Cost and Funding a Basic Income​

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On this page, we will look at estimates for the cost of a range of Basic Income schemes and how these might be funded. This page is for New Zealand but may be relevant to other countries. It is best viewed on a computer screen.

 

Figures given on this page are estimates only. On this page, all references to the "present progress tax system" or to a progressive tax system refer to the present New Zealand progressive 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 census on 6 March 2018 measured the New Zealand population as 4,699,755.

 

In March 2020 Statistics New Zealand announced that the population had reached an estimated 5 million. To make total Basic Income payment estimates as accurate as possible it is necessary to increase the population counts for each age group from 2018 census proportionately to 2020 figures. The results are shown here.

  • Child: 0 to 17 years inclusive:              1,174,540

  • Youth: 18 to 24 years inclusive:              466,180

  • Adult: 25 to 64 years inclusive:            2,598,320

  • Superannuitant: 65 years and over:        760,960

  • Total: 18 to 64 years inclusive:            3,064,500

Who will receive a Basic Income?

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

Will everyone receive the same rate?

 

At present, in 2020, Job Seeker Support for 18 to 24 years is paid at 85% of the adult rate. Paying a Basic Income with a youth rate for 18-24-year-olds at 85% of the adult rate results in just over a 2% reduction in the total cost of paying a Basic Income.

 

Those with special needs will continue to receive additional payments to make their incomes up to existing levels. The extra payments are paid at present and are not an extra cost so are not considered here.

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

 

This page considers the costing for a Basic Income for those aged 18 to 64 inclusive.

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 from the New Zealand government. See details. In the future, it is envisaged that these payments will be converted to Basic Income payments for those under 17 years of age. A child Basic Income is paid to their caregivers. 

 

Superannuitants are not included here as they already receive New Zealand Superannuation which is essentially a Basic Income for those over 65. 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, and current relativities or differences in income for those in need may need to be reassessed.

 

The values of Basic Income given here are after or free of tax because this is the real cost to a government. 

 

Some values suggested for a Basic Income are: $175, $250, $300, and $500 per week. We will consider values in this range.

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?

 

Some 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 are made up to existing levels.


Others advocate a Basic Income large enough to replace all existing welfare payments eliminating 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 special needs and this will result in ethical dilemmas regarding equity issues. Should those with special needs continue to receive additional funding to maintain current relativities but not because they need additional funding?

 

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 welfare system such as poverty traps or problems with the high administrative costs of the welfare system.

Does a Basic Income need to be fully funded?


A fully funded Basic Income is one where the total payments are fully funded by taxes from other sources. In other words, every dollar of payment on a Basic Income is raised through taxes from sources other than those resulting from the Basic Income payments. This might be done by increasing existing taxes on income, increasing the GST rate, or increasing or introducing other taxes such as a property or wealth tax or taxes on transactions.

 

Fully funding in this way is not necessary or realistic. When people receive a Basic Income they spend it on goods and services and the government receives GST on the extra expenditure. The extra money that has been put into circulation also generates extra employment and boosts business profits so the government receives additional tax from income tax and profit taxes. What money the government does not take back in taxes continues to circulate and 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 available for the government to pay out again.

Paying money with a well designed Basic Income scheme ensures a high rate of taxation return to the government as a Basic Income targets money to those who need the money the most and those who need the money the most are also most likely to spend the money boosting local economies and 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. 

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 equal the amount being paid out. The total amount of money required by a government to start a Basic Income working will depend on both how fast a Basic Income is introduced, and the rate the money is returned to the government. The total required to start a Basic Income may be no more than the first year's payments. After the first year, the tax returned may be sufficient to make the Basic Income self-funding. 

What are the savings?

 

There are two principal savings areas.

 

1. Flat tax. 

Converting from the present progressive income tax with current values to a flat tax set at the present maximum tax rate of 33% will increase taxation for everyone except those who have no income. If a Basic Income paid is then paid in conjunction with the conversion to a flat tax, 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 flat tax. Combining a Basic Income with a conversion to a flat tax saves a significant amount of expenditure and the combination of a Basic Income with a flat tax targets the Basic Income to those on low to middle incomes. The total expenditure saved with a conversion to a flat tax depends on the flat tax rate chosen and not on the Basic Income rate.

As an example: using the current maximum tax rate of 33% payable by those on or above a taxable income $70,000 per annum, with a conversion to a 33% flat 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 of $70,000 per annum or greater. Those with taxable income above $70,000 will pay $9,080 extra tax per annum and no more than $9,080 extra tax. Therefore, if people are paid a tax-free Basic Income of $13,000 per annum, those with no income will be $13,000 better off. The additional income received reduces progressively to $3,920 better off ($13,000 less $9,080) for those on $70,000 or greater incomes. Thus, it is misleading to say that you are giving the very wealthy $13,000 when they will only receive an extra $3,920 per annum after the extra tax of $9,080 is paid.

