Tax and Basic Income | basic-income-nz

Taxation and Basic Income

This page looks at taxation issues associated with Basic Income. Coupling a Basic Income with an appropriate tax regime will improve the targeting of money available to those on the lowest incomes while minimising the net cost of a Basic Income. This will in turn minimise the alternative sources of funding required. Alternative sources of funding are then discussed briefly.

1 Apr 2022 Jobseeker Support and New Zealand taxation figures are used on this page.
A Basic Income should always be introduced in conjunction with an appropriate tax regime.
This page shows how an appropriate tax regime might be designed.
The examples given are for illustrative purposes and do not necessarily represent the policy of this organisation.
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.
All references to cost are to the net expenditure by the government and not to costs incurred by individuals or firms.
Targeting refers to the value of the Basic Income delivered when compared to the net cost per capita of the scheme. A scheme that delivers more value as a Basic Income at less cost per person will have better targeting.
Any Basic Income scheme that will for a specific Basic Income value deliver higher net payments to more people will invariably cost more in net government expenditure and will therefore require higher levels of funding. Higher taxes may be required adding to the political difficulty of introducing a Basic Income scheme.
In general, a proportional tax will deliver less net Basic Income to any individual than a progressive tax but will show better targeting of the money to those on the lowest incomes resulting in lower overall cost. It may therefore be easier to introduce politically.
If a Basic Income is introduced using a proportional tax set at a level less than the highest tax rates under the current progressive tax system then one or more higher tax rates may need to be retained to avoid overall tax cuts for those on the highest incomes.
For any Basic Income value, it is possible to design an alternative progressive tax scheme that provides better targeting than a proportional tax or a two or three-stage tax but such schemes are likely to involve high or very high tax rates for those with high taxable incomes and this may lead to tax avoidance, tax evasion and other unintended consequences.
An appropriate tax is one that enhances the benefits of a Basic Income.
An appropriate tax will:
- ensure that the greatest benefits are received by those with the greatest need,
- minimise the overall cost of a Basic Income scheme, and
- ensure that those with the least need for a Basic Income receive the least benefit.
- A tax scheme that is not designed to achieve these objectives may undermine the effectiveness of the
  Basic Income scheme and significantly increase the cost of the scheme.
Just as a Basic Income is paid equally to all, a tax regime should apply equally to all.
Care needs to be taken to ensure that any tax changes introduced with a Basic Income do not unduly benefit
those who have little or no need for an increase in income or for a Basic Income.
A poorly designed tax regime could unduly add to the overall cost of a Basic Income.
Tax cuts and adjustments that benefit the wealthy or those on high incomes more than those on low incomes are not appropriate tax changes for a Basic Income Scheme as they undermine the principle objectives of a Basic Income.
There is a need to avoid the temptation to use a progressive tax and reduce the tax rates for the first tax steps in order to benefit those with the lowest incomes as this will:
- reduce the overall taxes of those on high incomes more than those on lower incomes and
- significantly add to the total cost of a Basic Income scheme.
If the number of tax steps is reduced when a Basic Income is introduced, care needs to be taken to ensure that those with the highest incomes who are on the highest marginal tax rates do not receive a tax cut as this will:
- benefit those on the highest incomes more than those on the lowest incomes, and
- increase the overall cost of the scheme.
The best way to target value to those on low incomes is to use a Basic Income with an appropriate tax regime as explained in more detail below.

List of questions answered here.

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

What are the three main tax types? Progressive, Proportional, and Regressive tax.
What is the Effective Tax Rate (ETR)?
What is the Marginal Tax Rate (MTR)?
What is the Effective Marginal Tax Rate (EMTR)?
Why use a proportional tax?
How does the New Zealand Income tax system work at present?
How do tax cuts work and who benefits the most?
Would a personal tax exemption work?
What happens with a change from a progressive tax to a proportional 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 proportional tax?
Will everyone have to change to a proportional tax?
What about people on temporary work permits?
Will existing computer systems be able to handle a Basic Income and a proportional tax?
What is a two-stage tax and why use it?
What is the Ulm Model?
What is a modified Ulm Model?
Is there a case for a three-stage tax or a greater number of tax stages?
Will additional taxation be necessary and how will this be raised?

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What are the three main tax types?

