They involve tax rates horrendously high or the minimum incomes so low that ihe UMI is not a viable means of eliminating poverty.

The notion of a universal minimum income has had a long gestation. Some say it originated with a proposal for a ‘social dividend’ by Lady Rhys Williams as far back as 1942 but you can find precursors even to that. The American origin is Milton Friedman’s ‘negative income tax’. When Minster of Finance, Roger Douglas promised a Guaranteed Minimum Family Income but he never implemented it.

Today the notion is usually described as a Universal Minimum Income (UMI), in which the government provides everyone with a basic income which it funds by taxing market income. It is a popular idea and seems eminently sensible so why has it not been implemented?

Many advocates put the UMI forward without doing the sums. Those who do, find that the required tax rates are horrendous or the minimum income is so low that it is not a viable means of eliminating poverty. Among the latter are New Zealanders Douglas, Gareth Morgan and Keith Rankin.

What the notion falls foul of is a simple mathematical theorem. Like all economic analysis it requires some simplification but once you have got it, then the tradeoff is obvious because the simplifications do not affect the logic of the outcome.

Let me explain how it works. Suppose you set the minimum income that all New Zealanders should get as X% of the average income.

(An important aside, this is not the same as the average wage, because each wage supports, on average, other people such as children and non-earning household members. The last time I did the calculation, the average private disposable income (including investment income) was about 60 percent of the average wage before tax.)

When I have asked people, they usually suggest a minimum income of about 60% of the average income. That is X = 60%. Bingo! You have just set the average income tax rate at 60%. It is as simple as that. The average tax rate is the same ratio of the minimum income as a proportion of average income. Relax the simplifications (like the state providing public services such as education and health care) and you still get the same broad result: a high minimum income requires, on average, a high tax rate.

That explains why those on the benefits face horrendous marginal tax rates, sometimes over 100 percent. By increasing theirs we can lower tax rates on everyone else – including the rich.

I have known this result for a long time (it is obvious once you have done the mathematics) and try as I might, I cannot find a way around the logic. For instance, you could raise the tax rate on the rich to, say, 80 percent and lower the rate on the rest – but not by that much. The poor would still find about half of every dollar they earned would be taken from them.

Now to the crunch. I said there were assumptions in the mathematics. One is that there is no behavioural responses to the change in tax rates, that faced with higher tax rates, people do not work less and do not take other measures to reduce their tax burden (including moving offshore). Yeah right. At this point the modelling gets messy, but the clear result is that if people faced by high tax rates cut back their effort (and their savings), tax rates would have to be even higher for a given UMI. Ooops. (Beneficiaries currently facing ultra-high rates might work more but their additional work would not compensate for everyone else cutting back.)

Others have argued that we simply need to drop the minimum to say 25 percent of average incomes (the rate Friedman mentioned) which would reduce the average tax rate to 25 percent, close to its current one. Most advocates of the UMI would not support that because it would not eliminate poverty.

I have thought of but one way out of the dilemma. Suppose we split the community into two groups based on whether they should work (in the earning workforce) or not. (This is a thought experiment, you understand; it might be an administrative and political nightmare.) Those who should work would get nothing but they get a job and its after-tax income, those that cannot work get a guaranteed minimum income as in the UMI scheme. If the second group was only 40% of the population, then the required average tax rate for a 60 percent minimum income would be only 24 percent (i.e 60 *40%).

There are two conceptual difficulties. The first is that earners and non-earners (including children) live together in the same house so  the non-earners may not have a guaranteed UMI. The second is some of the earners will be on occasions unemployed. Bother, bother, bother.

So I ended up thinking about how to improve the current system, which kind of (clumsily) works a bit like this two group option. To me the priority is giving additional support to children and those that care for them.

The government talks about doing this in its next budget, but it seems to be very muddled. I guess I’ll be coming back to the issue of the child poverty – before and after the budget.

 

Comments (23)

by Brent Jackson on February 16, 2015
Brent Jackson

Have you taken into account that we are already paying a UMI to everyone 67 or older ?  That's 640,000 (and growing) which is 14% of the population.

You wrote :

There are two conceptual difficulties. The first is that earners and non-earners (including children) live together in the same house so the non-earners may not have a guaranteed UMI. The second is some of the earners will be on occasions unemployed. Bother, bother, bother.

