How to Reduce Inequality s1

Increasing Equality [email protected] March 2016

Introduction The future of mankind is under threat from many directions. Some threats have always been present. Inequality and unemployment are two such enduring problems which have many faces. The continuing accumulation of wealth in few hands increases inequality while the accelerating progress of technology threatens the jobs of even the increasingly precarious “middle -class”.

The more forward looking politicians are increasingly aware of these threats and are searching for ways of, at least, relieving the problems. For example see http://www.davidclark.org.nz/2014/10/universal-basic-income-anyone/ particularly the video “Humans Need Not Apply”.

There have been many ideas. Most have been considered by themselves. But a combination of some old ideas can be seen, with the aid of computer modelling, to be more powerful than any one of them. Chief amongst these ideas is the concept of a Universal Basic Income (UBI). This is not a new idea, having been actively advocated since at least 1800. The focus has been on reducing poverty but modern communications have led to an increasing demand to also reduce the wealth and power of the most affluent. Some see this dual task as essential for the preservation of capitalism and democracy.

Pope Francis has called inequality one of the greatest threats to our civilization. The OECD have declared inequality to be a threat to economic growth. So both those who worship God and those who worship money want to see a greater distribution of wealth.This objective is given further impetus by studies which report that policies which put spending power into the hands of those with the least spending power increase GDP the most.

(See https://medium.com/basic-income/how-we-can-transform-americas-broken- economic-system-to-work-for-everyone-ddba38fc328a and https://www.fas.org/sgp/crs/misc/R41849.pdf )

So it may well be the case that by increasing equality everyone becomes better off financially and socially.

There have been many names and many varieties of UBI considered over the years. It is not the purpose of this paper to review these varieties of UBI nor to review the many forms of tax that could be used to finance the UBI. A realistic UBI will have many benefits but the tax used to finance it could negate some of those benefits. Few advocates have addressed the question of finance in any detail. It is this which is the main focus of this paper. This paper is intended to stimulate discussion, to raise questions and to answer a few of them. It is intended to show the existence of a powerful mechanism for reducing inequality.

The paper estimates the effect of a UBI on people with different incomes and assets. It demonstrates that a combination of a UBI with Income Tax and an Asset Tax can be 2 used to increase equality of both wealth and income to almost any desired extent by the appropriate choice of variables. The paper makes no attempt to finally choose the values of any of those variables but gives a number of examples. The figures that are used are intended to be illustrative only. The actual levels of UBI and taxes must ultimately be determined by the Government of the day.

Layout of this paper What is suggested is a major change to our taxation and benefit systems. This will have many side effects. In order to concentrate on the main structure some things are discussed in an appendix "Frequently asked Questions" and referred to as FAQ 1 or 2 etc. "How to get there from here" is outlined in a supplementary paper "Transition to a UBI & Asset Tax" available on my website http://perce.harpham.co.nz. The present paper and the spreadsheet referred to later are also available on the same website.

Why we need a new imperative One of the most striking features of the past 30 years is the rapid increase in inequality of both income and wealth. The titles of the following recent books reflect some of the history: • Wilkinson & Pickett "The Spirit Level - Why More Equal Societies Almost Always Do Better" (2010) Penguin Books. • Joseph Stiglitz “The Price of Inequality: How Today's Divided Society Endangers Our Future” (2013) Penguin Books. • Thomas Piketty “Capital in the Twenty-First Century” (2013) Harvard University Press. • Malcolm Torry “Money for Everyone; Why We Need a Citizens Income” (2013) Policy Press UK • Guy Standing “The Precariat - the new dangerous class” (2014) Bloomsbury.

Others have spoken out • The World Bank President, Jim Yong Kim, at the IMF - World Bank Spring Meeting 2014 said “fewer than 100 people control as much wealth as the poorest 3.5 billion combined.”

• Pope Francis in May 2014 called for governments to redistribute wealth to the poor in a new spirit of generosity to help curb the "economy of exclusion" that is taking hold today.

• The IMF were reported on March 13, 2014 by the Inter Press Service as saying that income inequality tends to reduce the pace and durability of economic growth and have gone on to suggest approaches to progressive redistribution with national tax and spending policies “purposely tilted in favour of the poor”.

This latter remark is as valid in New Zealand as elsewhere. Our present welfare system has reverted over its last 30 odd years to its first origins as for “the deserving poor”. It has been repeatedly patched and modified into a level of complexity which is expensive to administer and often stressful for the beneficiaries. In my view there is a requirement to greatly simplify the system and to increase equality in all respects. 3

The first industrial revolution resulted in an enormous improvement in productivity but the benefits of this accrued mostly to those who were already wealthy enough to finance the machinery that improved the productivity. Those who worked the machinery took some two hundred years to achieve anything like a fair share of the benefits.

There is a need now for a “post-industrial” society which does not take another two hundred years to distribute some of the advantages of the electronic and robotic revolution. Otherwise, reinforced by globalization, the spectre of unemployment and social unrest looms large.

Equality is, of course, a matter of more than money. Other non-monetary factors (such as gender, ethnic identity and so on) can lead to very significant inequalities. Also, if the same things and services were provided free of charge to everyone (using public funding) then there would be equality with respect to such offerings. I think of the availability of free swimming pools, healthcare, education, transport, school meals, parks, childcare and so on. There are many such things which are not currently fully publicly funded. Thus income and personal wealth play a very significant role in people's ability to lead the lives that they could live, and in the shaping of society as a whole.

This paper offers a mechanism for government policy to directly increase both income and wealth equality. The "Spirit Level" book noted above has demonstrated the destructiveness of inequality with respect to the health and happiness of whole communities. Poverty in New Zealand cannot be compared to poverty in many countries but inequality can. Both are now increasingly recognized as undesirable and unethical.

