Taxation and Basic Income

 

This page looks at taxation issues associated with Basic Income.

List of questions answered here.

The following questions are answered here. Scroll down to see the answers.

  • Why use a uniform tax?
     

  • How does the New Zealand Income tax system work at present?
     

  • How do tax cuts work and who benefits the most?
     

  • What happens with a change from a progressive tax to a uniform tax?
     

  • Which is the best way to combine a Basic Income with a tax scheme?
     

  • How do incomes change with a Basic Income?
     

  • Should a Basic Income be paid as a taxable or tax-free amount and with a progressive or uniform tax?
     

  • Will everyone have to change to a uniform tax?
     

  • What about people on temporary work permits?
     

  • Will existing computer systems be able to handle a Basic Income and a flat tax?
     

  • Will additional taxation be necessary and how will this be raised?
     

_______________________________________________________________________________________________

Why use a uniform tax?

 

The majority of Basic Income advocates recommend that those who receive a Basic Income be taxed at a uniform tax rate rather than with a progressive tax.
 
A uniform tax, also known as a flat tax, rather than a progressive tax is used because a uniform tax reduces the cost of providing a Basic Income by targeting the Basic Income to those with low incomes. 
 
See: "How do incomes change with a Basic Income?" below for worked examples that show how the combination of a Basic Income with a uniform tax provides the best targeting and lowest overall cost.
How does the New Zealand Income tax system work at present?
New Zealand has a progressive tax system with tax rates that increase progressively as income increases. There are four steps.
  • The first tax rate of 10.5% applies for all income up to $14.000
  • The second tax rate of 17.5% applies for all income from $14,000 to $48,000
  • The third tax rate of 30.0% applies for all income from $48,000 to $70,000
  • The fourth rate of 33% applies to income in excess of $70,000
 
A person with income greater than $70,000 will have the first $14,000 taxed at 10.5% and the next $38,000 at 17.5%. The next $22,000 is taxed at 30% and all income exceeding $70,000 at 33%. For those with incomes over $70,000, thirty-three per cent is the marginal tax rate, the rate the last dollar of income is taxed at, but the average tax rate for most people is likely to be considerably lower, perhaps less than 25%.
How do tax cuts work and who benefits the most?
Pay rates tend to increase with time due to inflation. If the tax margins are not increased in line with inflation, people may end up paying a greater percentage of their income in taxation and real incomes after tax may reduce. Government, even when they increase expenditure in line with inflation, may end up with surpluses. The usual reaction is to talk of tax cuts but Basic Income may be a better alternative.
 
There are two ways tax may be cut.
 
  • The first method is to increase the margins, the point where the tax rate changes from one rate to another, while leaving the rates unchanged.
    • This method is usually justified as being necessitated by inflation or as a way of reducing a surplus.
       
  • The second method is to reduce tax rates.​
    • This may occur if the government has an annual surplus after the first method has been applied.​
       
  • Whichever method is applied, those with no income will receive no benefit and the benefit will progressively increase until income reaches $70,000. Those who receive the greatest tax reduction in total dollars will be those with incomes greater than $70,000.
     
  • With a progressive tax system, tax cuts, even when restricted to the lower margins and rates for the lowest incomes, are not a good method of targeting the benefit of the cuts at those on the lowest incomes as those on lower incomes will receive only part of the benefit while those on higher incomes will always receive the full benefit from the tax cuts.
  • A Basic Income is a more efficient way of distributing value to those with the lowest incomes, as explained in more detail below.
What happens with a change from a progressive tax to a uniform tax?
 
  • As the progressive tax system gives an effective tax discount on the first $70,000 of income, converting to a uniform tax usually involves removing the discounted or lower tax rates so that all income is taxed at the maximum tax rate of 33%. 
     

  • Changing to a uniform tax of 33% will have a significant adverse impact on those with low incomes. Those with the lowest incomes will have a tax increase from 10.5% to 33% or 22.5%. This is likely to significantly increase poverty in the lower-income group. 
     

  • However, reducing the uniform tax rate to less than 33%, say 30%, will give those on the highest incomes a 3% tax cut while still significantly increasing the tax on those with the lowest incomes.
     

  • Changing to a flat tax of 33% will result in a person on the minimum income of $17.70 per hour (ph),  $36,950 per annum (pa), paying an additional $6,706 pa (21%) in tax while a person with an income of $70,000 or greater will pay an additional $9,080 in tax (8.4% for those on $70,000). As a percentage, the tax increase declines as income increases so the greatest impact is on those with the lowest incomes.
     