1. Progressive tax

A Progressive tax is a tax where the marginal tax rate (MTR - see below for a further explanation of MTR) increases progressively as income increases. The increases in the marginal tax rate usually occur in steps so each time gross income exceeds a predetermined threshold, the tax on the next dollar will be at the next marginal tax rate. Alternatively, the marginal tax rate may increase in direct proportion to the gross income earned.

2. Proportional tax

A Proportional tax is a tax where the tax paid is at a fixed rate so the total tax collected is directly proportional to the income earned. The marginal tax rate does not increase or decrease as gross income increases. A proportional tax is also known as a uniform tax or flat tax.

3. Regressive tax
A Regressive tax is a tax where the marginal tax rate (MTR) decreases progressively as income increases. The tax decreases may occur in steps at specific thresholds or in direct relationship to the gross income earned.

What is the Effective Tax Rate (ETR)?

The Effective Tax Rate (ETR) is the effective rate that tax is paid on total annual gross income.

With a progressive income tax, the Effective Tax Rate paid on total income may be significantly lower than the Marginal Tax Rate paid on the last dollar earned.

With a proportional tax, the Effective Tax Rate will be the same as the tax rate or marginal tax rate.

With a regressive tax, the Effective Tax Rate may be larger than the marginal tax rate.

When a tax-free Basic Income is paid, the Effective Tax rate will be lower than the Marginal Tax Rate paid on the last dollar earned.

What is the Marginal Tax Rate (MTR)?
The Marginal Tax Rate (MTR) is the rate at which tax is paid on the last dollar earned.

What is the Effective Marginal Tax Rate (EMTR)?
The Effective Marginal Tax Rate (EMTR) is the effective tax rate paid on the last dollar earned when other deductions or abatement of state grants are as being considered equivalent to additional tax paid.

The Effective Marginal Tax Rate will be higher than the Marginal Tax Rate when there are other deductions and may in some cases exceed 100%. When the EMTR exceeds 100%, earning extra income will result in a reduction in net income. This is a poverty trap.

Why use a proportional tax?

Basic Income advocates often recommend that those who receive a Basic Income are taxed at a rate that is proportional to their income. This is known as a proportional tax.

There are three types of tax, regressive, proportional, and progressive (see above).

A proportional tax rather than a progressive tax is used with a Basic Income because a proportional tax reduces the total cost of providing a Basic Income and provides better targeting of a Basic Income to those on low incomes.

A proportional tax provides better targeting of a Basic Income to those with low incomes than can be achieved with a progressive tax.
See: "How do incomes change with a Basic Income?" below for worked examples that show how the combination of a Basic Income with a proportional tax provides the best targeting and lower overall cost.
Tax-free thresholds and progressive tax systems are intended to give people on low incomes an effective discount tax rate on their low incomes, but while they give a discount to those on low incomes, they also give the maximum value of the discount and a larger discount to those on higher incomes. The people who need the discount the least get the maximum value of the discount.
With a progressive tax, lowering the initial tax rates on low incomes significantly reduces overall government tax income because the tax discount is available to everyone including those on very high incomes. To compensate for the income loss, governments increase the marginal tax rates on higher incomes, but, because there are fewer people in the higher tax brackets the increases in tax rates must be significantly higher. The resulting high marginal tax rates encourage tax avoidance and are a disincentive to work.
Alternatively, when governments lose tax income because of lower initial income tax rates they respond by cutting other essential expenditures such as education and health.
A better solution is to pay a Basic Income and tax all other income with a proportional tax.
Note: if, when switching from a progressive tax to a proportional tax, the tax rate chosen is lower than some of the higher marginal tax rates, those on the higher marginal tax rates will receive a reduction in their marginal tax rates and in the total tax paid. To overcome this, it is advisable that the higher tax rates are retained. This will result in a 2 or more-stage tax regime.
For other alternatives see the Ulm Model below.

As a general rule, a regressive tax is not recommended as it accelerates the transfer of wealth from the poor to the wealthy.

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 five steps.

The first tax rate of 10.5% applies to all income up to $13,999
The second tax rate of 17.5% applies to all income from $14,000 to $47,999
The third tax rate of 30.0% applies to all income from $48,000 to $69,999
The fourth tax rate of 33% applies to income from $70,000 to $179,999
The fifth tax rate of 39% applies to all income above $180,000

A person with an income greater than $180,000 will have:

the first $14,000 of their earnings taxed at 10.5% and
the next $34,000 at 17.5%,
the next $22,000 taxed at 30%,
the next $110,000 taxed at 33%, and
all income over $180,000 taxed at 39%.

