How big will a Basic Income be?

 


This page looks at the question of the size of a Basic Income. 

  • 1 July 2021 rates are used.

 

Several possible levels for a Basic Income are considered on this page.
BINZ does not promote any particular level of Basic Income. 
 
  • International Basic Income experts recommend Basic Income payment levels in the range of 20% to 30% of GDP per capita, or alternatively, 25% of GDP per capita.
     
  • As of April 2021, the New Zealand GDP per capita was NZ $57,376. 
    • Assuming a proportional tax of 33%, this gives an annual Basic Income range of:
      • $11,475 to $17,213 before tax and $7,688 to $11,532 after tax. 
    • The equivalent weekly payments are:
      • $220 to $329 before tax or $147 to $221 after tax. 
         
  • For comparison, the 2021 adult jobseeker support rate payable from 1 July 2021 is:
    • Before-tax $314.73 per week or $16,422.00 per annum or
    • after-tax or tax-free: $278.50 per week or $14,531.75 per annum.
    • In addition, those on jobseeker support are entitled to a tax-free accommodation support payment of $70, $80, $105, or  $165 per week depending on the area where they live. This is equivalent to an additional:
      • $4,081.00 to $9,619.50 p.a. gross or before-tax or
      • $3,652.50 to $8,609.46 p.a. net or after-tax or
      • $70 to $100 per week net or tax-free.
    • When the jobseeker support rate and accommodation supplement are added, the total payments are: 
      • $20,074.70 p.a. to $25,031.60 p.a. gross or before-tax or
      • $18,184.25 to $23,141.20 p.a. net or tax-free or
      • $348.50 and $443.50 per week net or tax-free or
      • 51% to 65% of the minimum wage.
         
  • The present New Zealand minimum wage is $20 per hour before tax.
    • This is equivalent to:
      • $800 per week or $41,742 p.a. gross or before -tax
      • $679 per week or $35,417 p.a. net or tax-free.
         
  • Various alternatives for a Basic Income have been suggested. The most common proposals are:
    1. A minimal payment of $175 per week.
    2. Convert the existing jobseeker support payments to Basic Income payments. This may be done with or without the accommodation supplement included.
    3. Choose a nice round figure.
    4. Larger payment rates.
    5. Basic Income is paid in addition to existing welfare payments. 
       
These alternatives are discussed in more detail below starting with the lowest first.
1.  A minimal payment of $175 per week.
 
  • A Basic Income of $175 per week after-tax coupled with a 33% proportional tax on all other income has been suggested.
     
    • $175 per week is just a little more than the $174.14 required to offset the extra tax paid by those earning over $70,000 p.a. and less than $180,000 p.a. if or when the present progressive tax is replaced with a proportional tax of 33%. 
    • The figure of $175 per week is chosen as it is a nice round figure and a little more than the $174.14.
    • The tax rate of 33% is the maximum tax rate paid on income over $70,000 and less than $180,000 with the current progressive tax system.
       
  • A payment of $175 is also suggested because it gives a low-cost Basic Income suggested as a first value for the introduction of a Basic Income and allowing for the value to be increased at a later date.
     
  • With a Basic Income of $175 per week, those who are on jobseeker support at present will still require additional payments to increase their incomes to the current jobseeker support levels.
     
    • As a consequence administration costs remain higher than if the second alternative is adopted.
       
  • Because the $175 rate is linked to the present progressive tax system it will not be indexed with inflation.
     
    • Consequently, as jobseeker support increases each year with inflation but the $175.00 level is fixed the additional payment required to bring those receiving a Basic Income of $175.00 per week up to the jobseeker support level must be increased each year to keep up with inflation.
    • This will progressively erode the value of the Basic Income component as a percentage of the total income received by individuals on jobseeker support and over time erode the advantages of having a Basic Income.
    • Similarly, a fixed $175.00 per week Basic Income will progressively reduce as a proportion of total income for other income earners as inflation occurs and erode the advantages of having a Basic Income.
 
  • If the $175 is indexed with inflation it will cease to be a nice round figure and costs will rise as those with incomes over $70,000 p.a. will receive greater net income from the Basic Income.
2.  Convert jobseeker support payments to Basic Income payments.
 