In contrast, if the Basic Income is paid as a non-taxable amount of $13,000 per annum in conjunction with the present progressive tax system, everyone, including those with very high incomes, will retain the full $13,000. Such a system will be much more costly to implement and will reward the wealthy and those who do not need it.

 

If a Basic Income is paid as a taxable amount in conjunction with the present progressive tax system the payment needs to be a taxable amount. The before-tax amount must be chosen so the after-tax amount is $13,000 for those on no income. As other income increases, the after-tax value of the Basic Income reduces. Those on higher incomes, over $70,000 per annum, will still retain 67% of the taxable amount payable as the maximum or marginal tax rate is 33%. This means that the wealthy will retain an extra $9,732 after paying tax or almost 2.5 times the $3,920 they would retain with a flat tax. Again, the cost of a 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 flat tax and a taxable Basic Income paid in conjunction with the present progressive tax will not be so efficient at targeting the Basic Income to those most in need.

 

These examples show that a Basic Income implemented in conjunction with a flat tax is significantly less costly than a Basic Income implemented with the present progressive tax and also shows that a Basic Income with a flat 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 $250 per week and a flat tax of 33% is 45% of the same $250 per week Basic Income implemented with the present progressive tax system.

 

Using a Basic Income paid in conjunction with a flat tax is a much better way of targeting the money to those on lower incomes than paying a Basic Income in conjunction 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 flat tax increasing the cost of the  Basic Income scheme.

 

If the flat tax rate chosen is less than the current maximum tax rate of 33% this will result in a tax cut for those with very high taxable incomes. Flat tax rates higher than 33% will increase the tax on those with very high incomes but will also reduce the extra after-tax income that others 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 flat tax better targets the payments to those on the lowest incomes.

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

 

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

 

  Flat tax    Savings

           Rate      $ billion

    30%       15.19        

    33%       20.02

    36%       24.86

    39%       29.69

For a Basic Income of $250 a week with a 33% flat tax, changing to the flat tax recovers more than half 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 may be used to replace part of the current welfare system and other payments such as student allowances and thus save the government expenditure. 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 table below. Annual savings from a 33% flat tax and Welfare savings are also shown. The right-hand column 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 expenditure such as welfare, savings from a conversion to a flat tax, and in increased government income from taxation, and not quote the figures for the total initial payments in isolation. 

     |   Basic Income Rate      | Initial Expenditure | 33% flat tax savings | Welfare savings |  To find    |

     |  per week | per annum  |     $ billions          |      $ billions             |     $ billions      | $ billions  |

        $175          $9,131              27.98                        20.02                      2.33                 5.63                

        $200        $10,436              31.98                        20.02                      2.67                 9.92

        $250        $13,045              39.98                        20.02                      3.33                16.63  

        $300        $15,653              47.97                        20.02                      4.00                23.95

        $500        $26,089              79.95                        20.02                      6.67                53.26

 

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 flat 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 an increase in GST, a property tax, a comprehensive wealth tax or transaction taxes.

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. As a progressive tax scheme does not achieve the advantage of the extra tax revenue that comes with the conversion to a flat tax and does not target the Basic Income to those on lower incomes as well as a flat tax does, high levels of tax increase are required. If high marginal tax rates arise 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 flat 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 flat 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 a conversion to a 33% flat tax and savings from a partial replacement of the welfare system.

  1. A 4% increase in GST giving a total GST of 19% will raise an additional $8.3 billion or enough to pay for a $175 per week Basic Income. The Basic Income is increased to $182 per week to compensate for the increase in the price of Goods and Services.

  2. 10% increase in GST giving a total GST of 25% will raise an additional $20.74 billion or enough to pay for a $250 per week Basic Income. The Basic Income is increased to $275 per week to compensate for the increase in the price of Goods and Services.

  3. 15% increase in GST giving a total GST of 30% will raise an additional $20.74 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.

An add-on Basic Income 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 problems in the current welfare system such as inefficiency and poverty traps, will not gain the cost and targeting advantages of using a flat tax adding to the cost of the scheme, and they are concerned at the very high GST rates that result and 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 simply 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 leads to 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 flat tax or savings from the partial replacement of the welfare system.

 

  1. A 15% increase in Basic Income giving a total GST of 30% will raise an additional $31.12 billion or enough to fully fund an add-on $175 per week Basic Income that has been increased to $201.25 per week to compensate for the increase in the price of Goods and Services.

  2. A 25% increase in Basic Income giving a total GST of 40% will raise an additional $51.86 billion or enough to fully fund an add-on $250 per week Basic Income that has been increased to $312.50 to compensate for the increase in the price of Goods and Services.

  3. A 30% increase in Basic Income giving a total GST of 45% will raise an additional $62.23 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 flat 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 flat 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 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 flat 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 flat 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 flat 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 October 2020

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