A part of the problem in New Zealand appears to stem from the country, in 1984, joining the philosophy that then swept the world based on the various mantra of “user pays”, “trickle down”, “market forces” and “small Government”.

The following graph (Rashbrooke, 2013) shows how income inequality has increased in New Zealand since 1984. The top line is the inflation-adjusted incomes of the top 1% of earners (pre-tax) and the bottom line is the income of the bottom 10% (post- tax, because a different data source is employed). The gap between the top and bottom lines, and indeed between the top and everyone else, is very clear. 4

The glaring disparity in incomes is compounded by the huge accumulation of wealth by the better-off, as is indicated by the area shaded for this purpose in the figure above. To improve equality we must deal with both the disparity in incomes and in wealth.

The bottom line on the graph gives emphasis to the comment that “the poor are poor because they have no money” rather than because they are lazy, stupid or ignorant.

In New Zealand, the long established concept of a “safety net” has been diluted with many questions about who is deserving, how much do they deserve, how much surveillance is needed to ensure that they continue to deserve (the 2014 budget included $49 million for this purpose), how can they be forced to be different and so on.

Few have questioned if the rich are deserving of their wealth. But worldwide there are increasing questions about the creation of money by banks, the power of global corporations, patronage of political parties, inadequate financial regulation, tax havens, tax avoidance and the like.

Taxation and benefit systems need to be modified so that the same strictures are applied to people at both ends of the spectrum.

In New Zealand Superannuation we have an example of a benefit system which solves many of the problems that beset other benefits. Superannuation is close to being a Universal Basic Income (UBI) that citizens automatically receive after they reach the age of 65. It has none of the complexity of “means testing” or many of the 5 attendant compliance and surveillance issues that now plague our other benefits. This approach could be extended to the whole population with a different UBI dependent solely on age. But how can we also tackle inequalities of wealth?

One of the more obvious manifestations of wealth inequality is in the homes of individuals. They vary from poor-quality housing to "mansions" and multiple homes. As there is some correlation between property ownership and total wealth, we can usefully consider the example of local bodies, which are financed by Rates – a form of Asset Tax – when thinking about reducing wealth inequality. (See FAQ 3 – Why not tax all wealth?)

Other forms of tax might be used to finance the UBI, but there are particular virtues in an Asset Tax on rateable properties. Such a tax could be collected easily as an addition to Rates. An Asset Tax would also help to ensure that wealth is used productively. The level of the Asset Tax needed to finance UBIs depends on the levels of Income Tax and the cost of the UBIs. And we need to find a way to ensure that the Asset Tax does not negate the benefit of the UBI for those it is most intended to assist. But let us consider a UBI first.

The growing list of UBI advocates. In New Zealand Keith Rankine has continually advocated the "basic income/flat tax" and variants for many years. He has also reviewed much of the UBI history in New Zealand (Rankine,1998).

Professor Evelyn Forget has traced how close the United States and Canada came to adopting a form of UBI in the 1970s (Forget, 2008). In the American case, the government almost adopted a Guaranteed Annual Income as part of President Lyndon Johnson's ‘war on poverty’. The idea was pursued by presidents Richard Nixon, Gerald Ford and Jimmy Carter, but was abandoned after the election of Ronald Reagan in 1980. The history of the Canadian pilots has also been documented in further detail (Bregman, 2013).

A wide range of sources in recent years have recommended either a UBI or something close to it. The Mirrlees Committee in the United Kingdom reported back, after its two-year enquiry into the British tax and benefit system, that, ‘The holy grail of integrated design, however, has always been the integration of taxes with benefits. The attractions of integrating taxes with benefits … removes the need to separate out means-tested benefits as a special mechanism.’ (Mirrlees, 2011)

A UBI is to be the subject of a referendum in Switzerland in 2015 or 2016 and has been advocated by various European and North American politicians. Pilot projects are getting underway in both Finland and Holland. Closer to home, the 2011 work by Gareth Morgan and Susan Guthrie, The Big Kahuna, successfully critiqued our current tax and benefit systems while advocating a UBI and an Asset Tax, albeit a different one to that outlined in this paper.

They may not be directly relevant to the western world but pilot or ongoing projects in Namibia, India and Brazil have shown that the security of even very small ongoing payments without conditions can have large effects in terms of self-sufficiency, innovation, health and education for the impoverished. 6

It is worth noting, however, that not all UBI proposals have serious merit. In 2012, as part of the Welfare Working Group’s inquiry, the Treasury considered a UBI of $15,600 a year for people aged 16 and over and $4,472 a year for children (Treasury, 2011). This was to be funded entirely from income tax and the abolition of other benefits and would have needed a flat tax rate of 44.4% to 50% on every dolar earned in order to fund it. This was, in my view rightly, considered to be impractical and did nothing directly to reduce the inequality of accumulated wealth.

Some thoughts about a UBI. A UBI can be seen as a natural progression in the evolution of human rights through time. Individuals have gone from being chattels of others, in the pre-modern practices of serfdom and slavery, through to being emancipated by notions of freedom and the basic equality of all human beings. These freedoms logically extended into individuals having the right to choose their leaders, for landowners to vote, then for all men to vote, and – eventually – for all women to vote. By the mid twentieth century, these rights had extended to all individuals being entitled to a "safety net" via the cradle to grave welfare system.

However, the modern welfare state has changed to make the safety net into something of a "containment net" for the poor with means-testing, surveillance, loss of privacy, restriction of choice and a "poverty trap" for those who obtain a benefit that is often too low to keep them out of income poverty. In this modern age, people should be able to live with some dignity as of right – and the UBI is perhaps the most effective and fair way to ensure that dignity.

