Cost and Funding a Basic Income​


This page uses figures applicable from 1 April 2022.

On this page, we will look at estimates for the cost of a range of Basic Income schemes and show how these might be funded. This page is written for New Zealand and uses New Zealand figures but the principles outlined on this page are similar for other countries.

 

The figures given on this page are estimates only. All references to the "present progressive tax system" or to a progressive tax system refer to the present New Zealand progressive tax system with existing tax rates and thresholds unless explicitly stated otherwise.

 

To estimate the cost and funding of a Basic Income scheme a number of factors must be considered. Some of the topics covered here are covered in more detail on other pages.

The following topics are discussed on this page.

  1. What is the current population?

  2. Who will receive a Basic Income?

  3. Will everyone receive the same rate?

  4. Will children and those who receive New Zealand superannuation be included in the calculation?

  5. What rate or rates will the Basic Income be paid at?

  6. Will the Basic Income be a payment paid in addition to existing payments (an add-on scheme) or fully or partially replace existing welfare payments?

  7. Does a Basic Income need to be fully funded?

  8. What are the savings?

  9. What will the payment totals be?

  10. Increasing Income Tax rates.

  11. Using GST to fund a Basic Income.

  12. The progressive introduction of a Basic Income.

Population

 

The last census on 6 March 2018 measured the New Zealand population as 4,699,755. Statistics New Zealand announced in March 2020 that the population had reached an estimated 5 million, 5,122,600 on 30 June 2021, and 5,127,100 on 31 March 2022.

To make total Basic Income payment estimates as accurate as possible it is necessary to increase the population counts for each age group from the 2018 census proportionately to 2022 figures. The results are shown here.

  • Child: 0 to 17 years inclusive:
    2020 = 1,174,540,
    2021 = 1,203,340,
    2022 = 1,204,397

     

  • Youth: 18 to 24 years inclusive:
    2020 = 466,180
    2021 = 477,611
    2022 = 478,030

     

  • Adult: 25 to 64 years inclusive:
    2020 = 2,598,320
    2021 = 2,662,031
    2022 = 
    2,664,369
     

  • Superannuitant: 65 years and over:
    2020 = 760,960
    2021 = 779,619
    2022 = 780,304

  • Total: 18 to 64 years inclusive:
    2020 = 3,064,500
    2021 = 3,139,642
    2022 = 3,142,400            

Who will receive a Basic Income?

For the calculations on this page, we will assume that all Basic Income payments in the age group from 18 to 64 will be at the same rate. The population figure used will be the 18 to 64 inclusive total.

Will everyone receive the same rate?

From 1 April 2022, the Job Seeker Support rate for 18 to 24 years is 87% of the adult rate. Paying a Basic Income with a youth rate for 18-24-year-olds at 87% of the adult rate results in just under a 2% reduction in the total cost of paying a Basic Income. On this page, it is assumed that all payments in the 18 to 64 range will be at the same rate.

Those with special needs will continue to receive additional payments over and above the Basic Income to make their incomes up to existing levels. These extra payments are paid at present and are not an extra cost with a Basic Income so are not considered in the calculations here.

Will children and those who receive New Zealand superannuation be included in the calculation?

 

This page considers the cost of a Basic Income for those aged 18 to 64 inclusive. It does not include those younger or older than this age range.

A Basic Income for those in the 0 to 17 inclusive age range is not included here. At present families receive support for their children aged under 18 from the New Zealand government. See details. In the future, it is envisaged that payments for those under 18 will also be converted to Basic Income payments. A child's Basic Income will be paid to the child's caregiver as is the case with the present family support payments. 

 

Those over 65 are not considered here as they already receive New Zealand Superannuation, which is a Basic Income. For further discussion on New Zealand Superannuation see: New Zealand Superannuation.

What rate or rates will the Basic Income be paid at?

Basic Income advocates have suggested a range of values for a Basic Income. The higher the amount paid the more the savings in welfare payments will be, but both the upfront costs and the difficulty of funding increase. High Basic Income rates will distort current relativities or differences in income for those in need, and this needs careful consideration.

