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.
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.