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Taxation and Basic Income

 

1 April 2023 Jobseeker Support and New Zealand taxation figures are used on this page.
 

This page looks at issues associated with Basic Income and taxation. It assumes that the reader is familiar with the concepts outlined on the page, Taxation Basics which should be read and understood first. 

Because a Basic Income is likely to result in significant increases in total government expenditure, increases in tax or alternative tax sources are likely to be required to pay for a Basic Income. It is therefore likely that income tax will be retained, at least in the short term, as any alternative taxation introduced to pay for a Basic Income is unlikely to be sufficient to enable income tax to be eliminated during the introductory phase (van Parijs and Vanderbought 2017).  
 

A Basic Income may be paid as a taxable amount, as New Zealand Superannuation and the majority of New Zealand Benefits are, or paid as a tax-free amount. A Basic Income may be paid in conjunction with a progressive, proportional, or regressive tax. This gives six possible combinations. If it is paid as a taxable amount we can expect that, like New Zealand Superannuation, the amount paid will be added to other income and that the tax will be calculated on the total income. If, however, it is paid in conjunction with a proportional tax (uniform or flat tax), there is no difference in the net amount paid between a taxable Basic Income and a non-taxable Basic Income, if the Gross value is increased in such a manner that the net amount is always the same value. There is also no difference in the net cost to the government. This page compares the different outcomes with the different possible tax systems that might be used with a Basic Income so that the most appropriate method of taxation can be determined. 

Paying a Basic Income as a taxable amount in conjunction with an appropriate tax regime will maximise the value of the Basic Income that may be paid, improve the targeting of the money available to those on the lowest incomes, and minimise the total net cost to the government of a Basic Income scheme, where the net cost is government expenditure after tax has been deducted. This will in turn minimise the additional funding required from increases in current taxes or from alternative sources of funding. Alternative sources of funding are also discussed briefly below.

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  • 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 figures given on this page are estimates only.
     

  • The examples given are for illustrative purposes and do not necessarily represent the policy of this organisation.
     

  • 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 or net cost per capita of the scheme. A scheme with better targeting delivers a higher Basic Income at less cost per person.
     

  • A Basic Income scheme that delivers 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 income 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 costs. It may therefore be politically easier to introduce. 
     

  • 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, those in the higher tax brackets will receive marginal or overall tax cuts with a loss of tax revenue for the government. Using a two, three or more-stage tax that retains tax rates higher than the initial tax rate will avoid tax cuts to marginal or overall rates for those with higher 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 while 

    • ensuring that those with the least need for a Basic Income receive the least benefit, and

    • minimise the overall cost of a Basic Income scheme.

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. A more expensive scheme will make it more difficult to introduce a 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 which is to ensure that those with the greatest need benefit the most and that there is a smooth and automatic transition to those who have a smaller need and benefit less while administrative costs are kept to a minimum.
     

  • 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 taxes paid in absolute dollars by 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.

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On this page

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Scroll down to read more.

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  • Why use a proportional tax?
     

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

  • 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 Transfer Limit or 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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Why use a proportional tax?

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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 Taxation Basics).
 

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 a larger value discount in absolute amounts to those on higher incomes. The people who need the discount the least get the largest value 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 must 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 evasion and are a disincentive to work.
  • Governments, aware that tax rate increases are unpopular, may compensate for reduced tax income arising from lower initial income tax rates by cutting 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 rather than 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 
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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 and should be offset by providing a Basic Income. 
       

  • Reducing the proportional tax rate further, to a value 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.​

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  • Changing to a proportional tax of 33% will result in a person on a minimum income of $22.70 per hour (p.h.),  $47,377 per annum (p.a.) (2023), paying an additional $8,317 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 by a change o a proportional tax.

 

  • 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.

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

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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.
       

  1. 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.
       

  2. 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.
       

  3. A tax-free Basic Income with a progressive tax 
    As a general rule, any Basic Income scheme that combines a 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 usually recommend that those who receive a Basic Income will have all other income taxed at a proportional rate. 

    • However, if the tax rate chosen for the proportional tax is less than the maximum marginal rate under the present progressive system, a tax cut for those on the highest marginal rates will occur. To prevent tax cuts for high-income earners, a two or more-stage tax is recommended with the higher marginal tax rates maintained.

    • Another exception to this is when a two or more-stage tax is used for a scheme such as the Ulm Model, or transfer limit model. For further discussion on this see 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.

