Sunday, December 19, 2004

Tax and Welfare - A Window of Opportunity

In an earlier post I mentioned that I was reworking figures on Universal Basic Income schemes taking into account the impact of the Working for Families package. I have now completed the analysis and you can download the results from this spreadsheet and Word document. The interesting thing is that it now looks as though the transition could be made (ie in FY 2008) to a Basic Income system with almost no one losing from the transition. The exception is income-splitting married superannuitants with more than $40,000 other taxable annual income each and (even then the worst case is an increase of $110 at an "other income" of $60,000 each - compared to $360 if we reintroduced the surtax). This is for a system that automatically includes a universal student allowance, reduces mean effective tax rates for most New Zealanders to 39% (from typically about 50-70%, marginal can be over 90% see SageNZ), can be converted to a strict UMR system with all income subject to an effective marginal rate of 36% (33% if we index NZ super to cpi rather than average wage) in another 20 years of normal growth).
The Working for Families package did a lot of good things but has generated a ruinously high set of marginal effective rates for families on moderate to higher incomes. Something has to be done to fix this and it looks like a Basic Income / Flat Tax option could be the answer.

UPDATE 22/12/2004
If you're not familiar with the concepts of Universal Basic Income (aka Basic Income, Negative Tax or Universal Marginal Rate) I'll try and give a brief outline (you can download the documents on the sidebar if you want more details. Basic Income systems look at the combined effect of Welfare (menas-tested benefits) and Income Tax and "reanalyze" it into a Basic Income component (the level of benefit paid to someone with zero earnings) and an "effective income tax" which includes both tax and abatement of the benefit. To take a simplified example imagine income tax was charged at 20% for the first $20,000 and 30% thereafter and that unemployment benefit was paid at $12,000 per year abated by 60% of earned income. Then under a Basic Income analysis we would say the combined scheme had an effective tax rate of 80% (20% tax plus 60% abatement) for the first $20,000 and 30% thereafter. Under a Universal Marginal Rate (or Basic Income / Flat Tax) scheme we would introduce a single flat tax rate of 40% (or whatever was needed to balance the budget. The graph above shows the effective tax rates that will apply to a number of different NZ families by 2008. Note that these are the AVERAGE effective rates. The four child family earning $80,000 doesn't pay 76.8% on just the last few dollars (as it happpens their top marginal effective rate is 88%) they pay $61456 total.


Blogger Rich said...

Excellent work!

For me one major advantage of a UBI scheme is that the possibility for abuse (and hence the need for a bureaucracy to limit such abuse) is much reduced.

One unanswered question is whether one or other of the following would happen:
a)with no WINZ to chivvy them, more people would become economically inactive.
b)without the loss of benefit looming, more people would move into part-time work
c)people in "informal" part time work would move into the formal sector

I'd suspect that many on the right would arge that (a) would predominate and use this to argue against the concept of a UBI.

BTW, are there any statistics on the number of NZ residents who are neither employees, superannuants or beneficiaries - e.g. live off savings (or drug dealing)?

22 December 2004 at 4:24 PM  
Blogger Greyshade said...

I suspect there will always be a place for somewhere like WINZ to handle genuine emergencies/exceptions. There are always some people who have trouble managing even quite high incomes and people who suffer misfortune (eg redundancy) and need temporary support. The key difference is that the focus is then on getting the beneficiary off the benefit and functioning independently. The BI allowances, on the other hand, are entitlements and the only management required is to ensure that the taxpayer get their full entitlement.

Winz also provides a useful(?) service to people seeking work and could administer a work test if we decide we need one. It's my personal opinion that most people will be happy to work given the opporunity to keep a fair share of their earnings but if this is a concern it's not difficult to require a "work test" of some sort (working or actively seeking work) to qualify for some part of the allowances or for a negative net balance. The sensible thing would be to see what happens and act accordingly.

22 December 2004 at 6:13 PM  
Blogger Greyshade said...

re Stats for Non-employed. Best source is probably Household Survey but unfortunately main breakdowns are by individual (age, ethicity, region, sex, etc). Family breakdown only gives employed or not employed by family type. This does tell us that about 12% of couples with no dependants are not working along with 25% of singles with no dependantsbut there's no way of knowing how many of those singles are students or how many of the couples have one partner over 65.

22 December 2004 at 7:46 PM  
Blogger Rich said...

Had you assumed in your financial calculations that the UBI would be payable to all NZ residents over 18?

One piece of analysis (that would be quite hard to do) would be to work out the effect of UBI on the public finances over the economic cycle. Currently in a recession taxes fall and benefit costs increase - hence the need for a prudent government to maintain surplus during a boom (as you may have noticed). I wonder whether this effect would be more or less pronounced under a UBI - I suspect only a PhD in Economics could tell you!