The present welfare system is made more complex and, in some cases, more of a prison by being largely based on social assumptions from the past. It is now much harder to define what is meant by "a family", "living alone", "sharing " and the like. Relationships change more quickly and more often. Work status can be very erratic. The population is more mobile. A great simplification can be achieved by making all payments universal, to the individual, and based solely on age.

A UBI, in my view, should be simple, understandable, effective and easily administered. To fulfil these criteria I suggest that the UBI should: • be paid to all citizens of New Zealand and special cases (see FAQ 10 – What about non-citizens?) as individuals; • be independent of people’s living and other arrangements; • vary only with age, having different rates for children, youths and adults; • be tax-free.

An unrecognized UBI. There are often unexpected side effects of features of complex systems. One such effect is hidden in the present income tax structure. This is apparently designed to assist those on low incomes but which, strangely, gives greater benefits to those on higher incomes. This follows from an observation by Keith Rankine some years ago.

Our current tax structure and the tax payable at different levels of income are as follows: 7

 Income tax on the first $14,000 a year of income, at the current tax rate of 10.5%, is $1,470  Income tax on the next $34,000 a year at 17.5% is $5,950  Income tax on the next $22,000 a year at 30% is $6,600. This gives a total of $14,020 on the first $70,000  Thereafter the tax rate is 33%

One consequence of this structure, in which (in New Zealand as elsewhere) the tax rates increase in steps, is that those who earn enough to pay the higher rates of tax still get the benefit of all the lower rates on smaller amounts of income. For example, if every dollar of a $70,000 income were taxed at 33%, the tax payable would be $23,100 instead of $14,020 – some $9,080 more than at present. Someone on $1,000,000 a year is also $9,080 a year better off because of the lower tax rates applied below $70,000. Those earning below $70,000 a year, however, do not get the full financial benefit of the lower tax rates. This is clearly less than ideal, if we want to be fair and want the tax and benefit systems to promote equality.

However, the above calculations point to an intriguing possibility. All those on $70,000 and above per year, currently, effectively enjoy a UBI of the form that I suggest. That is to say that they pay 33% tax on every dollar of their income but get a tax-free payment of $9080 per year. This is regardless of their level of income above $70,000, their assets or other circumstances such as being a superannuitant. It is not in any way means tested and does not vary as their earnings increase.

These numbers, in other words, provide the first foundations for sketching out a UBI- based system in New Zealand with the features of no means testing and the same tax for everyone. If we gave the same $9080 per year and taxed all their income at 33% everyone on less than $70,000 per year would be better off and we would have simpler tax and benefit systems.

So why don’t we give everyone $9,080 a year and tax all income at 33%?

If we did this for, say, 18 to 64 year olds, it is easy to see what difference this will make compared to the present tax structure. Note that the UBI is not taxed, but all other income would be taxed at 33%, giving us the following net differences from the present levels of annual income:

Taxable Income ($) 0 14,000 48000 70,000 100,000 Difference ($) 9,080 5,930 660 0 0

With the UBI suggested above everyone on less than $70,000 per year is better off and no one is worse off. As a result, there will be less income tax collected and we have to find some way of making it up. Of course, $9,080 is not a magic number, nor is it necessarily the right level for a UBI. It is merely the level that comes logically out of the present tax structure. We will explore some alternative figures below.

Before we do that, however, it is worth looking specifically at how a UBI might help reduce poverty – and in particular child poverty. New Zealand has high levels of child poverty, and the issue represents a major social, ethical and economic concern for citizens and policy-makers. Working for Families has reduced some child poverty, but 8 with limited results for households where parents are not working, and at the expense of adding considerable administrative complexity.

It would be far simpler and, in my view, more satisfactory to replace Working for Families with different levels of UBI applied to younger age groups, including children in households where neither parent is working. Child poverty could be significantly diminished in this approach depending on the level chosen for their UBI. These UBIs would normally be paid to parents or caregivers, on top of their own UBI. The figures could be set at, for instance, $5,000 a year for 13 to 17 year olds and $3,500 a year, or more, for younger children. In view of the current discussions about the needs of 0 to 3 year olds in particular it may be that the latter figure should be higher but I will use these figures for illustration.

As above, we are not limited to $9,080 (or the above figures for children) in our choice of the particular level of UBI payments. There are, however, a number of considerations that might guide us in selecting the desired level of the UBI. First, it is worth thinking about present benefit levels. The UBI should be set high enough to replace most current benefits (although hardship grants and the like will still be required for particular cases). And it would be difficult to argue that present benefits are currently set too generously, given the high levels of poverty among beneficiaries and the working poor.

Second, there is the question of affordability. Any decision to pay a UBI will create significant extra costs for government, which will have to be met through the tax system. Some, but only some, of the additional costs would be funded from the considerable administrative savings that will result from implementing the UBIs. The UBIs will also replace many existing benefits. Financing is the second half of our proposal for a reformed tax and benefit system, namely an Asset Tax and changed Income Tax. Before that, however, it is worth considering some of the benefits that a UBI might bring with its changed approach and focus on increasing equality.

Some Benefits of a UBI I will discuss at some length just one of these benefits. A UBI of the type I suggest would reduce the incentive and opportunity to "game" our faulty system. For example consider the 2015 Job Seeker Allowance (this being a euphemism for Unemployment Allowance)

Annual Job Seeker Allowance, after tax, different classes, tax rate “M”. Single 18-19 at home $7,304 away from home $9,175 Single 20-24 $9,175 Single 25+ $10,956 Married, civil union, defacto (with or without children) $9,175

There is a clear temptation, to make false claims about one’s status, given the higher benefits for different classes of people. A costly bureaucracy is needed to detect and deter such gaming of the system. In addition to the tangible cost to Government, there is also a less tangible cost to people's quality of life if they feel that they live in a 9

‘surveillance state’ that intrudes unnecessarily into their personal arrangements. With a UBI whose payment depends only on age, not one's living arrangements, these problems do not arise.