These are the marginal tax rates.

The marginal tax rate is the rate at which the last dollar earned is taxed.

A person's marginal tax rate may be 10.5%, 17.5%, 30%, 33% or 39% depending on a person's income
Thus, for a person earning more than $48,000 but less than $70,000, the marginal tax rate is 30%
for a person earning more than $70,000 but less than $180,000, the marginal tax rate is 33%,
for a person earning more than $180,000, the marginal tax rate is 39%.

The average tax paid is often considerably lower than the marginal tax rate, perhaps less than 25%.

How do tax cuts work and who benefits the most?

People's incomes and pay rates tend to increase with time due to inflation. If the tax margins are not increased in line with inflation, people will end up paying a greater percentage of their income in taxation. Real incomes after tax will reduce.

When the economy is doing well, governments, even when they increase expenditure in line with inflation, may end up with surpluses.
One reaction is to talk of tax cuts but Basic Income is a better alternative.
In difficult times, governments may incur a deficit - this is when government expenditure exceeds income.
Again, some people call for tax cuts to boost the economy. However, the proven link between tax cuts and a boost to the economy is dubious. A Basic Income is a better alternative because it will boost both the economy and government revenue.
A Basic Income is a better alternative because, when applied correctly with an appropriate tax regime, it will target the money toward those most in need of income while maximising the boost to the economy.

There are two ways tax may be cut.

The first method is to increase the tax margins or thresholds, the point where the tax rate changes from one tax 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 the tax rates.
- This may occur if the government still 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 $180,000.
- Those who receive the greatest tax reduction in total dollars will be those with incomes greater than $180,000, those with the highest incomes.
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 to those on the lowest incomes.
- This is because those on lower incomes will receive only part of the benefit of the tax cuts while those on higher incomes will always receive the full benefit. Tax cuts invariably favour those on high incomes or the wealthy.

A Basic Income is a more efficient way of distributing value to those with the lowest incomes, as explained in more detail below.

Would a personal tax exemption work?

A personal tax exemption is an amount that people are allowed to earn before they are taxed.
The suggestion is that those on low incomes will benefit from being able to work and earn a relatively low income before being taxed. For example, the first $500, $1,000, or $2,000 per week earned may be tax-free. These amounts are equivalent to $26,089, $52,178, or $104,355 per annum.
However, with such a scheme:
- Those who earn no income will receive no additional income from the proposal.
- Additional income after tax will progressively increase up to the threshold point where incomes begin to be taxed.
- All those earning more than the tax-free threshold will receive the maximum increase in income.
As a result, personal tax exemptions target money toward those who earn more than the tax-free threshold. They give more to the wealthy than to the poor and considerably add to the cost of a scheme that uses such exemptions.
A Basic Income coupled with an appropriate tax works better by ensuring that the maximum benefit is received by those with the lowest incomes with the increase in net income reducing as gross income increases. This ensures that money is targeted toward those most in need.

What happens with a change from a progressive tax to a proportional tax?

