How to recover from a Lost Opportunity

It is regrettable that the opportunity to consider both Tax and Benefits at the same time has been lost or, at the least, delayed. Both the Tax working Group and the Welfare Expert Advisory Group had great objectives set out for them but they were hamstrung by their Terms of Reference. As a result, apart from the Capital Gains Tax, neither group produced any significant ideas for new taxes or system wide structural changes.

Neither considered the possibilities for Basic Incomes (BI) to be joined with supporting tax or taxes to produce a fairer and more effective system which will reduce inequality, bureaucracy and surveilance. This is possibly because many people think that a Basic Income for Adults should be at the same level as Superannuation which is a BI for those over 65. They then multiply by the number of adults and conclude that we could never afford such a BI. Then they refuse to contemplate realistic levels of BI which could bring multiple benefits to society and be funded by acceptable taxes.

For this article I will consider only the major new cost of Basic Incomes for Adults 18 to 64 years of age. Child & Teen BIs as well as changes to Superannuation will be dealt with elsewhere. These are to some extent less urgent. But ultimately everyone in their age group, or their carers, would be paid a BI with no consideration of their assets or other income. Evidence and logic suggest the following expectations would be realised by these payments:

A stop to “beneficiary bashing” and official intrusion into people’s lives·

Easy collection of fines and child maintenance

Reduction of child poverty

The empowerment of women and recognition of mothers and carers

Possible repopulation of rural centres with retired and seasonal workers.

A large saving in the administration costs of benefits

A reduction in problems associated with Accident Compensation payments..

A reduction in student “Living Allowance” problems.

Easier rehabilitation of prisoners

Improved feelings of security and reduced stress for many

An improved worker/employer power balance

Improved social cohesion and a more resilient economy

An improvement in health and school attendance

I start from a consideration of “fairness” in the personal Income Tax structure. Some people who earn $70,000/yr and above think that it is not fair that somebody on up to $14,000 a year only pays Income Tax at the rate of 10.5% whereas they pay 33% on some of their income.

I also think that it is not fair. But in a rather different way. The high earners only pay 10.5% on the first $14,000 of their income and then 17.5% up to $48,000/yr, then 30% up to $70,000 and 33% thereafter.

If everyone paid 33% on ALL their income those on $70,000 upwards would have to pay another $9080/yr because they would then lose the exemptions on the lower levels of their incomes. At present the value of the current exemptions from the 33% are greater for those who have the most because they get all the exemptions aimed at the lower incomes. No doubt with a uniform 33% tax rate they would want to be refunded this $9080 so that their total tax bill would remain the same as at present. Perhaps this would be fair. But only if we made the same payment to everyone. This would be a Basic Income! Then those with no income would be better off by a net $9080/yr, those on $14,000 by $5930/yr (9080 - (14,000x0.33 - current tax) and on $48000 by $660/yr and proportionately for intermediate amounts. Except for those with no income everyone would make a contribution to what they were to receive because their BI would be eroded by the higher 33% tax.


But we would have a Basic Income. AHA! Basic Income would be paid on an ongoing basis whether a person had a job, property or other income or not. There would be no stand-down periods or claw-backs. So there would be the security of this payment as a means for living regardless of circumstances, gender or relationships and this would not be reduced by assets, savings,or redundancy pay etc. The BI payment for adults does not have to be $9080 per year or any other figure. The fact that superannuation is a BI (albeit with blemishes) does not require that BIs for those in a different age group should be in any way linked to the payments to Superannuitants - or Children when they get a BI.

At $9080/yr this Adult BI would have some of the benefits noted above. But how would the country pay for those who are below the $70,000 limit and are better off with any such payment? The question looms even larger if we wish to replace all the bureaucracy and surveillance, leaving just that necessary to continue to provide hardship allowances. This replacement is needed if we are to become almost entirely free of targeting, surveillance and poverty traps. The tax-free BI would then simply depend on age. For this replacement we need to move the Adult BI payment to a minimum of something like $11,000 per year. Then, using 2015/16 figures to get consistency across various data sets, we will need some 31 billion dollars more to be collected in taxes. OUCH!