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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 if or when the present progressive tax is replaced with a 33% proportional tax.

Some Basic Income advocates suggest a net Basic Income of $175 p.w., $9,131 pa. be paid with a two-stage tax, 33% for incomes less than $180,000 p.a. with a 39% marginal tax on incomes above $180,000 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 $22.70 p.h., $908 p.w., or $47,377 p.a. (2023), and

  • $70,000 p.a. to $180,000 p.a.
     

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

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  1. A net Basic Income of $174.02 p.w. with a 33% proportional tax.

    • ​A person with no income will receive the full $174.02 p.w., or $9,080 p.a. 

    • A person on a minimum income of $22.70 p.w. will receive an extra $14.50 p.w., $756.32 p.a. (2023)

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

  2. 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 of $22.70 will receive an extra $140.91 p.w., $7,353 p.a. (2023)

    • A person on $70,000 p.a. will receive an extra $133.45 pw., $6,963 p.a. (2023)

    • A person on $180,000 p.a. will receive an extra $121.50 pw., $6,399.38 p.a. (2023)
       

  3. 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. 

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Note: with a proportional tax, for every dollar increase in net Basic Income 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.

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Example 2. ​A net Basic Income of $338 per week or  $17,622 per annum (from 1 April 2023).

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  • This rate is the same as the adult jobseeker rate from 1 Apr 2023.

  • The gross value of the Basic Income is $386.54 per week or 20,168.69 per annum. (2023)

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The minimum income for 2023 is $22.70 per hour before tax.

  • A person working 40 hours per week will receive $908.00 per week or $47,378 p.a. gross or before-tax income.

  • After-tax figures are $767.26 per week or $40,033.64 per annum with the current progressive tax.

  • After-tax figures are $607.35 per week or $31,716.29 per annum with a proportional tax of 33%.
     

​A tax-free Basic Income with a proportional tax of 33% - 2022.

    • A person with no income will receive the full $338 p.w., or $17,622 p.a. (2023)

    • A person on the minimum income of $22.70 p.h. will receive an extra $178 p.w., or $9,299 p.a. (2023)

    • A person on $70,000 or more but less than $180,000 will receive an extra $164 p.w., $8,542 p.a. (2023)

  2. A taxable Basic Income with a progressive tax - 2022. 

    The taxable or gross value of the Basic Income will be $386.54 p.w., or $20,169 p.a. (2023) 

    • A person with no income will receive the full net or after-tax payment of $337.74 p.w., or $17,622 p.a. (2023)

    • A person on the minimum income will receive an extra $272 p.w., $14.197 p.a. (2023)

    • A person on $70,000 will receive an extra $259 p.w., $13,514 p.a. (2023)

    • A person on $180,000 will receive an extra $236 p.w. or $12,304 p.a. (2033)

  3. A tax-free Basic Income with a progressive tax - 2023.

    • ​A person with no income will receive the full $$337.74 p.w., or $17,622 p.a.

    • A person on the minimum income will receive the full $337.74 p.w., or $17,622 p.a.

    • A person on $70,000 or greater will receive the full $337.74 p.w., or $17,622 p.a.

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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. 

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

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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.

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  • New Zealand welfare payments such as jobseeker support are as a general rule considered to be taxable income.

    • The government pays the net amount and the cost to the government of deducting tax at source is negligible.

    • Similarly, when a Basic Income is paid with a proportional tax on all other income, the government will pay the net or after-tax amount.

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Will everyone have to change to a proportional tax?

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No. Only those receiving a Basic Income.

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  • A feature of a Basic Income scheme paid in conjunction with a proportional tax is that only those receiving a Basic Income will need 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.

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What about people on temporary work permits?

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  • A Basic Income is normally restricted to citizens or those with permanent residency. This question needs to be considered carefully 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

    • third, 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 proportional Basic Income scheme 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.
     

  • Government 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 or three-stage tax system. With such tax systems, the tax rate may either increase or decrease above pre-set income thresholds.
     

  • Using a two or three-stage tax gives the designers of a Basic Income more flexibility. Tax rates for net recipients and net payers can be adjusted independently to ensure that payments to recipients are balanced by the extra tax raised, or to maximise the benefits achieved with a Basic Income.
     

  • When a uniform (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 constant negative Basic Income and the positive uniform tax are added together 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 progressively increases.
     

  • 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. 
     