As the progressive tax system gives an effective tax discount on the first $180,000 of income, converting to a proportional tax usually involves removing the discounted or lower tax rates so that all income is taxed at a higher marginal tax rate. In New Zealand, this may be a proportional tax in the range of 33% to 39%.
Changing to a proportional tax of either 33% or 39% without some form of compensation will significantly hurt those on low incomes.
- With a 33% proportional tax, those with low incomes will have a 22.5% tax rate increase, from 10.5% to 33%.
- With a 39% proportional tax, those with low incomes will have a 28.5% tax rate increase, from 10.5% to 39%.
- This increased tax can be offset by providing a Basic Income.
Reducing the proportional tax rate to less than 33%, to say 30% in an attempt to benefit those on low incomes will, however, give those with incomes over $70,000 but less than $180,000 a 3% cut in marginal tax, and those with incomes over $180,000 a 9% cut in marginal tax while still significantly increasing the tax on those with the lowest incomes.
- With a 30% proportional tax, those on an income of $180,000 or greater at present will receive a 9% cut in their marginal tax rate.
- Changing to a proportional tax without a Basic Income will hurt those on low incomes and will benefit people on high incomes.
Changing to a proportional tax of 33% will result in a person on a minimum income of $21.20 per hour (p.h.), $44,247 per annum (p.a.), paying an additional $7,838 p.a. (18%) in tax while a person with an income of $70,000 or greater will pay an additional $9,080 in tax (13% for those on $70,000 and 5% for those on $180,000).
- As a percentage, the tax increase declines as income increases so the greatest negative impact is on those with the lowest incomes. Those on the lowest incomes are hit the hardest.
A change to a proportional tax will give the greatest percentage increase in tax to those on the lowest incomes while making very little difference in total taxation as a percentage to those on very high incomes.
- Without a Basic Income, a change to a proportional tax favours the wealthy while driving those on low incomes into poverty. Without a Basic Income, this is a regressive change as it hits those on lower incomes harder than those on higher incomes.
Because a change to a proportional tax hits those on the lowest incomes hard while having little impact on the wealthy, a change to a proportional tax without a Basic income should not be contemplated.
However, with a Basic Income, a desirable outcome is achieved. This will be demonstrated in more detail 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 proportional 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 proportional tax on other income, produce exactly the same results.
- This occurs because, with a proportional tax, the tax rate on a taxable Basic Income is the same as on other income and 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 proportional tax:
- is the simplest option to implement,
- provides a Basic Income that is best targeted at those with the lowest incomes, and
- gives a scheme that provides the most value 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 than the first option above,
- is not as well-targeted to those on lower incomes, and
- is significantly more expensive than the option of a Basic Income paid with a proportional tax.
A tax-free Basic Income with a progressive tax
- is the least targeted at those on the lowest incomes,
- is the 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 will have all other income taxed at a proportional rate.
- An exception to this is when a two-stage tax is used, such as the Ulm Model, or in some instances, an appropriate three-stage tax. For further discussion on a two-stage or three-stage tax and the Ulm Model see below.

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 p.w. is just enough to offset the $9,080 pa extra tax paid by those with incomes greater than $70,000 but less than $180,000 when the present progressive tax is replaced with a 33% proportional tax.

Some Basic Income advocates suggest the alternative of a net Basic Income of $175 p.w., $9,131 pa. be paid with a 33% proportional 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 in the examples below:

No income,
minimum income of $21.20 ph., $848 p.w., or $44,247 pa., and
$70,000 p.a. to $180,000 p.a.

All increases in income shown below are net or after-tax values.

A net Basic Income of $174.02 p.w. with a proportional tax.
- A person with no income will receive the full $174.02 p.w., or $9,080 p.a.
- A person on the minimum income will receive an extra $23.80 p.w., $1,241.72 p.a.
- A person with an income of $70,000 p.a. or greater income will receive no additional income.
A taxable Basic Income that gives a net Basic income of $174.02 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 p.w., or $9,080 p.a. net.
- A person on the minimum income will receive an extra $145.10 p.w., $7,571 p.a.
- A person on $70,000 p.a. will receive an extra $130.27 pw., $6,797 p.a.
- A person on $180,000 p.a. will receive an extra $118.61 pw., $6,189 p.a.
A tax-free Basic Income with a progressive tax.
- A person with no income will receive the full $174.02 p.w., or $9,080 p.a.
- A person on the minimum income will receive the full $174.02 p.w., or $9,080 p.a.
- A person on $70,000 or greater will receive the full $174.02 p.w., or $9,080 p.a.

Note: with a proportional tax, for every dollar that a net Basic Income increases over $174.02 p.w., 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 $315 per week or $16,436 per annum (from 1 April 2022).

This rate is the same as the adult jobseeker rate from 1 Apr 2022.
The gross value of the Basic Income is $358.97 per week or 18,730.16 per annum.

The minimum income for 2022 is $21.20 per hour before tax.

A person working 40 hours per week will receive $848.00 per week or $44,247 p.a. gross or before-tax income.
After-tax figures are $718.38 per week or $37,483.38 per annum with the current progressive tax.
After-tax figures are $568.16 per week or $29,645.17 per annum with a proportional tax of 33%.

A net Basic Income with a proportional tax of 33% - 2022.
- A person with no income will receive the full $315 p.w., or $16,436 p.a.
- A person on the minimum income will receive an extra $165 p.w., or $8,598 p.a.
- A person on $70,000 or more but less than $180,000 will receive an extra $141 p.w., $7,356 p.a.
A taxable Basic Income with a progressive tax - 2022.