  • A second alternative is to replace existing jobseeker support payments with Basic Income payments of the same after-tax value.
     
  • This rate will eliminate jobseeker support payments and significantly reduce administration costs.
     
  • The present levels for jobseeker support fit within the international recommended levels for a Basic Income.
     
  • To maintain the value of the payments, the Basic Income payment rate must be increased each year to keep up with inflation.
     
  • Because a Basic Income is paid to everyone, all welfare payments that are currently lower than the Basic Income will be replaced with the Basic Income. This includes student allowances.
     
  • Those on welfare benefits that are higher than jobseeker support will still require additional payments to bring their income levels up to present levels. Alternatively, they may qualify for a higher level of Basic Income. For instance, those with special needs could qualify for a higher level of Basic Income paid to those with special needs. 
     
  • Assuming a proportional tax of 33%, those with incomes over $70,000 p.a. who receive a Basic Income will receive an after-tax payment that increases by a dollar for each additional after-tax dollar that the Basic Income exceeds $175. 
     
  • For those with earnings over $180,000 per annum, the current 39% marginal tax rate could be retained if considered desirable. 
     
  • There are two possible ways to convert jobseeker support payments to a Basic Income. The jobseeker support without the accomodation supplement is converted to a Basic Income or alternatively the jobseeker support and accomodation supplement are added together to give a Basic Incomme value. 
     
  • A Basic Income without the accomodation supplement. 
    While the Basic Income will replace jobseeker support payments, other payments that those on jobseeker support receive such as the accommodation supplement will remain unaffected and must be paid in addittion to the Basic Income.
    • This option is a lower cost Basic Income than a Basic Income with the accomodation supplement included but will be a more complex sceme to administer.
    • Additional payments such as accomodation supplement will remain available to those who are eligible to receive them at present.
    • All additional payments must be increased with inflation to maintain their value.
    • Retaining the accomodation supplement and other payments as they are at present will result in administration costs to ensure the correct payments are made and to ensure that they are correctly abated.
    • Manual reporting of incomes is required at present to ensure that accomodation supplements are abated at the correct rate and this requirement well remain. 
    • At present accomodation supplement is abated from the first dollar earned so retaining accomodation supplements will not completly eliminate the poverty trap. 
       
  • A Basic Income with the accommodation supplement included.
    With this proposal, the value of the accomodation supplement is added to the jobseeker support to give a higher value Basic Income. This occurs at present with New Zealand Superannuation.
    • Adding the Basic Income at a single higher rate to produce a uniform Basic Income rate for the country is recomended and will give the most benefits from a Basic Income.
    • As there are four different rates of accomodation supplement dependent on the area where a person lives, four different rates of Basic Income will result if the principal of different rates depending on area is retained.
    • Four different Basic Income rates depending on the area will complicate the Basic Income scheme and require that the Basic Income payment rate is changed every time a person shifts from one area to another.
    • Problems will occur if a person moves from a high accomodation rate area to a lower area and forgets to report the move, or if a person frequently changes from one area to another.
    • Alternatively:
      • the accomodation supplement could be added at the maximum rate only.
        • This results in a uniform Basic Income payment rate for the whole country.
        • A uniform Basic Income will eliminate most, if not all, administration costs associated with the payment of a seperate accomodation supplement.
        • Poverty traps are eliminated.
        • A uniform Basic Income will encourage people to live in or move to regional areas, boost regional economies, and help counter urban drift.  
      • the accomodation supplement could be added at an intermediate rate.
        • Only those on low incomes living living in high accomodation cost areas would need to apply for an accomodation supplement. 
        • Administrative costs accotiated with manual reporting of incomes and abatements are not completly eliminated and poverty traps will remain for those who still receive and accomodation supplement.
    • If the accomodation supplement is included at the maximum rate only the need for those on low incomes to report any additional income earned is eliminate. 
    • Adding the accommodation supplement at the higher rate will result in a higher level of Basic Income and a more expensive scheme but will eliminate the need to pay accommodation supplements to anyone who has no full time employment and eliminate all the administration costs that go with this. Administration costs are considerably reduced or eliminate.
3.  Use a nice round annual figure to replace jobseeker support.
 