I am not sure what exactly you mean by the first.  Are you complaining that the payments will go to the parents (ie earners) rather than the children (non-earners) ?  Isn't your restriction of the UMI to 40% of the population is merely adding children (and the work-incapable) to National Super ?

The second is hardly an issue.  There are currently 130,000 on the Job-seekers benefit, which is only 2.8% of the population.  It will not have a significant effect on the viability of the scheme.

If you restrict the UMI to only a portion of the population, then, by definition, it is not a UMI.  The way you describe your maths seems to assume that all of the UMI is paid for by income tax.  However, income tax on individuals is only 36% of Govt Income.  Note that 36% * 60% is 22%, which is very close to the average tax rate.

I do not think a simplistic multiplication of two numbers can accurately assess the viability of a UMI.  I think manipulation of the Government's budget will be required (see http://www.stats.govt.nz/~/media/Statistics/Browse%20for%20stats/Governm...)

by Katharine Moody on February 16, 2015
Katharine Moody

Yes, I also was confused by the simple mathematical formula presented.

Here is how Gareth Morgan would fund it (the default settings are his proposal);

http://www.bigkahuna.org.nz/calculator/finance-minister.aspx

Or this slide in the presentation;

http://www.bigkahuna.org.nz/presentation.aspx?p=19

And

http://www.bigkahuna.org.nz/presentation.aspx?p=20

What attracts me to the proposal is the reduction in current costs of MSD and IRD (i.e., smaller government), the flexibility given to individuals to determine their own living arrangements (i.e., the abolition of means testing, none of the nonsense about whether or not one is living with a partner, or parents or whatever - and the absence of obligations imposed by government to be 'work ready' - that is, people can choose to take on any type or amount of paid work and not be penalised for it) and the fact that such a scheme respects the value of presently unpaid work. 

by Rich on February 16, 2015
Rich

Just to illustrate a counter-example:

Suppose, as you say, the UBI is set at 60% of average income (and is untaxed, although one would expect it to be taxed in most models, as benefits are).

Let's also for simplicity assume a much more equitable society and that everyone who works earns the average income. 5% are unemployed, and another 5% choose not to work (children and pensioners are left out of this, as the former are supported by the parents and the latter are supposed to be paid from the Super Fund).

And we have a population of 1 million, to make the numbers simpler. And an average income of $100k a year.

90% of the population earn 100% of the average income, which adds up to $90bln

10% receive a UBI of 60% of the average income, so 100,000 x 60k = $6bln

That means that $6bln / $90bln = 7% of *extra* income tax would be needed to fund a UBI.

Not 60%.

 

by Rich on February 16, 2015
Rich

Or, if you took a higher figure of 30% not working, that would come out at 25% of extra tax.

 

by Nick Gibbs on February 16, 2015
Nick Gibbs

@Rich,

Let's also for simplicity assume a much more equitable society and that everyone who works earns the average income. 

So we assume we have a communist society. History has tried that. It failed.

by Lee Churchman on February 16, 2015
Lee Churchman

He's not assuming a communist society. for example, where did he say that there would be common ownership of the means of production? 

BTW Nordic social democracies are wildly successful. Much more so than our banana republic. 

by Brian Easton on February 16, 2015
Brian Easton

Brent Jackson

Have you taken into account that we are already paying a UMI to everyone 67 or older? That's 640,000 (and growing) which is 14% of the population.

Yes. It is an example of my two category option at the end.

I am not sure what exactly you mean by the first. Are you complaining that the payments will go to the parents (ie earners) rather than the children (non-earners)? 

I am not complaining, I am merely pointing out that when earners and non-earners are mixed in a household you cannot guarantee every non-earner a minimum income.

There are currently 130,000 on the Job-seekers benefit, which is only 2.8% of the population. It will not have a significant effect on the viability of the scheme. 

It is a design problem. How do we deal with them? Give them nothing, give them a special benefit with a high tax (abatement) – as we do now. It’s not insuperable, just messy (as it is now). and you lose the elegance/simplicity of the UMI. 

If you restrict the UMI to only a portion of the population, then, by definition, it is not a UMI.