The taxable or gross value of the Basic Income will be $359 p.w., or $18,730 p.a.
- A person with no income will receive the full net or after-tax payment of $315.00 p.w., or $14,532 p.a.
- A person on the minimum income will receive an extra $260 p.w., $13,580 p.a.
- A person on $70,000 will receive an extra $241 p.w., $12,549 p.a.
- A person on $180,000 will receive an extra $219 p.w. or $11,425 p.a.
A tax-free Basic Income with a progressive tax - 2022.
- A person with no income will receive the full $315 p.w., or $16,436 p.a.
- A person on the minimum income will receive the full $$315 p.w., or $16,436 p.a.
- A person on $70,000 or greater will receive the full $$315 p.w., or $16,436 p.a.

An examination of these figures shows:

all three options deliver the same net amount to a person with no other income
of the three options, option 3, a tax-free Basic Income with a progressive tax on other income, pays the greatest net amount to those on higher incomes
the first option of a Basic Income paid in conjunction with a proportional tax on all other income is the best means of targeting the Basic Income to those on low incomes keeping the overall cost of a Basic Income scheme down.
Option 3, a tax-free Basic Income with a progressive tax, is the least targeted and the most expensive option, increasing the incomes of those who do not need additional income.

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

No. Only those receiving a Basic Income.

A feature of a Basic Income scheme paid in conjunction with a proportional tax is that only those receiving a Basic Income will be required to have their income taxed at the proportional rate. This enables a Basic Income to be introduced voluntarily and progressively.
The combination of a Basic Income with a proportional 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 proportional tax rate or to let them choose between the two options of receiving a Basic Income with a proportional 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 proportional 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 proportional tax rate.
Inland revenue computers handle many different tax rates. Incorporating a proportional 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.

What is a two-stage tax and why use it?

Some Basic Income proposals use a two-stage tax taxation system. With a two-stage tax system, the tax rate may either increase or decrease above a threshold income level.
Using a two-stage tax gives the designers of a Basic Income more flexibility. Tax rates on net recipients and net payers can be adjusted independently to ensure that payments to recipients are balanced by extra tax raised or to maximise the benefits achieved with a Basic Income.
When a uniform tax (proportional tax) is combined with a Basic Income, the Effective Tax Rate (ETR) is progressive. That is, the ETR progressively increases as gross income from other sources increases.

This is because the Basic Income may be considered to be a negative tax payment and when the negative Basic Income and the positive tax are added the net result is negative for those on low incomes so the ETR is negative.

As gross income from other sources increases, taxation on other income increases in proportion. Tax paid will eventually exceed the Basic Income received so the ETR progressively becomes less negative and eventually becomes positive.

While the marginal tax rate on other income has not changed, the ETR on all income is progressive.
Changing the tax rate on income above a threshold changes the rate that the ETR increases but the increase in ETR with other income will remain progressive, except for some very unusual cases.
There are two possible ways that the tax rate can change: a tax rate that increases when other income exceeds the threshold or a tax rate that decreases when other income exceeds the threshold.
1. In the first case, a tax rate that increases above a threshold results in lower marginal tax rates on extra income earned by those taking up part-time work, lowering the disincentive to work, but tends to increase the overall cost of a Basic Income scheme resulting in higher tax rates on those above the threshold.
2. In the second case, a higher initial tax rate, and a lower rate above the threshold will reduce the overall cost of a Basic Income scheme and limit those who benefit from it but will have the disadvantage of higher marginal tax rates for those on lower incomes taking up part-time work. A special case of a tax rate that decreases beyond a threshold is the Transfer Limit or Ulm Model.
3. With the Transfer Limit or Ulm Model, the initial marginal tax rate is higher than the second tax rate giving a regressive tax> However, with a Basic Income included, the overall tax rate or effective tax rate (ETR) is likely to remain highly progressive as other income increases.

What is the Trasfer Limit or Ulm Model?

The Ulm Model (Deutsch: Ulmer Modell) was developed at the University of Ulm in Germany. It is a special case of a Basic Income combined with a two-stage taxation system where the tax rate reduces above a threshold.
With the Ulm Model, the threshold is usually set at the Transfer Limit, the point where the Basic Income received equals the taxation raised on other income. As a result, the net income received at the Transfer Limit is equal to the Gross Income.
When other income is less than the Transfer Limit, the Basic Income will be greater than the taxes paid. When other income is greater than the Transfer Limit, the taxes paid will be greater than the Basic Income received.
The advantage of the Ulm Model with a higher initial tax rate is that it reduces the overall cost of a Basic Income scheme by targeting the net payments toward those with the lowest incomes.
A disadvantage is slightly higher marginal tax rates for those on the lowest incomes.