And while about $11,000/yr will let us remove most benefits (excluding of course the Superannuation and Working for Families) without making the recipients worse off it will not improve things for those currently receiving them. The cost of hardship allowances could remain at about the current level unless it is decided to make them more generous. Nonetheless let us work through the idea of having an Adult BI of $11,000 per year and a 33% tax rate. The same process can then be followed to find the consequences of choosing some other figure.

Those above $70,000 per year on a tax rate of 33% levied on all of their income will then be paying an extra $9080/yr each while those below $70,000/yr will be paying proportionately less. But all this payment of the increased rate for those above and below $70,000/yr adds up to about $18bn. We might also save more than $6bn/yr from removing existing benefits and bureaucracy. (This needs careful detailed consideration with decisions to be made benefit by benefit and other assignments or redundancies for the displaced staff). However, we will need about 7bn more in tax if we are to have a tax-free Adult BI of $11,000/yr and a uniform tax rate of 33%.

Where would this come from? We could raise the uniform tax rate to 38% to recover it but then the BI would be eaten up by the increased new rate at an income of $52,250/yr so everyone above that rate would be worse off. It would be fair to charge those who earn more to pay more. My choice would be something like raising the rate by 1% at $150,000/yr and another 1% on every $50,000 thereafter up to a maximum of 60%. To avoid the higher earners benefitting from the lower rates it would be necessary to levy the new rate on all income - not just the top portion. I am surprised to calculate that this would yield only about $1bn. It would be useful and is morally desirable but would not noticeably impact on the inequality of wealth. There are many possibilities.

There is a “stamp duty” in Australian states. This is different in different states. It is levied on sales of property and cars as well as some shares and other things. It is made complex by various exemptions. Exemptions benefit groups of people who would otherwise pay taxes. In my view all exemptions should be extinguished with the introduction of Basic Incomes. If things like income and wealth are taxed appropriately Government should not need to make gifts other than the visible BI to some chosen people or to have sneaky, complex little penalties for having an income which, for example, prevent a child from getting a student loan. Note that the State of Victoria recently collected 6.4bn in stamp duty after losing 2.4bn because of a drop in property sales and prices.

There are death duties, estate duties, gift duties, fundamental and far reaching ideas such as transaction taxes, so called “new economics” where Government issues debt instead of the banks and many other possibilities.I have always wondered why Government is fixated on income whereas N Z local bodies have always been financed by rates. More recently Regional Councils have put a levy on rates. Rates are easy to collect and hard to avoid. They are paid by companies and trusts. There are no exemptions for family homes.

What we are really interested in is the net benefit of the Basic Income less any new taxes. Who will be the winners and who the losers overall? My preference is for a tax levied on the improved value of properties and collected with local body rates. The choice of name is important. I have used Asset Tax but it may be best called a Consumption Tax because buildings are huge consumers of the world's resources in terms of their heating, construction, maintenance and so on. Cars, boats, aeroplanes and the like might also be included at some later time. The Asset Tax will be calculated here to fund Basic Incomes only but it could cover other environmental needs also.

Whatever the name a levy of 0.5%/yr on the improved value of all rateable properties and collected with the rates would yield the required 7bn. Those with no income and no property would be $11,000/yr better off than at present. With a $70,000/yr income or higher and a 1 million dollar property (Asset Tax of $5,000/yr) people would be a net $3,080/yr (5000 - 1920) worse off than at present. If they shared with someone else on $70,000/yr they would each lose only $580/yr, (3080 -1920)/2, more than at present.

Some of these numbers can be independently adjusted to give the greatest electoral appeal. I have provided a start for a comprehensive study of what levels of Basic Income are feasible, how to pay and how to transition to them. The ideas are clear and simple. I have gone into more detail in the paper “Simplifying our Tax and Benefit Systems” on my website at https://perce.harpham.nz.

A great deal of work is required before any commitment is made to implementation. But doing a proper study and creating an informed electorate will be of great value and would demonstrate Government’s identity and transformative direction with doctrines of kindness, environmental commitment and giving "Capitalism a heart". Lets do this!

Perce Harpham. perce@harpham.nz

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