I am not uncomfortable with that except I notice that you use the term UMI for part of the population in your opening paragraph (quoted above).

The way you describe your maths seems to assume that all of the UMI is paid for by income tax. However, income tax on individuals is only 36% of Govt Income

One simplifies to explain the notion. So, yes, you can add other taxes (such as GST) and get broadly the same result.

Kathleen Moody

If you are using the same default settings as I found, the proposal ends up with an addition to the current fiscal deficit. It gives no income support to children, a sole parent with a child on a benefit would have her income slashed by about $90 a week, a NZ Superannuitant by about $100 a week, many lower income people would face a higher marginal tax rate, and generally the rich would be considerably better off than the poor. You may be happy with the increase in poverty especially among children. That is your political position but many New Zealanders would not be.

Rich

You have not understood how the system works.

First, your average income is $90,000 p.a. (i.e. 90%*$100,000 +10%*$0)

So everyone would get $54,000 p.a.

The total cost to the state would be $54billion.

The required average tax rate would be $54b/$90b = 60%, exactly as expected.

Your system is actually the two category system I wrote about.

Incidentally, NZ Superannuitants are not funded by the Super Fund, nor are they meant to be. Your scheme for children would increase child poverty.

 

by Brendon Mills on February 17, 2015
Brendon Mills

to implement a UBI, a starting point I guess would be to use the entire social welfare budget, and divide it up among every man woman and child in NZ.

about $130 per person per week was the figure I came up with.

 

by Brendon Mills on February 17, 2015
Brendon Mills

By the way -- can anyone explain how Roger Douglas' Gauranteed Minimum Family income was intended to work? 

by Katharine Moody on February 17, 2015
Katharine Moody

Many of the points you raise about the Morgan proposal are valid criticisms/problems - for which the authors provide possible transitional solutions for. For example, where sole parents are concerned, the income projected does not include any payments from non-custodial partners; sole parents would be able to share accommodation expenses with others of their choosing without abatement/penalty in income, they would be able to pick up casual and/or part time work without abatement/penalty in income, and so forth. For superannuitants, those who do not own their own homes would be the most vulnerable/disadvantaged - and there is a suggestion by the authors that the Cullen Fund might be used to bridge that accommodation expense gap.

I think we need to look at any such radical proposals for overhaul/change of our tax and welfare systems based on an acceptance that the status quo social welfare model is broken and on the other side of the ledger, too much of excess capital is being invested in unproductive industry with a very low rate of return. Additionally, the uber rich (individuals and corporates) have many 'perfectly legal' ways to evade/minimise tax paid - and the middle class is disappearing.  Governments the world over find achieving fiscal surpluses nigh on impossible under current settings and because the middle class has no/little excess disposable income - household debt has reached crisis point.

So, something radical is needed. Time I think to focus on solutions, rather than criticisms/barriers to progress, or to offer up equally well developed and researched alternative proposals.

by DeepRed on February 17, 2015
DeepRed

Another partial solution is to shift the tax burden from income to speculative flows, such as a Tobin tax or FTT. For those to work properly, though, they would need backing from the G20 nations. And Wall St, London's Square Mile and Zurich will probably go out of their way to resist them.

by mikesh on February 17, 2015
mikesh

You are of course misrepresenting the ideas of Gareth Morgan and Keith Rankin. Both are recommending a (tax free) UBI, rather than a UMI, coupled with the levying of a flat tax on all income. Morgan proposes a flat tax of 30% and a UBI of $11,000 per year, while Rankin advocates a UBI of $200 per week ($10,400 per year) and a flat tax of 35%. The principal difference between the two is that Morgan sees his proposal as largely replacing the current welfare system, while Rankin would keep the welfare system going. When one does the sums it looks as though each person would be paying much the same amount of tax as under the the present progressive tax system. ie to all intents and purposes the tax he would be paying would be flat tax on his income partially offset by the UBI. 

by Draco T Bastard on February 17, 2015
Draco T Bastard

They involve tax rates horrendously high or the minimum incomes so low that ihe UMI is not a viable means of eliminating poverty.

That isn't the problem. The problem is that we view our financial system backwards with the result that we believe that the government needs an income which it raises through taxes. In reality, the government is the source of all money and resources.