A tax-free UBI with no “claw-back” of earnings would make any level of paid work improve the position for beneficiaries. Currently, especially for those who do not qualify for Working for Families, taking a job at, say, 20 hours a week at the minimum wage may not look very attractive. Benefits are currently reduced as earnings increase, and given the transport and other costs of being in work, the individual may be worse off than they were without a job. In other words, the present arrangement for “job seeker” benefits actively discourages people from seeking work. This is known as "the poverty trap". When the poor earn something then currently, because they are no longer so poor, they are less “deserving”.

And, strangely, they are also less deserving if they are foolish enough to marry or to share scarce housing.

With a uniform tax rate and no reduction of the UBI regardless of how much or little an individual earns, the "poverty trap" is removed. Even a single, 25+ unemployed person would be better off on a relatively low UBI than on the current benefit of $10,900 – just as long as they could get even a few hours of paid work per week.

A UBI would, arguably, promote an innovation climate, in which someone who wanted to start a small business could manage with only a little income from the business, as the UBI would provide a “base” income. They could then employ others with the necessary skills for only a few hours at a time, and have employment grow with the business.

There are many benefits of UBI which are deserving of a similar discussion to that above but UBIs, if set at the right levels, could promote:  A stop to “beneficiary bashing” and official intrusion into people’s lives ( See FAQ 1 What about the bludgers?)  Easy collection of fines and child maintenance  Reduction of child poverty  The empowerment of women and recognition of mothers and carers

 Possible repopulation of rural centres with retired and seasonal workers.  A large saving in the administration costs of benefits  A reduction in ACC and student loan problems  Easier rehabilitation of prisoners

 Improved feelings of security and reduced stress for many  An improved worker/employer power balance  Improved social cohesion and a more resilient economy  An improvement in health and school attendance  See FAQ 13 for more of the many potential benefits of a UBI.

As an example of the many side issues consider Accident Compensation. If someone was earning $30,000 per year and a UBI of, say, $10,000 then in the event of an accident if ACC paid its normal 80% of earnings the victim would have $24,000 plus 10 the UBI of $10,000 instead of a mere $24,000 of income. Would, or could, or should the ACC payment be reduced with consequent savings to employers and the self employed?

Another issue is the need to maintain an adequate minimum wage so that the UBI does not simply become a subsidy to employers.

A flat tax An element of this integrated tax-benefit system is a UBI – a flat rate Universal Income Tax (33% in the discussion so far). The virtue of this flat tax rate is that it reduces the opportunities for avoidance and greatly simplifies the tax system. There is also merit in having higher taxes for extreme incomes and this is discussed in Appendix 2 but not included in the current modelling. To the extent that such higher taxes were levied they would reduce the need for either Income Tax or Asset Tax.

An Asset Tax will make Wealth Work It is generally accepted that people should, where possible, work for their living. Equally there should be a responsibility on those who control the wealth and assets of the country to ensure that they are used productively for the benefit of the country rather than simply for private enjoyment. Any tax on assets will encourage the productive use of those assets and reduce inequality. If the assets do not earn then the tax will erode them.

We noted earlier that local bodies collect property-based rates. Regional Councils already add to local body rates. It therefore seems sensible that all assets subject to local body rates have a central government charge added to them – an Asset Tax. Apart from encouraging the efficient use of capital, an Asset Tax would broaden the tax base and increase the tax paid by overseas owners of New Zealand assets. It would be reasonable to expect it to also reduce the prices of property.

If there were no exemption for a family home, the tax would be very easy to administer. Questions of multiple ownership would not have to be resolved. Whoever paid the rates would pay the tax be they individuals, companies or trusts etc.

I prefer the name Asset Tax although this proposal is based on taxing property. The use of property as a convenient proxy for the entire wealth of individuals is extremely convenient. The base could be extended to include cars, caravans, boats, planes and so on. Or even to the comprehensive listing of personal jewellery, furniture and clothing etc required in India's Wealth Tax. But it would become vastly more complicated and intrusive for taxpayers and expensive for the bureaucracy. We are fortunate in New Zealand to have a well established valuation system for use by local bodies and can readily build on that.

Modelling the integrated tax-benefit system Let us now explore the concept of a UBI combined with an Asset Tax and Uniform Income Tax.

I cannot sufficiently emphasise the importance of considering tax and benefits at the same time. The latest paper from the Child Poverty Action Group gives many 11 examples of the damage that results from current policies devised for and administered by different departments - for example: if a working father leaves the family and the mother is not working Work and Income peer into the bedrooms of the poor to see if the sole parent is co-habiting and therefore not entitled to a benefit. On the other hand the IRD, even less qualified in social matters, peers into the bedrooms of the poor to see if she is not co-habiting so that she can be denied the IWTC (In Work Tax Credit) for her children.

To work out the various possibilites for the combination of tax and benefits I have set up an interactive spreadsheet model. Before showing some of the results I will explain some of the components of the model.

As is implied in the discussion above there will also be a need for an additional payment to the UBI for those 18 and over in order to compensate the less well off for the Asset Tax - up to some level . This will be referred to here as a “Tax Relief” . It is essential that those with few property assets are not adversely effected.

Also some 35% of the population, mostly poorer people, now rent their home. Any new tax on such homes will, in time, increase the rents. Those renting homes will be disadvantaged compared to those owning their homes. Again, the level of the UIT affects the level of the Asset Tax required and it would be very strange to dispense money as a Tax Relief to those with homes but to deny it to those without homes. So I conclude that a Tax Relief should be paid to all Adults and Superannuitants regardless of whether they own a home or not.