What is a modified Ulm Model?

With the Ulm Model, the initial or higher tax rate continues until the transfer limit occurs. This is the gross income level where the Basic Income received is equal to the tax paid on gross income. Beyond this point, the tax paid will exceed the Basic Income received.
With the modified Ulm Model, the higher initial marginal tax rate paid continues until the point is reached where the net income received with a Basic Income and the higher initial tax rate is equal to the net income received with the present progressive tax and no Basic Income. This will increase the savings achieved and lower the overall cost of the Basic Income scheme.

Is there a case for a three-stage tax or a greater number of tax stages?

Some Basic Income advocates argue that there is a case for using a three-or-more-stage tax when implementing an Ulm Model or Modified Ulm Model taxation system.
This is because the present tax system's progressive tax scheme may have higher marginal rates of taxation for those on higher incomes. Choosing a second-stage tax rate lower than the highest rates will result in tax cuts for those earning income in the higher tax bands.
New Zealand has a higher tax rate of 39% for those earning over $180,000. If a uniform tax of 33% was introduced as the second tax rate for all those earning above the threshold between the first and second tax rates, those earning above $180,000 would receive a tax cut. This can be countered by introducing a third tax rate for those earning above $180,000.
Similarly, extra tax thresholds and tax rates could be introduced if necessary or when existing tax regimes have a greater number of higher tax bands, but more than three tax bands are usually not considered necessary in New Zealand.

Further information

Wikipedia: Ulmer Modell (Ulm Model)
Wikipedia: Bedingungsloses Grundeinkommen (Unconditional basic income)
Obituary: Helmut Pelzer, inventor of Ulmer Model for Basic Income, dies at 90, Basic Income Earth Network (BIEN)

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

To a large extent, a modest Basic Income is self-funding but a small amount of 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 a proportional tax rate or with a two or three-stage tax as discussed above.
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. Modelling shows that after an introductory period, a Basic Income will return 99% of the money paid out as taxes. The additional money required from other sources to fund a Basic Income is, therefore, less than 1% of the total money required to pay a Basic Income.
Basic Income trials in various countries show improvements in physical and mental health, particularly for low-income recipients, and reductions in crime. These changes will result in reductions in government expenditure which may be used to fund the Basic Income.
If there is still a tax revenue shortfall, advocates have suggested various alternative methods of increasing tax revenue. BINZ suggests that all alternatives be considered carefully but does not support any particular additional tax. 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 also other possibilities.
Increasing GST has been suggested as one way of increasing tax revenue. GST increases will, however, result, in increases in the cost of goods requiring those on low incomes to spend more for essential goods. Consequently, the value of the Basic Income must be increased further to compensate. Unduly high GST rates may result in more goods being purchased online from foreign countries so this loophole must be closed and kept closed. Others may travel to foreign countries to purchase goods or to spend their money on various activities. High GST rates also tend to target those on lower incomes more as people on lower incomes spend a greater proportion of their incomes on goods and services. This adds to the flow of wealth from the poor to the wealthy.
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 tax will also impact those on lower incomes and penalise savings so suggest that either the family home or perhaps the first $750,000 or $1,000,000 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. Again, an exemption of say $750,000 or $1,000,000 might be introduced to avoid penalising the least wealthy or avoid discouraging savings.
Taxes on bank transactions, either within New Zealand or on foreign transactions have also been suggested.

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Revised. 7 Oct 2020, 6 Oct 2021, 21 June 2022, 21 Aug 2022, 26 Aug 2022, 20 Oct 2022, 1 Nov 2022, 15 February 2023, 13 May 2023.

A Proportional tax is a tax where the tax paid is at a fixed rate so the total tax collected is directly proportional to the income earned. The marginal tax rate does not increase or decrease as gross income increases. A proportional tax is also known as a uniform tax or flat tax.

3. Regressive tax A Regressive tax is a tax where the marginal tax rate (MTR) decreases progressively as income increases. The tax decreases may occur in steps at specific thresholds or in direct relationship to the gross income earned.

A proportional tax rather than a progressive tax is used with a Basic Income because a proportional tax reduces the total cost of providing a Basic Income and provides better targeting of a Basic Income to those on low incomes.

A proportional tax provides better targeting of a Basic Income to those with low incomes than can be achieved with a progressive tax.

