Targeting and taxation

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The Universal Declaration of Human Rights (UDHR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR) require governments to maintain basic but adequate living standards for all their citizens.

A Basic Income provides the ideal solution to the need to ensure that all residents of a country have sufficient income to meet basic needs. However, the total sum of the payments presents a considerable increase in government expenditure which is balanced by an increase in Government income. For a Basic Income, the sum of the payments is not a true measure of cost as people also pay taxes.

Combining Basic Income payments with a suitable or appropriate taxation regimen will minimise the real cost of a Basic Income and aid the introduction of a Basic Income scheme. An appropriate taxation scheme will help target the payments toward those on the lowest incomes while minimising the benefit to those who do not need extra income.

On this page

The following topics are discussed on this page. Scroll down to read.

Why are payments targeted?
How are welfare payments targeted now?
A New Zealand example of a poverty trap

Why are payments targeted?

Governments seek to achieve a suitable relationship over time between income and expenditure.
If government expenditure exceeds government income by an amount that is greater than the economy can accommodate, inflation may occur.
Consequently, governments seek to target money toward those areas where the need is perceived to be greatest.
Governments will also seek to target money within a particular area of expenditure to ensure that the money is well spent where the need is greatest.
By targeting money to where the need is greatest in one area, the government may then have money available to spend in another area.

How are welfare payments targeted now?

Governments use several methods to target welfare payments or benefits to those most in need.

Eligibility. First, there are eligibility tests.
- Means test. Welfare payments (benefits) may be means-tested. This can penalise those who have saved and invested their money before becoming otherwise eligible for a benefit.
- Relationship tests. A person in a relationship may be disqualified if they have a partner who is earning a minimal income or more.
- Income tests. People who might otherwise be eligible for a benefit might be disqualified if they have other sources of income even when they are minimal and result of a person's savings.
Standdown periods. Second, governments often require unnecessarily long standdown periods before people become eligible for a benefit. This will often force them to spend their savings or if they have none, to rely on charities.
Thresholds. Third, those who are receiving benefits are subjected to limits (thresholds) on incomes from other sources that they can earn before their benefits are abated.
Abatement. Fourth, those who receive a benefit will have their benefit abated at a set rate for every dollar they earn above the threshold until there is no benefit left to receive.
Abatement of living allowances. Fifth, living allowances which are tax-free payments received in addition to the basic benefit may also be abated at an undisclosed rate.
Tax on benefits. Sixth, because benefits are taxable, taxation will also reduce the benefit received as other income increases.
Sanctions. Seventh, governments often set rules that those who receive benefits must follow. Failure to follow the rules can result in sanctions which usually take the form of stopping the benefit for a period of time.

This form of hard targeting is difficult and costly to administer.
- The information must be gathered manually on money earned in one week in order to reduce the value of the benefit paid in the following week. Errors can occur in both the collection of data and in the calculation of deductions to be applied.
- Spending money on the administration of a complicated system is a waste of money that might be better paid to those who will benefit from it.
Hard targeting produces poverty traps where the monetary reward for work reduces to the point where there is little or no monetary incentive to work, or perhaps even a monetary disincentive.

A New Zealand example of a poverty trap

The New Zealand Jobseeker Support payments are a good example of a poverty trap.
There is no asset test for Jobseeker Support. This is potentially discriminatory, see below.
Two people in a relationship will be treated as a couple.
- This usually means that the partner of a person who is working will not be eligible for Jobseeker Support.
To be eligible to receive Jobseeker Support you must be a New Zealand citizen or resident who is not in employment but looking for work, or in part-time employment but looking for more hours of work, or have a health condition or disability that affects your ability to work.
From 1 April 2023, you are permitted to earn $160 per week before the abatement of the payments begins. This means that at the minimum gross wage of $22.70 per hour, you may work for 7 hours and 2 minutes before the abatement of Jobseeker Support payments begins.
Net Jobseeker Support payments are abated at 70 cents in the dollar for each gross dollar earned until they reduce to zero. Consequently, when a person is paid at the minimum income the current net adult Jobseeker Support payment of $337.74 per week is abated to zero after another 21.25 hours of work. This is 28.25 hours per week in total. The gross weekly income cut-out point is given as $643.00
The 70 cents abatement is equivalent to an additional tax of 70 cents in the dollar. Thus, a person earning less than $14,000 per annum who will normally pay 10.5 cents in the dollar taxation will pay the equivalent of an additional 70 cents in the dollar bringing their total effective marginal tax rate (EMTR) up to 80.5 cents in the dollar.
However, as a person earning $643.00 per week will be earning some $33,436.00 per annum will be in the second tax bracket of 17.5 cents which applies from $14,000 to $48,000, those earning over $14,000 will have an EMTR of 17.5 + 70 = 87.5%.
EMTRs of 80.5% and 87.5% faced by low-income workers are well above the 39% MTR that some of our highest earners are paying.
EMTRs are likely to be higher still as the living allowances paid in addition to the basic Jobseeker Support are also abated at an undisclosed rate.
In addition, those who work often face additional costs for clothing and transport.
As a consequence, the total EMTR is likely to exceed 100%.
This means, that for each additional dollar earned, a person who has an income between the abatement threshold point of $160 per week gross and the gross weekly income cut-out point of $643 may receive little or no additional income for each additional gross dollar they earn. This is a poverty trap. The financial reward for work is reduced to zero or becomes negative.
Poverty traps are a major disincentive to work. While it is argued that the system is designed to encourage work, the financial reward for work is removed. Rather than seeking work, people are likely to look for ways to avoid work.

Reducing abatement rates

It has been suggested that reducing the abatement rates to an acceptable level would overcome the problem of poverty traps.
- For example, eliminating the threshold before abatement begins and reducing the abatement rate to 22.5 cents in the dollar for those earning less than $14,000, the first tax bracket, 15.5 cents in the dollar for those earning between $14,000 and $48,000, the second tax bracket, 3 cents in the dollar for those earning between $48,000 and $70,000, and zero beyond that will produce an EMTR of 33% for all those earning less than $180,000.
- This will emulate a tax rate of 33% for those earning less than $180,000 and 39% for those earning more than $180,000.

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Both the Universal Declaration of Human Rights (UDHR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR) require governments to maintain adequate living standards for all their citizens.

Universal Declaration of Human Rights (UDHR)

Articles 22 to 25 of the UDHR outline the right of all citizens to Social Security, work, rest and leisure, and an adequate standard of living. These articles are reproduced in full below.

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Revised. 21 July 2023.