  • A change to a uniform tax will give the greatest increases in tax as a percentage to those on the lowest incomes while making very little difference in total taxation as a percentage to those on very high incomes. The change favours the wealthy while driving those on low incomes into poverty.
     

  • Because a change to a flat tax hits those on the lowest incomes hard while having little impact on the wealthy, a change to a flat tax without a Basic income should not be contemplated. However, with a Basic Income, a desirable outcome is achieved. This will be demonstrated below.

Which is the best way to combine a Basic Income with a tax scheme?

A Basic Income might be paid as a taxable amount or as a tax-free amount and taxation might be either uniform or progressive. This gives four possible combinations. We examine these possibilities below to determine the best combination.
 

  • To provide a fair comparison of the different possibilities, the net or after-tax value of the Basic Income, which is the actual cost to the government, must be the same in all cases.
     

  • Two of the combinations, a taxable Basic income or a tax-free Basic Income, paid in combination with a flat tax, produce exactly the same results. This occurs because with a flat tax the tax on a taxable Basic Income is constant and does not vary with income. This leaves just three combinations to compare.
     

  • Of the three, a Basic Income, either taxable or tax-free, paid with a flat tax is the simplest option to implement and provides a Basic Income that is best targeted at those with the lowest incomes and gives a scheme with the lowest overall cost.
     

  • Of the remaining two, a taxable Basic Income with a progressive tax provides better targeting and lower cost than a tax-free Basic Income with a progressive tax, but is more complicated, not as well-targeted, and significantly more expensive than the option of a Basic Income paid with a flat tax.
     

  • A tax-free Basic Income with a progressive tax is the least targeted and most expensive option and should not be contemplated for any Basic Income scheme.  
     

  • Consequently, Basic Income advocates invariably recommend that those who receive a Basic Income have all other income taxed at a uniform rate. 

How do incomes change with a Basic Income?

Here we show, using examples, how incomes will vary with a Basic Income of different values.

Example 1. A net Basic Income of $174.02 per week tax-free, $9,080 pa.

A net Basic Income of $174.02 pw is just enough to offset the $9,080 pa extra tax paid by those with incomes of $70,000 or more when the present progressive tax is replaced with a 33% flat tax.

Some Basic Income advocates suggest the alternative of a net Basic Income of $175 pw., $9,131 pa. to be paid with a 33% flat tax as this will give everyone, including those with incomes over $70,000, a small increase in net income.

For comparison purposes, three incomes levels are used: 1. No income, 2. minimum income of $17.70 ph., $708 pw., or $36,942 pa., and 3. $70,000 pa. All increases in income shown are net or after-tax values.

  • A Basic Income with a flat tax.

    • A person with no income will receive the full $174.02 pw., or $9,080 pa. 

    • A person on the minimum income will receive an extra $45.50 pw., $2,374 pa.

    • A person with $70,000 or greater income will receive no additional income.

  • A taxable Basic Income with a progressive tax.
    The taxable or gross value of the Basic Income will be $194.44.

    • A person with no income will receive the full $174.02 pw., or $9,080 pa

    • A person on the minimum income will receive an extra $160.41 pw., $8,370 pa.

    • A person on $70,000 or greater will receive $130.27 pw., $6,797 pa.

  • A tax-free Basic Income with a progressive tax.

    • A person with no income will receive the full $174.02 pw., or $9,080 pa.

    • A person on the minimum income will receive the full $174.02 pw., or $9,080 pa

    • A person on $70,000 or greater will receive the full $174.02 pw., or $9,080 pa

Note: with a uniform tax, for every dollar that a net Basic Income increases over $174.02 pw., everyone, including those with incomes over $70,000, will receive an additional dollar. Similarly, for those receiving a tax-free Basic Income, their net incomes will increase by a dollar for every dollar the Basic Income increases.

 

Example 2. A net Basic Income of $219 per week tax-free, $11,427 pa.

This rate is the same as the adult jobseeker rate for 2019.

Some Basic Income advocates suggest a Basic Income of $229.98 pw., $12,000 pa. as this gives a nice round annual figure, but it will soon cease to be a nice round figure if indexing with inflation. 

  • A Basic Income with a flat tax.

    • A person with no income will receive the full $219 pw., or $11,427 pa. 

    • A person on the minimum income will receive an extra $90.48 pw., $4,721 pa.

    • A person on $70,000 or greater will receive an extra $44.98 pw., $2,347 pa.

  • A taxable Basic Income with a progressive tax. 
    The taxable or gross value of the Basic Income will be $244.69 pw., or $12,768 pa.

    • A person with no income will receive the full $219 pw., or $11,427 pa.