 

The values of Basic Income given here are net or after-tax values, that is, free of tax, because the net value is the real cost to a government. 

 

Some values suggested for a Basic Income are: $175, $250, $300, $315, and $500 per week. We will consider values in this range. The adult Jobseeker support payment from 1 April 2021 is $315.00.
 

For more information on the size of a Basic Income see: How big will a Basic Income be?

Will the Basic Income be a payment paid in addition to existing welfare and other payments (an add-on scheme) or partially or fully replace existing payments?

 

Most Basic Income advocates suggest that a Basic Income should replace all welfare payments of equal or less value in order to reduce the cost of a Basic Income. A Basic Income of this nature is paid with additional add-on welfare payments for those with special needs to ensure that all incomes that are greater than the Basic Income level are made up to existing payment levels. This ensures that no person is worse off with a Basic Income. Alternatively, those with special needs may be paid a larger Basic Income.


Others advocate a Basic Income large enough to replace all existing welfare payments. This, they say, will eliminate the need for the welfare system and the need for any additional welfare payments. However, this means a higher cost for the Basic Income scheme with increased funding difficulties and as a consequence, those with special needs will receive no more than those without. This results in ethical dilemmas regarding equity issues.

 

At present those with special needs receive additional funding because they have additional costs. Should those with special needs continue to receive additional funding to maintain current relativities but not because they need additional funding? If they were to receive additional funding, any objective to totally eliminate the welfare system would not be achieved.

 

Others see a Basic Income as being paid as an add-on to the existing welfare system. An add-on scheme is more expensive to implement as it does not reduce the current welfare expenditure and does not solve any of the existing problems with the current welfare system such as poverty traps, and high administrative costs.

Does a Basic Income need to be fully funded?


Because Basic Income recipients spend the money they receive, it will generate tax revenue through GST and income and profit taxes as the money circulates. This revenue can be used to fund subsequent Basic Income payments so a Basic Income does not need to be fully funded.

 

A fully funded Basic Income is one where all Basic Income payments are fully funded by taxes from other sources. In other words, every dollar spent on Basic Income payments is raised from taxes on activities other than economic activities resulting from the Basic Income payments. This might be done by increasing existing income taxes, increasing the GST rate, or increasing or introducing other taxes such as a property or wealth tax or taxes on transactions not subject to GST at present. However, as indicated in the previous paragraph, this is unnecessary. 

 

Fully funding in this way is not necessary or realistic. When people receive a Basic Income they will spend it on goods and services and the government will receive GST on the expenditure generated by the Basic Income. Any extra money that has been put into circulation through the Basic Income payments will generate extra employment and boost business profits so the government receives additional tax from income tax and profit taxes.

 

What money the government does not take back in taxes when the first round of Basic Income payments are spent remains in circulation. The remaining money is now in the hands of people other than those who originally received the payments. Those who now have the money can spend it and when they do the government will take back a second amount of tax from GST, income tax, and profit tax. The money left after the second round of expenditure will continue to circulate and the process is repeated. Each time it circulates the government takes a portion back as taxes. Eventually, more than 99% is returned to the government. As money is returned to the government it is immediately available for the government to pay out again as Basic Income payments.

 

The second and each subsequent Basic Income payment will similarly create a series of progressively reducing GST and other tax returns to the government. The total tax that the government collects in each period will be the sum of the tax received on each of the preceding Basic Income payments for that period. With time, as more payment periods have passed, the total tax collected in each payment period will increase until it reaches a maximum equal to the Basic Income payment for a period. This will, after an initial introductory period, make a Basic Income almost entirely self-funding.

A well-designed Basic Income scheme ensures that money is targeted toward those who need the money the most - those on lower incomes. This ensures a high rate of taxation return to the government as those who need the money most are also most likely to spend the money quickly, boosting local economies and maximizing the GST and other tax returns to the government. 