Specifically, the government creates money (fiat currency) that it then spends into the economy to make the nations resources, government services and to ensure that minimum end produce is available (Pays people to work). It can also spend that money into the economy through a UBI. The prices that people pay for those resources and produce are the taxes that remove that money from circulation.

Due to the money multiplier there will be enough money to support a private sector but a) that sector will be small and b) the dead-weight loss of profit (which includes savings) will show up quite clearly.

by Pete Sime on February 18, 2015
Pete Sime

Personal income tax makes up 41% of revenue in New Zealand. The remaining 59% comes from company taxes, GST, witholding taxes and indirect forms of taxation. Your article appears only to consider income tax as the source of funding for a UMI.

by Brian Easton on February 20, 2015
Brian Easton

First a general clarification. The model is deliberately simplified to only have income tax. One could generalise it to other sorts of taxes (GST is easy since it is virtually a flat income tax). Same outcome; they are horrendously high.

Of course one can change the incidence of any tax so some people pay more, some less. I indicated I looked at an even higher income tax rate on the rich. But you still end up with higher tax rates.

 Brendon Mills

Giving everyone $130 a week or whatever will put beneficiaries, New Zealand superannuitants and children into poverty.

Cant tell you how Douglas’s GMFI worked. Even Douglas did not explain. (See Unfinished Business.) But I can tell you a couple of stories. When he first announced it I was in the budget lock-up, so I asked a Treasury official who said ‘nothing to do with us, that is for IRD’. The second time I rang the economist who was the tax adviser in Douglas’s office. He said, ‘nothing to do with me’. Both were a proper but coded way of officials saying there were no papers, and they had no idea what was intended either.

Katherine Mills

You say ‘something radical is needed. Time I think to focus on solutions, rather than criticisms/barriers to progress, or to offer up equally well developed and researched alternative proposals.‘ You remind me of Roger Douglas because you have a policy of crash through even though it wont work. Careful analysis can identify what might be viable options, as I tried to do. 

Dep Red

I have written on the Financial Transaction Tax. It wont raise enough.

Mikesh

I have not misrepresented either Gareth or Keith. Theirs are small variations on the basic analysis as you will understand if you do it.

Incidentally you may have not understood Gareth’s proposal. The scheme you nominate only gives his UBI to adults. It screws children. You may want to relegate more kids into poverty, but at least admit it. If Keith’s system maintains the existent welfare system, it will end up with very high tax rates on beneficiaries (as currently exist).

The principle difference between the two schemes is not what you say. Gareth’s system dumps more people into poverty, Keith’s ends up with high tax rates. That is exactly as the mathematics predicts.

As for the claim ‘When one does the sums it looks as though each person would be paying much the same amount of tax as under the the present progressive tax system’, I assume you have not done them. Using Gareth's default settings you would have found a person on $100,000 a year would be almost $100 a week better off, a person on $1,000,000 almost $400 a week better off. Who will be worse off.? The poor. 

DTB

Another person with the initials DTB would explain you have confused money and resources.

by mikesh on February 20, 2015
mikesh

"Incidentally you may have not understood Gareth’s proposal. The scheme you nominate only gives his UBI to adults. It screws children. You may want to relegate more kids into poverty, but at least admit it. If Keith’s system maintains the existent welfare system, it will end up with very high tax rates on beneficiaries (as currently exist)."

Well I never!!! I would never have guessed!!!

Actually, Gareth suggested that if we were to apply a 32% flat rate instead of 30%, we could probably provide a child allowance. I didn't mention this because I didn't think it important. I wanted to restrict myself to his main ideas.

"As for the claim ‘When one does the sums it looks as though each person would be paying much the same amount of tax as under the the present progressive tax system’, I assume you have not done them. Using Gareth's default settings you would have found a person on $100,000 a year would be almost $100 a week better off, a person on $1,000,000 almost $400 a week better off. Who will be worse off.? The poor."

Yes, I did realise that income tax paid would be somewhat lower under this scheme, but on the other hand he was also suggested an "equitable rate of return" tax on non performing productive assets. It should be noted that he would apply this in particular to owner-occupied homes.