The reason for a Tax Relief paid to everyone rather than a Tax Rebate such that the Asset Tax is not levied on the first, say, $200,000 is that a Tax Rebate does not help those who have no income. Also to avoid the rebate applying to each of a number of properties with the same owner would be administratively complex and easily exploited.

There is a further complication. Superannuitants are already paid superannuation. It will be renamed as a UBI and will become tax-free. But, unlike the UBI for adults, it will not be a new payment. Superannuitants will benefit by the tax saving from the superannuation becoming tax-free but will have the same Uniform Income Tax. So, to compensate for the Asset Tax and higher UIT, the Tax Relief for Superannuitants must be different from that for Adults.

The levels of UBIs, the UIT and the Tax Reliefs can all be chosen at different levels. The Asset Tax required to bring it all into balance is then a result. The effect on people with different assets and incomes can then be calculated and the result of the choices becomes visible.

These calculations are easily done with the computer “spreadsheet”. By changing the choices of UIT etc one can see who will be winners and who will be losers as a result of those choices. One can then choose the settings to give a particular outcome and select the preferred outcome. 12

By manipulating the variables different objectives can be achieved. Some of these may be:

1) UBIs will approximate or exceed current payments to beneficiaries apart from hardship allowances which, with modifications, will still be required. Every owner of property will have to pay Asset Tax but, as detailed below, relief will be given for those with few assets.

2) To provide realistic child and teenage allowances to the caregivers - replacing Working for Families and covering all children and teenagers. This objective is to relieve child poverty.

3) To increase the total income of adults with no assets who have incomes below $70,000 per year - excluding the tax free UBI. The Asset Tax will erode income for all those with property. This objective is to help the “working poor”. Note that 84% of IRD returns declare incomes below $70,000.

4) To preserve the 65 and over UBI ( the tax-free superannuation) of a superannuated couple with no income other than the UBI but $1,000,000 of property. This objective is particularly related to the Auckland situation but is not limited to Auckland. If it were to be so limited it might increase the Auckland problems.

It must be remembered that there is “an inconvenient truth”. This is that the more the winners get the more the losers must pay. And that different objectives may interfere with one another.

One example from the spreadsheet There are many possible alternatives for the settings but here I will discuss just one to show the layout of the kind of result that is obtained for both Adults and Superannuitants. (Some readers might like to jump to page 15 to see "An example of some choices" rather than the next two pages of details)

All of the settings and the resultant Asset Tax are shown in the top five rows of the following tables. The UIT rate is set at 36% to reduce the Asset Tax required. Tax Relief is set at $2100 for adults and $2600 for Superannuitants. Since the Tax Relief is an addition to the UBIs the net effects for the less well off are improved.

First the adult results In the following table the red figures show all those who have a net loss with these settings while the black figures show those who have a net gain compared to the present. 13

In the main part of the table in the top left corner the resulting improvement in after- tax income for someone with no assets (0 in the blue row) and no income (0 in the green, or yellow, column) can be seen to be $11,180 per year. This is made up of the UBI of 9,080 (shown in row 4 of the top band above the main table) plus the Adult Tax Relief of 2,100.

Further down the same column for a taxable income of 70,000 someone with no property is shown to be in exactly the same position as at present because ,with a taxable income of 70,000, then with a UBI payment of 9,080 and tax on their whole income at 33% they would currently be in exactly the same position as under the current tax regime. But here the tax on the whole of their income has gone up to 36% (see line 4 in the green band above). The extra 3% tax on 70,000 is 2,100 which is the amount added to the UBI by the Tax Relief in this example.

Note that with zero taxable income a married couple with 200,000 of property (see the blue rows) will, combining 11,180 and 9,349, be significantly better off compared to the present even if they were both currently getting the married “Job Seeker” benefit before. And there would be no “poverty trap”. Those below $70,000 per year are better off and those above worse off because of the increased tax rate.

Even with a $1,000,000 home the same couple would be a combined 11,180 + 2023 better off.

A NZ citizen with a $5,000,000 home would be $49,686 worse off.

But an overseas owner would get no UBI or Tax Relief and would be $49,686 + $11,180 worse off. 14

Superannuitants results (Incidentally, whether someone switches from the UBI to Superannuation at age 65 or even 70 then becomes less of a problem under this proposal.)

With the same settings the results for Superannuitants are:

Superannuitants are presently receiving superannuation payments so that, when the continuing superannuation is simply treated as a tax-free UBI, they do not have the same uplift in income as adults getting their UBI. The benefit from making the Superanuation tax free is $1,997 per year. And the Tax Relief with the chosen settings is $2,600 per year giving those who have no property and with no other income a $4,597 benefit but the increased UIT compared to the present rates leads to even some of those with no assets and income below $70,000 being less well off than at present. But – why do they need the Super UBI if they have that level of income?

A Superannuitant couple in a $1,000,000 home with no income have a combined 4,597 – 4,560 or $37 loss compared to their present sitution. And, even in a $500,000 home, they are 4597 + 18 ( 4,615)better off.

A single Superannuitant with no income but an expensive house will be discussed further below.

It is possible to reduce the Asset Tax by increasing the UIT or increasing the Superannuitants Tax Relief. There is something of a circular problem here because if the Tax Relief is increased (which is equivalent to increasing the Superannuation but less convenient) the Asset Tax must also be increased as noted above. Also if the Adult Tax Relief is increased the Asset Tax must increase. Different settings of the variables may lead to more satisfactory solutions for some people but always there will be winners and losers. 15

The example given above is based on the married rate for Superannuitants. Like the Job Seeker and other benefits, it is also currently framed around the concept that people who make choices about different living arrangements should get different treatments. Thus single superannuitants, in April 2015 were given $22,476 (before tax) per year if they were living alone but only $20,656 if they were “sharing”. If married they got only $17,013 (before tax) each. It is questionable whether this concept has a place in the modern world.