See: "How do incomes change with a Basic Income?" below for worked examples that show how the combination of a Basic Income with a proportional tax provides the best targeting and lower overall cost.

Alternatively, when governments lose tax income because of lower initial income tax rates they respond by cutting other essential expenditures such as education and health.

A better solution is to pay a Basic Income and tax all other income with a proportional tax.

For other alternatives see the Ulm Model below.

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As a general rule, a regressive tax is not recommended as it accelerates the transfer of wealth from the poor to the wealthy.

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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 five steps.

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The first tax rate of 10.5% applies to all income up to $13,999

The second tax rate of 17.5% applies to all income from $14,000 to $47,999

The third tax rate of 30.0% applies to all income from $48,000 to $69,999

The fourth tax rate of 33% applies to income from $70,000 to $179,999

The fifth tax rate of 39% applies to all income above $180,000

A person with an income greater than $180,000 will have:

the first $14,000 of their earnings taxed at 10.5% and

the next $34,000 at 17.5%,

the next $22,000 taxed at 30%,

the next $110,000 taxed at 33%, and

all income over $180,000 taxed at 39%.

These are the marginal tax rates.

The marginal tax rate is the rate at which the last dollar earned is taxed.

A person's marginal tax rate may be 10.5%, 17.5%, 30%, 33% or 39% depending on a person's income

Thus, for a person earning more than $48,000 but less than $70,000, the marginal tax rate is 30%

for a person earning more than $70,000 but less than $180,000, the marginal tax rate is 33%,

for a person earning more than $180,000, the marginal tax rate is 39%.

The average tax paid is often considerably lower than the marginal tax rate, perhaps less than 25%.

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How do tax cuts work and who benefits the most?

People's incomes and pay rates tend to increase with time due to inflation. If the tax margins are not increased in line with inflation, people will end up paying a greater percentage of their income in taxation. Real incomes after tax will reduce.

When the economy is doing well, governments, even when they increase expenditure in line with inflation, may end up with surpluses.

One reaction is to talk of tax cuts but Basic Income is a better alternative.

In difficult times, governments may incur a deficit - this is when government expenditure exceeds income.

Again, some people call for tax cuts to boost the economy. However, the proven link between tax cuts and a boost to the economy is dubious. A Basic Income is a better alternative because it will boost both the economy and government revenue.

A Basic Income is a better alternative because, when applied correctly with an appropriate tax regime, it will target the money toward those most in need of income while maximising the boost to the economy.

There are two ways tax may be cut.

The first method is to increase the tax margins or thresholds, the point where the tax rate changes from one tax 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 the tax rates.​

This may occur if the government still 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 $180,000.

Those who receive the greatest tax reduction in total dollars will be those with incomes greater than $180,000, those with the highest incomes.

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 to those on the lowest incomes.

This is because those on lower incomes will receive only part of the benefit of the tax cuts while those on higher incomes will always receive the full benefit. Tax cuts invariably favour those on high incomes or the wealthy.

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A Basic Income is a more efficient way of distributing value to those with the lowest incomes, as explained in more detail below.

Would a personal tax exemption work?

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A personal tax exemption is an amount that people are allowed to earn before they are taxed.

The suggestion is that those on low incomes will benefit from being able to work and earn a relatively low income before being taxed. For example, the first $500, $1,000, or $2,000 per week earned may be tax-free. These amounts are equivalent to $26,089, $52,178, or $104,355 per annum.

However, with such a scheme:

Those who earn no income will receive no additional income from the proposal.

Additional income after tax will progressively increase up to the threshold point where incomes begin to be taxed.

All those earning more than the tax-free threshold will receive the maximum increase in income.

As a result, personal tax exemptions target money toward those who earn more than the tax-free threshold. They give more to the wealthy than to the poor and considerably add to the cost of a scheme that uses such exemptions.

A Basic Income coupled with an appropriate tax works better by ensuring that the maximum benefit is received by those with the lowest incomes with the increase in net income reducing as gross income increases. This ensures that money is targeted toward those most in need.

What happens with a change from a progressive tax to a proportional tax?

3. Regressive tax
A Regressive tax is a tax where the marginal tax rate (MTR) decreases progressively as income increases. The tax decreases may occur in steps at specific thresholds or in direct relationship to the gross income earned.

The second method is to reduce the tax rates.

This may occur if the government still has an annual surplus after the first method has been applied.