I wasn't touting either scheme actually (though I prefer Keith Rankin's). I was pointing out that you appeared to have misunderstood them. The salient point of both schemes, and which you seemed to have missed, is the joining of a flat rate of income tax with a UBI. The details of course would have to be worked out but the principle it seems to me is a good one.   


 

by Katharine Moody on February 21, 2015
Katharine Moody

But you still end up with higher tax rates.


Sure, if you're going to provide a UBI - you have to fund it somehow - no one denies that. But neither would anyone deny that there is an over-abundance of excess capital the world over just looking for a 'home'. So it gets invested in non-productive/low return/'safe' havens.  In fact there is so much excess capital sloshing around the world that interest rates have gone negative and folks are prepared to lose income in the present (presumably because they don't need any more to provide for their own necessities in life) for perceived gains in the future or as a safe haven in the interim.

As GM points out, a UBI is affordable if we learn to allocate capital more appropriately - as per the moral premise on which capitalism itself was conceived.

The is more than enough fiat to solve all our problems, Brian. :-) 

by Katharine Moody on February 21, 2015
Katharine Moody

Using Gareth's default settings you would have found a person on $100,000 a year would be almost $100 a week better off, a person on $1,000,000 almost $400 a week better off.

Fair enough for the person on a $100K wage/salary - lower taxes on income (I.e. leaving more disposable income for the middle/non-rentier class) and higher taxes on capital stores (the rentier class) is the whole point. For the person on a wage/salary of $1,000,000 pa - they'll have plenty of excess capital which they'll need to find a 'home' for (meaning they are likely part of the rentier class). If that 'home' isn't returning/earning at a reasonable (economically/societally beneficial) rate of return - it'll be taxed more than it is presently - so don't worry, the additional $400 week on their million dollar income will be reimbursed (and then some) to society (i.e., the tax/welfare system). 

by mikesh on February 23, 2015
mikesh

Using Gareth's default settings you would have found a person on $100,000 a year would be almost $100 a week better off, a person on $1,000,000 almost $400 a week better off. Who will be worse off.? The poor.

Actually, everybody would be better off, the poor included. Morgan believes that his scheme would be  affordable because welfare would be largely eliminated, and government revenues would be boosted by his "comprehensive capital tax". However, as I said in an earlier comment I'm not touting Morgan's scheme. I much prefer Keith Rankin's.

by Brian Easton on March 02, 2015
Brian Easton

I should have explained that Keith’s proposal is not unlike my final option of a two category system. Its difficulty is that it ends up with very high effective tax rates on those who shift between the two categories (e.g. between being on an unemployment benefit and having a job). So it does not resolve the problem of high tax rates on the poor.

Morgan believes that his scheme would be affordable because welfare would be largely eliminated, and government revenues would be boosted by his "comprehensive capital tax".
I have not seen the latest version of Gareth’s ‘comprehensive capital tax’ but the one I did had penalising effective marginal rates (as the mathematics would predict). Some would say they were a defacto expropriation of private capital, at the very least they would have generated capital flight.

by mikesh on March 02, 2015
mikesh

I have not seen the latest version of Gareth’s ‘comprehensive capital tax’ but the one I did had penalising effective marginal rates (as the mathematics would predict). Some would say they were a defacto expropriation of private capital, at the very least they would have generated capital flight.

The version outlined in his book The Big Kahuna gave a CCT rate of 1.8% of the value of the asset, ie His proposed flat tax of 30% applied to an "equitable rate of return" of 6%.

by KJT on March 10, 2015
KJT

We once had almost universal minimum income. Universal child support which was enough to actually support a child, and support for the elderly, which was enough to live on. It seemed to work rather well.

The fear of actually taxing the rich so that the rest have a fair share of the, abundant, resources New Zealand has, is the brake, not practicality, as Gareth Morgan has ably shown.

by KJT on March 10, 2015
KJT

The myth about capital flight, is often used to justify low taxes on wealth.

The fact is when people have enough income to buy goods the capital will return.

Or we can quantitative ease and replace the capital, keeping the profits here.

Money capital owners are to greedy to stay away just because it will be taxed, if there is money to be made.

Much higher tax rates in Aussie has not stopped the skilled from going there.

 

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