  • For a two-stage tax, 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 scheme with a low initial tax rate that increases above a threshold results in lower marginal tax rates on extra income earned by those with part-time work, reducing the disincentive to work. However, this tends to reduce the overall government tax income of a Basic Income scheme so higher tax rates are necessary above the threshold.​

    2. In the second case, a higher initial tax rate, and a lower rate above the threshold will increase the government tax revenue 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.

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What is the Transfer Limit or Ulm Model?

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  • 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. At the transfer limit, the net income received 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 lower incomes.
     

What is a modified Ulm Model?

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  • 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 further 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.
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Further information

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

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​To a large extent, a modest Basic Income will become self-sustaining over time but some additional taxation may be necessary to start or sustain the scheme.
 

  • 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 raised by paying the Basic Income as a taxable amount. For those receiving a Basic Income, adding the gross value of the Basic Income to other income received and taxing the total income with an appropriate tax such as a proportional or a two or three-stage tax as discussed above will increase tax revenue.
     

  • 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 possible taxes may be a way of avoiding distortions to the economy and unintended consequences. Some suggestions follow but there are also other possibilities.
     

  • A consumption tax may be applied in various ways including sales taxes and VAT or GST. Increasing GST is one way of increasing tax revenue. The following points should be noted.

    • GST increases will increase the cost of goods and services requiring those on low incomes to spend more for essential goods and services. Consequently, the value of the Basic Income must be increased further to compensate for the increased cost of living.

    • Unduly high GST rates may result in more goods being purchased online from foreign countries so this loophole must be closed and kept closed.

    • Some people may travel to foreign countries with lower GST rates to purchase goods or services or to spend their money on various activities. 

    • High GST rates 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.

    • While those with higher incomes will spend more on goods and services and consequently more in total GST they generally spend a smaller proportion of their total income on goods and services than those on lower incomes. This allows the wealthy to continue to increase their absolute wealth at a faster rate than those with low wealth and low incomes.  

    • GST paid by firms on the purchase of big-ticket items such as aircraft, busses, and so on will result in higher costs to the firms that will be passed on to consumers and impact those with lower incomes more than those with higher incomes.

    • High living costs due to GST increases may be a disincentive to inbound tourism while encouraging outbound tourism resulting in reduced government tax revenues and reduced private revenue from tourists.

    • van Parijs and Vanderborght, 2017, note that increases in GST are unlikely to produce sufficient increased revenue to allow the abolition of income taxes. They say, that like a linear expenditure tax, a GST will tend to tax the incomes of high earners at a lower rate, owing to their saving a higher proportion of their income. They conclude, that "there is no fundamental reason for rejecting GST or another form of sales tax as a way of funding a Basic Income, but no fundamental reason for adopting it either".
       

  • 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 to $2,000,000 of property should be exempted from this new tax.

    • A property tax rather than a comprehensive wealth tax is suggested as it will encourage people to invest in productive industries rather than parking their wealth in land but it will not be as effective as a comprehensive wealth tax at countering a very large accumulation of wealth by a small number of individuals. 
       

  • 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 to $2,000,000 might be introduced to avoid penalising the least wealthy or to avoid discouraging savings.
       

  • A capital gains tax.

    • Taxing capital gains tax on properties is sometimes seen as taxing another form of income but there are issues.

    • Capital gains or part of capital gains may be due to inflation and therefore not a real gain in value or real income. Capital gains must therefore be corrected for inflation. 

    • Capital gains are not realised until a property is sold. This means that accurate records must be kept of the purchase price of properties. Private homeowners may find they do not have sufficient funds to purchase a home of the same value after their property is sold and the capital gains tax is deducted. 

    • An exemption of say $750,000 to $2,000,000 on properties or exempting a family home might be introduced to avoid penalising the least wealthy homeowners or to avoid discouraging private home purchases. Many countries exempt the family home from capital gains for this reason.

    • Capital gains taxes do not directly tax accumulated wealth which may be a greater problem than capital gains.

    • Some consider that a wealth or property tax is preferable to a capital gains tax.​​
       

  • A transaction tax on bank and other transactions, either within New Zealand or on foreign transactions has been suggested.
     

  • Environmental taxes such as carbon taxes have been suggested.

    • Such taxes are not directly related to the central issues of income and wealth that a Basic Income seeks to address, but

    • Spending such taxes on a Basic Income could be justified as a fair way of distributing additional government income gained from a new tax. 

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END

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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; 14 June 2023; 14 July 2023. 24 July 2023

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