  • Some advocates suggest a nice round annual figure for the introduction of a Basic Income.
    Examples using net or after-tax payment rates that have been suggested include:
     
    • $12,000 p.a. ($230 p.w.). This is less than the current jobseeker support rate.​
    • $13,000 p.a. ($249 p.w.). This is less than the current job seeker support rate.
    • $13,500 p.a. ($258 p.w.). This is less than the current job seeker support rate.
    • $14,000 p.a. ($268 p.w.). This is less than the current job seeker support rate.
    • $14,500 p.a. ($278 p.w.). This is just 50 cents per week less than the current jobseeker support rate.
    • $15,000 p.a. ($287 p.w.). This is $8.50 a week more than the current jobseeker support rate.
    • $15,500 p.a. ($297 p.w.). This is $18.50 a week more than the current jobseeker support rate.
    • $16,000 p.a. ($307 p.w.). This is $28.50 a week more than the current jobseeker support rate.
       
  • As the first four figures are less than the current job seeker support rates the same comments apply as for the first alternative above.
     
  • As the fifth figure is similar to the payments suggested for the second alternative above there is little advantage when compared to the second alternative and the same comments apply as for the second alternative above.
    • The figure could be increased to $14,600 p.a., slightly more than the current payment of $14,531.75 p.a., but the advantage of a nice round figure will be lost with the first increase due to inflation.
       
  • Again, care must be taken to ensure that those with special needs who currently receive more than the Basic Income payment will continue to receive the same total income after the Basic Income is introduced.
     
  • If the payment rate is indexed with inflation to maintain its value the annual payment will cease to be a nice round figure defeating any advantage there might be to having a nice round figure.
     
  • If the payment rate is not indexed with inflation the value of the Basic Income payments will erode over time and the advantages of the Basic Income will be progressively lost.
4.  Higher payment rates
 
  • Higher levels of payment than those indicated in the first three alternatives for the initial introduction of a  Basic Income are seldom recommended by International experts.
     
  • However, higher payment rates have been suggested by some advocates who consider that they are sustainable. The following points should be noted.
     
  • While alternatives one to three may be paid for with little change to present taxation rates, payments higher than suggested in the first three alternatives will require additional taxation. This will not necessarily lead to a loss of total after-tax income as the increase in tax is offset by the Basic Income payments that people receive.  
     
  • Most people will work to increase their incomes above the levels received from a modest Basic Income. However, it has been suggested, but not proven, that when the level of a Basic Income is greater than a certain level or the levels suggested above, that there is a point where the number of people who decide not to work will increase as the Basic Income level increases.
     
  • Trials indicate that modest Basic Income payments do not result in increases in those opting not to work. However, trials have not been done with larger Basic Income payments to see if there is a threshold above which people will progressively decide not to work. If there is a threshold, it is likely to vary from person to person. It is worth noting that most people who have high incomes now from sources other than work or high wealth levels continue to work to enhance their incomes.
     
  • If the Basic Income level is greater than current jobseeker support rates, those with special needs may feel that the extra payment level they receive for their special needs has been eroded and ask for their payments to be increased to maintain their current margins.
     
5.  Basic Income is paid as an addition to existing welfare payments.
 
  • Paying a Basic Income as an additional payment to be added to all existing welfare payments is known as an "add-on scheme". 
     
  • A Basic Income is intended to replace and eliminate a substantial portion of the existing welfare system, simplifying the welfare system, and saving costs. Failure to replace this portion of the present welfare payments will significantly add to the total cost of a Basic Income scheme and fail to eliminate many of the complexities and inefficiencies of the present welfare system.
     
  • To keep such an add-on scheme affordable, Basic Income payments must be kept very low and the many advantages of a Basic Income will be either reduced or eliminated.
     
  • With an add-on scheme, if the Basic Income payments are set at a reasonable level the overall cost of the scheme will be very high as there will be no welfare payment savings whilst the many problems and costs associated with the existing welfare system will remain.

END

Revised 9 Nov 2021

210430, 210505, 211011.