 

How fast the money is returned to the government depends on the tax rates and also on the speed the money circulates - the velocity of money. The higher the tax rates or the faster the money circulates, the faster money is returned to the government as taxes. Those on lower incomes will spend a Basic Income quickly ensuring a higher velocity of money while those on higher incomes tend to accumulate money and spend it at a slower rate, slowing the velocity of money and consequently reducing government annual incomes.

What this means is that the government must fund the initial Basic Income payments but over time the money the government receives back in taxes will increase and soon almost equal the amount being paid out. The total amount of money required by a government to start a Basic Income working will depend on how fast a Basic Income is introduced, and the rate money is returned to the government.

 

Calculations for one model show that the total new money required to implement a Basic Income is about 50% of the first year's total payments as tax is returned soon after the first payment is made. For the second year, about 8% of the total year's payments are required. After the first two years, the tax returned to the government in each payment period is sufficient to make the Basic Income over 99% self-funding. 

A switch from a progressive tax to a proportional tax for those who receive a Basic Income will boost government tax revenue as the Basic Income is introduced. This will counter the extra cost required in the first year and may lead to government surpluses in subsequent years.

What are the savings?

 

There are two principal savings areas.

 

1. Proportional tax. 

Combining a Basic Income with a conversion to a proportional tax targets the Basic Income to those on low to middle incomes while significantly increasing tax revenue. Converting from the present progressive income tax with current values to a proportional or uniform tax set at say 33%, the present marginal tax rate for those earning between $70,000 and $180,000, will increase taxation for everyone except those who have no income. If a Basic Income is paid in conjunction with a requirement that those who receive it will pay proportional tax on all other income, all people will be better off if the Basic Income payments are greater in value than the maximum increase in tax resulting from the conversion to a proportional tax. The total net expenditure saved with a conversion to a proportional tax depends on the proportional tax rate chosen and not on the Basic Income rate.

An example: using the current tax rate of 33% payable by those with a taxable income between $70,000 per annum and $180,000, but converting to a 33% proportional tax.

Anyone on no income will pay no additional tax. The additional tax paid increases as taxable income increases up to a maximum extra payment of $9,080 per annum for a taxable income between $70,000 and $180,000 p.a. Those with taxable income above $70,000 will pay $9,080 extra tax per annum and no more than $9,080 extra tax until their income exceeds $180,000.

 

  • Paying a tax-free Basic Income with a proportional tax.
    If people are paid a tax-free Basic Income of $315 per week or $16,436 per annum, those with no income will be $16,436 per annum better off. The additional income received will reduce progressively to $7,356 better off ($16,436 less $9,080) for those on $70,000 or greater incomes. Thus, it is misleading to say that you are giving the very wealthy $16,436 when they will only receive an extra $7,356 per annum after the extra tax of $9,080 is paid.
     

  • Paying a tax-free Basic Income with a progressive tax.
    In contrast to the above, if the Basic Income is paid as a non-taxable amount of $16,436 per annum in conjunction with the present progressive tax system, everyone, including those with very high incomes, will retain the full $16,436. Such a system will be significantly more costly to implement and will unduly reward the wealthy and those who do not need the Basic Income payments.

    Consequently, if a Basic Income is paid in conjunction with the present progressive tax system the payment needs to be a taxable amount.
     

  • Paying a taxable Basic Income with a progressive tax.
    A gross or before-tax payment of $18,730 would give an after-tax amount is $16,436 for those with no income.

    With a progressive tax and a taxable Basic Income, as other income increases, the after-tax value of the Basic Income reduces. Because those on incomes between $70,000 per annum and $180,000 have a marginal tax rate of 33% they will retain 67% of the taxable amount payable, $18,730. This means that those in this income range will retain an extra $12,549 after paying tax. This is 1.7 times the $7,356 they would retain with a proportional tax.

    Again, the overall cost of a taxable Basic Income system paid in conjunction with the present progressive tax system will be much higher than that of a Basic Income paid in conjunction with a proportional tax. A taxable Basic Income paid in conjunction with the present progressive tax will not be as efficient at targeting the Basic Income to those most in need by using a proportional tax on other income.

