that it would need a flat rate income tax rate of over 50 per cent to cover the cost.

The tax and welfare systems are two sides of the same coin.

Reforming welfare without reforming the income tax system at the same time makes no sense.

Simplifying the tax system means getting rid of all the various income tax offsets, deductions and allowances, but it does not require scrapping the “progressive” nature of the existing system.

The system of income tax taking an increasing percentage of each additional dollar earned has long been accepted and seen as essentially fair – those who can most afford to pay, pay the most.

There is no reason why there should not be many more smaller tax bands.   Why not a hundred tax bands, of say, $5,000 or $10,000?

You could charge the first $5,000 earned over and above the basic income at, say, two per cent. That would only be $100, leaving an after-tax income of $4,900.

If the marginal tax rate increased by another two percentage points for every $5,000 of income, someone earning between $5,000 and $10,000 would pay 4 per cent on their extra income. Someone on the average adult full time earnings of just over $80,000 would pay 32¢ for every extra dollar.

That looks very similar to the current rates, where you pay 37¢ for every dollar of taxable income” over $80,000.

Taxable income, of course, is income after various deductions, allowances, credits and offsets have been taken into account, so in practice you can earn considerably more than $80,000 before you hit the 37¢ rate.

However, under the current system, even if your taxable income is as little as $5 a year, you will pay a third of that income in tax (well, 32.5¢ in the dollar to be precise).

What that means is that with a guaranteed basic income incorporated into a simplified income tax system, those earning a below-average income would pay less tax than they do now, those earning above that level would pay more.

That’s the price they would pay for the security of a guaranteed minimum income and the economic and social benefits it would bring.

It wouldn’t cover the total cost of the scheme, but then, it doesn’t have to.  There are a range of savings and sources of revenue never closely examined in reports such as that produced by the NZ Treasury.