23 December 2004 at 1:47 PM  
Blogger Greyshade said...

The full details of the calulations are in the spreadsheet which you can download from the post or the sidebar. The outgoings on the allowances are calculated by multiplying the allowances by the eligible population. The individual allowance therefore does include all over 18's regardless of whether they are students or not. The child allowances apply to younger people and are (normally) paid to their parents.
Actually the calulations under different economic scenarios are quite simple. The outgoings should be near enough to independent of economic performance and the tax base is the only thing expected to change - it should be proportional to GDP.

23 December 2004 at 2:31 PM  
Anonymous Anonymous said...

OK the real differences seem to be
1) a probably increace in the efficiency of incentives to work for the poor. (it is possible that a variable system would create more efficient incentives but unless we put a lot of effort into developing such a system it is unlikely we would stumble across it)
2) Rich people now get paid for having children etc.
3) one of the tools (in a social and a practical manner)for encouraging unemployed to work is removed - this should result in a net reduction in employed people - unless people are irrational.

24 December 2004 at 12:12 PM  
Blogger Greyshade said...


1) Not just for the poor to work. Don Brash (and others) have also had abit to say about the 91% marginal rates on middle-income families. I agree a variable rate system could theoretically be more efficient than a flat (under some theories) but the one we have now certainly isn't.

2) Rich people will pay less net tax if they have children. A married couple with four children earning $200,000 a year have less "ability to pay" than a single person with no dependants earning $200,000 a year and this should be recognised.

3) I assume you're referring to WINZ and the ability to withdraw the benefit - see my earlier reply to Rich.

24 December 2004 at 2:12 PM  
Blogger Genius said...

OK after a bit of consideration I think your idea sounds good...
So when do we get to protest about it? (I mean the lack of it)

25 December 2004 at 9:27 AM  
Blogger Greyshade said...

That's a very good question. I sent a copy of an earlier (pre-budget) UMR proposal to all political parties in Parliament at the time. I got a lengthy and quite supportive response from Peter Dunne and have sent him a copy of the update (along with Keith Rankin - see I'll send something out to the other parties in due course. If you or any other reader have influence with any party then it would be great if you could use it.

There is a widespread misconception that Basic Income policies are left/liberal but, in fact, they are equally compatible with right wing policies (typically with lower allowances and tax rates). At the end of the day the Basic Income analysis is just "Truth in Tax Rates" and UMR is a flat tax system based on true tax rates. It minimizes bureaucracy and government microcontrol of detail. It may actually be resisted by some on the left for precisely those reasons or because -

1) there is a misconception that increasing the margin between working and beneficiary standards of living undermines equality and increases "relative poverty"

2) the fact that wages are no longer the sole source of "acceptable family incomes" undermines trade unions and allows employers to evade their duty.

Anarcho-liberals, pragmatists and right-wing liberals who think about it will probably have no trouble accepting that UMR is just a good idea whose time has come.

26 December 2004 at 12:47 PM  
Blogger Genius said...

> If you or any other reader have influence with any party then it would be great if you could use it.

sadly no.
But I can jump up and down with a placard with the best of them ;)

28 December 2004 at 12:35 AM  
Blogger Genius said...

Does any other country have such a system?

28 December 2004 at 12:39 AM  
Blogger Greyshade said...

Genius - I don't know of any other country with a Basic Income (or negative tax or whatever) but there is a fair body of literature on the subject. Keith Rankin's site ( is a useful reference to NZ Basic Income.

28 December 2004 at 12:02 PM  
Blogger Genius said...

Shall I take it then that there are various people saying things - but not a critical mass to actually do anything?

I guess you need to convert a political party (which I note you are trying).. Or make one - at least then it would get some airplay.

29 December 2004 at 12:49 PM  
Blogger Make Tea Not War said...

Brazil has recently introduced a universal guaranteed basic income. I think its the first place in the world- I'm not sure on how its set up though.

30 December 2004 at 2:26 PM  
Blogger Genius said...

Maybe we need a "global universal basic income" it could be a good starting point for bringing governments together. It would also go well with harmonized tax rates.

I suggest it would not work well in the worst countries (because no way to distribute it) but you could start adding the OECD countries first. Including whatever PPP adjustments etc as required.

10 January 2005 at 11:43 AM  
Blogger Greyshade said...

Make Tea...
Brazil is interesting example. I suspect it's a minimum income system (ie means tested) rather than universal but even so.

Now that IS an interesting concept in spite of practical difficulties. After all a BI of $US1000 per year would make a huge difference to poor countries but be just about affordable for rich countries particularly as the relative population of richer nations increases over this century. EEC is probably the most likely place to get a near-term implementatio by agreement.

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