     

  • Conclusion.
    These examples show that a Basic Income implemented in conjunction with a proportional tax is significantly less costly than a Basic Income implemented with the present progressive tax and also shows that a Basic Income with a proportional tax is much better at targeting the money to those most in need. 

A Basic Income with the present progressive tax is just far too expensive. The cost of a Basic Income scheme implemented with payments of $315 per week and a proportional tax of 33% is just 60% of the same amount implemented with the present progressive tax system.

 

Using a Basic Income paid in conjunction with a proportional tax is a much better way of targeting the money to those on lower incomes than paying a Basic Income with the present progressive tax. With the present progressive tax, people on higher incomes retain a significantly higher proportion of the Basic Income paid out than they would with a proportional tax, thus increasing the cost of the  Basic Income scheme while slowing the velocity of money.

 

If the proportional tax rate chosen is less than the current marginal tax rate of 33% for incomes in the $70,000 to $180,000 range, it will result in a tax cut for those with incomes over $70,000 in addition to the extra money that they will receive from a Basic Income. Proportional tax rates higher than 33% will increase the tax on those with incomes over $70,000 but will also reduce the extra after-tax income that others on lower incomes might expect from a Basic Income.

Increasing the tax rates of a progressive tax system to fully fund a Basic Income is another possibility but the principle remains that a conversion to a proportional tax better targets the payments to those on the lowest incomes.

Another suggestion is that, rather than a standard proportional tax rate of 33% on all income, a proportional tax rate of 33% is used for all income up to $180,000, and the current higher rate of 39% is used for all income over $180,000. This two-stage tax system avoids a significant tax cut for those earning over $180,000 as well as an undue benefit of a Basic Income for those on very high incomes. 

For more discussion on taxation see: Taxation and Basic Income.

 


Additional tax income from conversion to a proportional tax.

Here are some examples of the expected additional tax the government will receive with a conversion from the present progressive tax to a proportional tax.

 

     Proportional   Saving

     tax

           Rate      $ billion

    30%       15.58        

    33%       20.53

    36%       25.49

    39%       30.44

With a Basic Income of $315 a week, changing to a proportional tax of 33% recovers almost 40% of the cost of the Basic Income while targeting the Basic Income toward those most in need.

 

With a Basic Income of $280 a week, changing to a proportional tax of 33% recovers more than 48% of the cost of the Basic Income while targeting the Basic Income toward those most in need. See the figures below.

2. Welfare and other Savings.

A Basic Income used to replace part of the current welfare system and other payments such as student allowances will save government expenditure on these items. The value of the welfare and other savings will depend on the rate that a Basic Income is paid at. The higher the Basic Income the greater the potential savings, but the greater the perceived inequities are likely to be. As a general rule, a Basic Income should be large enough to replace the basic Jobseeker Support payment.


Those with special needs are usually paid more than others without special needs. If a high Basic Income rate is high enough to replace the payments for those with special needs the margins for those with special needs will be eliminated and injustice will be perceived. Continuing to make additional payments for those with special needs in addition to a high Basic Income reduces the savings from replacing the welfare system. 

 

Conservative estimates of the savings have been included in the section below on "What will the Payment totals be".
 

What will the payment totals be?

The total annual Basic Income payments for various values of Basic Income are shown in the examples below. Annual savings from a 33% proportional tax and Welfare savings are also shown. The bottom line shows the additional revenue required for a government to fully fund a Basic Income.


When considering these figures it is important to remember that government expenditure on a Basic Income will result in savings in other government expenditures such as welfare, savings from a conversion to a proportional tax, and increased government income from taxation resulting from the expenditure, and not quote the figures for the total initial payments in isolation. Other government savings resulting from Basic Income but not quantified here come from lower crime rates and improved health. a 33% proportional tax and welfare savings are considered. 