An example of some choices To help further understand the possibilities let me set down one set of choices and the results as follows :

With these settings: Child UBI 3,500 Teen- age UBI 5,000 Adult UBI 9080 Superannuation 17,013 Adult Tax Relief 1,400 Super Tax Relief 3,500 UniformTax Rate 35% Asset Tax 0.91%

The results are as follows where positive means the individuals will be better off and a negative means they will be worse off - remember that the UBI has the tax relief added to it and both are free of tax:

1 Adult, no house, no income +10480 1 Adult, 1,000,000 house, income 100,000 -9702 2 Adults, 1,000,000 house, income 100,000 +778

1 Adult, no house, income 70,000 no change 1 Adult, no house, income 200,000 -2600

1 Super, no house, no income +5497 1 Super, no house, income 70,000 -1791 1 Super, no house, income 200,000 -4391

1 Super, 1,000,000 house, no income -3605 1 Super, 1,000,000 house, income 100,000 -11493 2 Super, 1,000,000 house, income 100,000 -5994

It may be worth noting that if someone could afford to buy, or build a $1,000,000 property instead of a $2,000,000 one then the income from the second $1,000,000, even on the current bank interest rate ,would be some $35,000 per year – well above the $10,000 of a 1% asset tax on the second $1,000,000. And that $1,000,000 would be available for productive investment, the creation of jobs and a reduction of our demand for overseas investment.

Hard cases Anyone with little or no income and an expensive house may be hard-pressed by the Asset Tax but hugely advantaged compared to those with the same income but without a house. If it is wholly owned then house-owners will have the benefit of not paying a mortgage and they will not have to pay rent. There should be provision for 16 hardship allowances (which I have assumed will continue at the present level at least) and, in genuine cases, for a “reverse mortgage” to accumulate the Asset Tax until the property is sold.

There is a precedent as at present, if someone is assessed as qualified for rest home or similar care, Government meets the cost of a standard room if the person's assets are less than $218,000 - otherwise the person has to pay themselves. In this case a reverse mortgage is available if required.

“Down-sizing” is a real option available to those owning or renting expensive property. Hopefully, funds would be released for productive investment thus reducing the need for foreign investment.

The higher the UBIs, the more other benefits can be abandoned and the fewer hardship allowances will be required – but then either the Uniform Income Tax or the Asset Tax must be higher. However, if the hardship allowances are in the nature of more minor top-ups it may be that some of the reduced administration can be reorganised. For example, disability allowances might become administered as part of the health system, since in some cases greater or more timely health expenditure might result in better social and economic results. ( See FAQ 11 - Why have hardship allowances?)

Conclusion and Side Effects It will be clear that this proposal can be used to increase equality.

UBIs could be financed in many different ways. The virtue of using an Asset Tax as proposed here is its inherent flexibility and its effect on inequality. This is a very simple system:  Everybody gets a UBI, with all the virtues of that , depending only on age.  The cost, clumsiness and indignities of the present benefit system largely disappear.  Every owner of a property asset (person, trust, company, collective) pays an Asset Tax.  The anomalies of the current Income Tax system disappear. The settings of the system can be made to achieve different objectives.

A number of side effects are likely. If a house has a sole occupant they might be more likely to share the cost with another person. It could help to relieve the housing shortage. One would also expect the Asset Tax to reduce house prices. And to relieve some pressure in Auckland if some people chose to move to places like Otago where houses are cheap and jobs are on offer. Again, with a UBI, families might well move to other country areas where there is seasonal work. But the Asset Tax may thus increase the demand and prices for cheaper properties.

Different situations may need hardship allowances. The number of these will depend on the levels of the UBIs.

Note that the money earned by putting money in the bank or investing in productive enterprise would be taxed at the Uniform Income Tax rate. By putting it in a property 17 instead of investing it and getting a taxable return the owner could be seen as depriving Government of income and forcing borrowing from overseas thus increasing the country's level of debt. On these counts alone, Government should therefore have an Asset Tax. (Also see FAQ 5).

An Asset Tax as proposed here will be simple to collect and very hard to avoid. Combined with a Uniform Income Tax and a UBI we have a very powerful weapon to increase equality. The spreadsheet lets us adjust the settings, to see the results, and to choose the compromises that must be made between different objectives

The level of the Asset Tax and UIT will depend on political calculations as to what the public will accept.

Note that 9080 is not any kind of magic figure. Nor are any of the other figures used here. All variables are just that - they can be set at any figure one chooses but the Asset Tax for fiscal neutrality is then an inevitable consequence.

Also note that the Asset Tax figures we have been deriving are well within the figure of 1% to 2% per annum that Thomas Piketty suggests as a global wealth tax in his book referred to earlier.

It is my suggestion that a New Zealand Government, of whatever persuasion, should commit itself to implementing a UBI along the foregoing or similar lines. In my view this would have the same significance as the creation of the modern welfare state of the 1930s. A great deal of thought is still needed on key aspects of the policy and many details, including the transition to a UBI and its financing. But it is to be hoped that politicians and policy makers will turn their attention to this important task.

As noted earlier further information, a paper on transition problems and a spreadsheet for modelling is available at http://perce.harpham.co.nz The author would appreciate comments and criticisms to [email protected].