    • A person on the minimum income will receive an extra $197.77 pw., $$10,320 pa.

    • A person on $70,000 or greater will receive $163.94 pw., $8,554 pa.

  • A tax-free Basic Income with a progressive tax.

    • A person with no income will receive the full $219 pw., or $11,427 pa.

    • A person on the minimum income will receive the full $$219 pw., or $11,427 pa

    • A person on $70,000 or greater will receive the full $$219 pw., or $11,427 pa

Should a Basic Income be paid as a taxable or tax-free amount and with a progressive or uniform tax?

The figures in the examples above show that the best targeted and lowest cost Basic Income scheme is achieved when a Basic Income, either taxable or tax-free, is combined with a flat tax.

  • New Zealand welfare payments such as jobseeker support are as a general rule considered to be taxable income. The cost to the government of deducting tax at source is negligible. Consequently, when a Basic Income is paid with a flat tax on all other income it makes little or no difference to the total net cost of the scheme if a Basic Income designed to give the same net value is paid as a taxable or tax-free amount.

Will everyone have to change to a uniform tax?

No. Only those receiving a Basic Income.

  • A feature of a Basic Income scheme paid in conjunction with a flat tax is that only those receiving a Basic Income will be required to have their income taxed at the uniform rate. This enables a Basic Income to be introduced voluntarily and progressively.
     

  • The combination of a Basic Income with a flat tax enables trials to be set up if thought desirable, and for these trials to be localised or for those on the trial to be dispersed throughout the country.
     

What about people on temporary work permits?

As a Basic Income is normally restricted to citizens or those with permanent residency this needs to be considered to ensure that people on temporary work permits are not unduly disadvantaged or discriminated against. There are several options.
 

  • The first option is to not pay these people a Basic Income and tax them using the present progressive tax system.
     

  • A second option is to pay those in full-time employment a Basic Income and tax them at the flat tax rate or to let them choose between the two options of receiving a Basic Income with a flat tax or no Basic Income and the progressive tax system.
     

  • The situation is more complicated for those in part-time employment. A full Basic Income payment for such people would not be appropriate so these people are likely to be taxed using the progressive system and receive no Basic Income.

Will existing computer systems be able to handle a Basic Income and a flat tax?

 

Yes. Existing computer systems are designed to handle a number of different tax systems and rates simultaneously.
 

  • People undertaking work must indicate if they are in primary or secondary employment and are taxed at different rates. Those on contract are taxed at another rate. Those on a Basic Income will be taxed at the flat tax rate.
     

  • Inland revenue computers handle many different tax rates. Incorporating a flat tax rate for those on Basic Income will not be difficult.
     

  • Computer systems already exist to pay New Zealand Superannuation and various welfare payments such as jobseeker support. It will not be difficult to include Basic Income payments.

 

Will additional taxation be necessary and how will this be raised?

 

To a large extent, a Basic Income is self-funding but some additional taxation may be necessary.
 

  • With a Basic Income, savings are made by eliminating welfare payments of the same or less value and partially replacing welfare payments of greater value.
     

  • Additional tax revenue is generated by taxing those receiving a Basic Income at the flat tax rate.
     

  • The extra money in the economy will increase expenditure and economic activity increasing the GST collected and increasing income tax, profit tax, and tax on interest and dividends. 
     

  • If there is a tax revenue shortfall, various advocates have suggested alternative methods of increasing tax revenue. BINZ does not support any particular additional tax and suggests that all alternatives be carefully considered. Spreading tax increases over a number of different possibilities may be a way of avoiding distortions to the economy and unintended consequences. Some suggestions follow but there are other possibilities.
     

  • Increasing GST has been suggested as one way of increasing tax revenue. GST increases will result, however, in increases in the cost of goods requiring those on low incomes to spend more for essential goods, so the value of the Basic Income needs to be increased to compensate. Unduly high GST rates may result in more goods being purchased online from foreign countries so this loophole needs to be closed.
     

  • A special property tax has been suggested as another alternative, perhaps as an additional levy on rates. New Zealanders already pay GST on rates so this would be an additional charge. While some see no need for exemptions, others consider that this will also impact on those on lower incomes and suggest that either the family home or perhaps the first $750,000 dollars of property should be exempted from this new tax. 
     

  • A comprehensive wealth tax has also been suggested. This will tax all accumulated wealth including property, bank accounts, and investments.
     

  • Taxes on bank transactions, either within New Zealand or on foreign transactions have also been suggested.

END

BINZ is not responsible for content on external websites. © 2017 BINZ. All rights reserved.