The following examples with a range of Basic Incomes (BI) show the initial expenditure and the remainder to find after savings from a change to proportional tax and welfare savings are realised.

Example 1
BI = $175 p.w. or $9,131 p.a.
Initial Expend.: $28.69 b. p.a.
Porportional tax saving: $20.53 b. p.a.
Welfare savings: $2.33 b. p.a
Remainder: $5.83 b. p.a.


Example 2

BI = $200 p.w. or $10.436 p.a.
Initial Expenditure: $32.79 b. p.a.
Proportional tax saving: $20.
.53 b. p.a.
Welfare savings: $2.67 b. p.a.
Remainder: $9.53 b. p.a.

Example 3

BI = $250 p.w. or $13,045 p.a.
Initial Expenditure: $40.99 b. p.a.

Proportional tax saving: 20.53b. p.a.

Welfare savings: $3.33 b. p.a.
Remainder: $17.13 b. p.a.

Example 4

BI = $280 p.w. or $14,610 p.a.

Initial Expenditure: $45.91 b. p.a.

Proportional tax saving: 20.53 b. p.a.

Welfare savings: $3.72  b. p.a.

Remainder: $21.66 b. p.a.

Example 5

BI = $300 p.w. or $15,653 p.a.

Initial Expenditure: $49.19 b. p.a.

Proportional tax saving: 20.53 b. p.a.

Welfare savings: $4.00  b. p.a.

Remainder: $24.66 b. p.a.

Example 6

BI = $315 p.w. or $16,436 p.a.

Initial Expenditure: $51.65 b. p.a.

Proportional tax saving: 20.53 b. p.a.

Welfare savings: $4.02  b. p.a.

Remainder: $27.10 b. p.a.

Example 7

BI = $500 p.w. or $26,089 p.a.

Initial Expenditure: $81.98 b. p.a.

Proportional tax saving: 20.53 b. p.a.

Welfare savings: $6.67  b. p.a.

Remainder: $54.78 b. p.a.

Because those who receive a Basic Income will spend all or part of the Basic Income, this will generate additional government revenue through GST and other taxes such as income and profit taxes. It may not be necessary to find any additional government revenue after the savings from the conversion to a proportional tax and welfare savings are accounted for and a budget surplus may soon be achieved. 

 

However, if additional government revenue is required it might be raised through other areas of taxation while still leaving most people better off. The options most often suggested are a property tax, a comprehensive wealth tax, transaction taxes, or an increase in GST.

Increasing Income tax rates.

One method suggested to bring in any additional revenue required is to use a progressive income tax scheme with increased tax rates and changes to the tax thresholds. However:

 

As a progressive tax scheme does not achieve the advantage of the extra tax revenue that comes with the conversion to a proportional tax and does not target the Basic Income to those on lower incomes as well as a proportional tax does, high levels of tax increase are required.

When high marginal tax rates occur they are known to lead to work aversion by those on low to mid incomes and to tax avoidance by the wealthy.

 

Consequently, this method of generating additional tax revenue is not recommended.

Using GST to fund a Basic Income.

 

An increase in Goods and Services Tax (GST) or Value Added Tax (VAT) has been suggested as a means of making up the shortfall after conversion to a proportional tax and savings from partially replacing the welfare system.

 


Other advocates see an increase in GST as a means to fully fund an add-on Basic Income scheme without the need to convert to a proportional tax or partially replace the welfare system. Examples of both options are outlined below.

 

With an increase in GST, the Basic Income must also be increased to ensure that those on lower incomes are still able to purchase the same amount of goods and services.

 

Partial funding with GST. 

The following three examples assume savings from a conversion to a 33% proportional tax and from a partial replacement of the welfare system.

A 3% increase in GST giving a total of 18% will raise an additional $7.48 billion or enough to pay for a $175 per week Basic Income. The Basic Income is increased to $180.25 per week to compensate for the increase in the price of Goods and Services.

10% increase in GST giving a total of 25% will raise an additional $25 billion or enough to pay for a $250 per week Basic Income. The Basic Income is increased to $276 per week to compensate for the increase in the price of Goods and Services.