Acknowledgements Many people have helped to formulate the ideas contained in the above paper, particularly Bill Rosenberg of the New Zealand Council of Trade Unions and my wife, Myra Harpham. The editorial help of Max Rashbrooke, Gill Caradoc-Davies and Wendy Kelling is also gratefully acknowledged.

Less directly, I have been helped by many others both in person and through their written works. I am conscious that there is a huge literature which I have barely sampled. The most notable feature of my sampling is to discover that so much of the literature is devoted to either taxation or to benefit systems instead of the combined net effect on individuals.

References. Googling "Basic Income" at the time of writing yielded 26,200,000 hits of which many are news-type articles but also many formal references. Some are known to me. At the end of "The Big Kahuna" 477 formal references are listed. Few consider how 18 to finance a UBI let alone the effect when combined with the necessary taxation. The following are particular references which have influenced me.

1. Bregman, R.(2013) “Why we should give free money to everyone” https://decorrespondent.nl/541/why-we-should-give-free-money-to- everyone/20798745-cb9fbb39

2. Forget, E. 2011) “The town with no poverty” http://public.econ.duke.edu/~erw/197/forget-cea%20(2).pdf

3. Morgan, G. (2011) and Guthrie,S. “The Big Kahuna”: Public Interest Publishing

4. Mirrlees, J.(2011) “Tax by Design”. Oxford University Press

5. Rashbrooke, M. (2013) “Inequality | A New Zealand Crisis”: Bridget Williams Books

6. Rankine, Keith (1998) "Revisiting the UBI", New Zealand Political Review 7(2):12-15

Appendix 1: Some Frequently Asked Questions 1. What about the Bludgers? 2.Why will companies stay here if we increase the tax on them? 3.Why not tax all wealth? 4.Why not deduct mortgages from Property value for Asset Tax purposes? 5.Why not tax shares? 6. How can someone with little income and high assets manage? 7.How can we transition? 8.Why not tax all assets used in companies? 9.What happens to the State servants? 10.What about non-citizens? 11.Why have hardship allowances? 12. Start-ups. 13. Some benefits of a UBI.

1. What about the bludgers? Older people will remember when there were plenty of jobs and welfare payments were much better than at present. Yet there were only some 5 or 6 registered unemployed in NZ.

However, we have now had several generations of unemployed families, jobs are less secure, required skill levels are higher, travel is more expensive, benefits are reduced as some paid work is done, and so on. It is very easy to become discouraged, to stop looking for work and to lose the discipline of going to work . 19

But with a UBI given to everyone the very term “bludger” becomes inappropriate. The UBI should be set at a level so that people can survive with dignity but will have to have at least a part time job for any extras or luxuries. (It is highly desirable, possibly essential, for there to be a reasonable minimum wage rate to prevent exploitation.)

Some people will, with a UBI, choose to do voluntary work, give more time to their children, look after others, develop a small business, acquire new skills, invent and innovate, get through a stressful period in their lives, and so on. This would enrich the community in the long term. It may also result in some of the huge “non-monetary” economy having financial multiplier effects and increasing the measured GDP.

There is a concern that enough people would withdraw from the labour force to create a labour shortage. The counter argument is that there will be fewer jobs in the future and they will be of a high skilled nature. Many people will not have the ability to acquire those high skills. They may be employed in supporting those who do have such skills to avoid the "frantic rich – leisured poor " or "high skilled – unemployed" divide which is already the positon for some. And otherwise to do some of the satisfying and useful but unwaged tasks that enrich our communities.

The international experience of related “pilot projects” is well described in Bregman's excellent paper “Why we should give free money to everyone” which is translated from the Dutch and noted in references above. Or Google “free money” and pick it from the list.

This international experience indicates that, possibly, there will be no more “bludgers” amongst the poor than there are amongst the wealthy, many of whom could afford to be totally indolent but nonetheless work very hard to good purpose.

Again, it is reasonable to suppose that any die-hard “bludgers” will be drawing benefits now. The UBI will not be greatly different from the present benefit so their ability to “lay-about” with comfort will also not be greatly changed so they will have no great incentive to increase their idleness. On the other hand with abolition of the “claw-back” of the benefit the poverty trap which discourages work will disappear making work more attractive.

2. Why will companies stay here if we increase the tax on them? This is a very complex question regardless of the level of tax, whether the tax rate is the same for companies as for individuals, or whether we have a UBI or not. If we increase taxes on companies it is often argued that companies will go to Australia or elsewhere. But the location of companies is not just a matter of tax but of the opportunities that are available.

It is often a question of where companies start, where people want to live, what are the rates of pay for people, skill levels, industrial relations, political and social stability, migration laws, education facilities, being a happy country, crime rates, market size and accessibility, communication facilities and so on. 20

Everything is connected to everything else. This is not the place for a lengthy discussion on general Government Policy but there is much that could and should be done regardless of whether or not there is a UBI and how it is funded. If the UBI and Asset Tax as I have formulated them stimulates these ideas so much the better. The large issues of what industries we will choose to have and “where are the jobs” is a different though very much related discussion.

We could sensibly give tax incentives for research and development, for training of the existing workforce, for childcare, for having collective agreements with the unions, for supporting environmental projects and other socially desirable issues.

The notion of a caring country may well be attractive to companies on a number of fronts. And, even with different taxes, they may well make more profit if the economy and their market is underpinned and stabilised by the regular payment of UBIs.

3. Why not tax all wealth? India, France, Spain, Iceland, Italy and some others have wealth taxes of various kinds. India for example requires annual returns including all sorts of valuables - jewellery, art and even clothing. The burden on citizens and the bureaucracy required to police elaborate returns appears very inefficient. I have been told that it is widely avoided.

Those who have other items of wealth are also likely to have more expensive homes so, in my view, it is better to collect all the required tax simply based on property values. Property is a good proxy for total wealth. Local Bodies can readily collect the Asset Tax levy for government just as they do for Regional Councils.