15% increase in GST giving a total GST of 30% will raise an additional $37 billion or enough to pay for a $300 per week Basic Income. The Basic Income is increased to $345 per week to compensate for the increase in the price of Goods and Services.


Can an add-on Basic Income be fully funded with a GST alone?

 

Some GST advocates suggest a Basic Income fully funded from GST might be introduced as an add-on scheme. Those who advocate this method of funding argue that a greater proportion of the population will benefit from this method of funding.

 

Others are concerned that an add-on scheme will not eliminate the current problems with the welfare system such as inefficiency and poverty traps, will not gain the cost and targeting advantages of using a proportional tax adding to the cost of the scheme, and that the very high GST rates that result will have consequential and unintended problems arising from the significantly increased price of goods and services.

Disadvantages of high GST rates.

High rates of GST tend to target and disadvantage those on lower incomes more than those on higher incomes. This is because those on lower incomes spend the majority of their income on goods and services in their home countries and local areas while those on higher incomes spend a smaller proportion of their income on goods and services and invest the remainder, or they spend their income, including the Basic Income, on overseas trips where they can avoid the unusually high GST rates in their home countries. This leads to an increased accrual of wealth by the wealthy. The rich get richer.

High GST rates will increase the cost of high-value items such as buses and aircraft and this will result in higher fares. Higher fares impact on those on lower incomes to a greater extent than those on higher incomes. 

 

Those who are concerned at the problems that arise from a GST only funding model prefer to see taxation spread more widely over a number of tax options. 

Examples of add-on Basic Income schemes fully funded from GST follow. 
 

In the following three examples the Basic Income is paid without converting to a proportional tax or savings from the partial replacement of the welfare system.

 

A 14% increase in GST giving a total GST of 29% will raise an additional $34.93 billion or enough to fully fund an add-on $175 per week Basic Income that has been increased to $199.50 per week to compensate for the increase in the price of Goods and Services.

A 20% increase in GST giving a total GST of 35% will raise an additional $49.9 billion or enough to fully fund an add-on $250 per week Basic Income that has been increased to $301 to compensate for the increase in the price of Goods and Services.

A 30% increase in GST giving a total GST of 45% will raise an additional $74.84 billion or enough to fully fund an add-on $300 per week Basic Income that has been increased to $390.00 to compensate for the increase in the price of Goods and Services.

 

These examples show that a scheme that uses a proportional tax and partial replacement of the welfare system will enable higher levels of Basic Income payments for a given value of GST increase than a scheme that retains the present progressive tax or an add-on scheme.  An add-on system is expensive and gives more money to those who do not need it.

Thus, increasing GST by 10% to a final rate of 25% will fund a Basic Income of $250 per week (increased to $275) when the Basic Income is paid with a conversion to a proportional tax and with welfare savings, but a 25% GST increase to a final rate of 40% is required to fund a Basic Income of $250 per week (increased to $312.50) when the Basic Income is paid as an add on scheme. A GST of 25% is within the range of GST rates charged in other countries but 40% is unusually high.

The progressive introduction of a Basic Income.

A Basic Income paid in conjunction with a proportional tax can be introduced progressively. It does not have to be introduced overnight. At the present, the government operates a number of different tax rates simultaneously. People nominate the rate they will be taxed at, primary or secondary when they sign up with a new employer.

 

A Basic Income can be introduced progressively and voluntarily when people who sign up for Basic Income are required to also agree to a proportional tax on all other income. This smooths the transition to a Basic Income system. Money from the first payments made will be generating tax returns for the government smoothing the introduction of a Basic Income for those who sign up later. A progressive introduction of a Basic Income lowers the initial sum of money that a government must find to start a Basic Income scheme but may require the government to spread the initial funding over a longer period of time. For more information see: frequently asked questions - Will Basic Income be compulsory?

End

Revised 9 Oct 2020, 4 Oct 2021, 19 Jun 2022.