Cars, boats, planes, insured objects etc might be added but they are also likely to correlate reasonably with property ownership so the result from including them would be much the same as increasing the Asset Tax itself with it based solely on property. And they would need to be collected in a different way. I think that this complication should be avoided, at least initially.

Incidentally, I prefer the name Asset Tax because, in my formulation, it is based on improved value so that it embraces both land and buildings. Some have advocated a “land tax” and others a “property tax” possibly excluding land.

The valuation of property for rating purposes is well established and respected. The first thing most people look at when purchasing a property is the official valuation - it appears on all real estate information sheets.

It is tempting to think of applying an Asset Tax to savings or other accumulations of cash. This would discourage saving, would increase the cost of borrowing and result in much manouvering around particular dates. Consider the position of someone who has saved $1000 for a year and has had to pay $2 in Asset Tax. They will have been charged income tax on the income from interest anyway. If they, or a bank, are now to lend the money then if the saver is to get the same return as at present they will want to deliver $998 but to charge interest on $1000. And if they have held the money for 21 two years they will want to deliver $996 but to still charge interest on $1000 and to be repaid $1000. It could get very complicated.

4. Why not deduct mortgages from Property value for Asset Tax purposes? The answer is partly contained in the preceding answer. In order to maintain Government's Income from Asset Taxes one would want to impose the Asset tax on the mortgage suppliers. Any tax levied on the supplier of the mortgage will be passed on to the receiver of the mortgage so they will have to pay anyway. But both parties to the mortgage would also have to furnish returns to IRD who would have more processing and surveillance costs.

More importantly perhaps would be the response of the tax-avoidance industry if mortgages were excluded from the Asset Tax. The mortgage might be given by a Trust. Or several friends might set up a company in a tax haven – contribute the amount of their mortgage in shares and get their mortgage from the company. There may have to be several layers of such devices to escape the tax net but the possibilities for those who can afford the benefit of tax specialists are interesting.

It is really much simpler and more efficient to charge the owner of the property directly. They are the ones who have made the decision to purchase the property and who enjoy the use of it. They are the ones who are using the resource.

5. Why not tax shares? The argument is essentially the same as the earlier one against levying the Asset Tax on savings. The company in which the shares are invested will be charged Asset Tax on its physical property so also charging Asset Tax on shares in the company would be double taxation to that extent. Also the company will be paying tax on its profits and it will be providing jobs. The incomes generated by the jobs will be taxed. The dividends from the company will also attract Income Tax.

To the extent that shares in productive companies divert investment to them rather than property for private use the need for overseas capital is diminished. If the capital value of shares were to be taxed then it is likely that the effect of having an Asset Tax on property would be much less effective at diverting money from property into productive investment.

And if, instead of an Asset Tax on the value of the shares, just the profit on share trading were to be taxed then, in fairness,the losses need to be allowed as an offset. In a stable market the profits and losses balance so there would be no net income. In Australia and other countries taxing share trading profits and allowing losses has led to considerable avoidance of tax. Share traders who deal in shares as a business already pay income tax on the net results of their profits and losses. 22

6. How can someone with little income and high assets manage? This has been dealt with briefly in the main text and is of concern because the answer is “with difficulty”. By raising the level of the UBI I have shown that the Asset Tax can be compensated up to $200,000 of assets, or more, or less. This compensation will of course increase the Asset Tax level required from those above the “protected level” wherever this is set.

People with more assets than the protected level will be worse off than if there were no Asset Tax. They then have difficult choices to make but they do have choices.

In some cases this may force a move from a high value house to a lower value one. Even for those concerned, in spite of the trauma of moving, it may be beneficial so as to reduce their maintenance, housekeeping and the like. Also if they were to move away from congested cities to more rural areas there could be benefits for both places.

As a first example consider a widow whose home has increased in value over the years but she only has Superannuation to live on. Maybe it is a million dollar home and she is now being asked to find an Asset Tax of, say, $10,000 per year. Suppose the Tax Relief was set at $2,000 and she received a further $2,000 because the superannuation is no longer taxed then she has had her expenses increase by $6,000 per year. But, unlike those with no property, she does have choices.

One choice is to take out a reverse mortgage on the property whereby she receives a regular payment which will accumulate until she dies or sells the property. Depending on the interest rates and inflation she may well be able to cover the outgoing for over 100 years. Another concern is that she may not be able to bequeath anything to her children. In this case she could well sell the property, buy something smaller and cheaper and gift some money to her children ahead of her death. There could be horrible emotional wrenches and possibly separation from friends but she does have choices which are not available to those with no property and who are unable to help their children in the present.

Another case is that of farmers. With a $2,000,000 farm and perhaps no income in a particular season an additional expense of, say, $20,000 in Asset Tax is particularly unwelcome. But, if they have a partner, then the UBI plus the Tax Relief for each of them will more than negate this. If they have children so much the better. What is proposed should be of great help to sharemilkers and others who aspire to own their farms. It is the owner of the farm that they are working on who has to pay the Asset Tax.

Again there is the possibility that some people, retiring or otherwise, may choose to sell in the city and move to one of the country towns where they can get seasonal work and cheaper housing.

Those with higher incomes and higher value property have even more choice.

7. How can we transition? Again, the answer has to be “carefully over a number of years” See my paper at http://perce.harpham.co.nz. 23

8. Why not tax all assets used in companies? There is an attraction to taxing the total Balance Sheet assets of companies. In other words taxing their total use of resources. Having attempted to think my way through the problems that this would create for start-up companies, computer software companies, forestry companies and the like I have had to conclude that it would lead to extreme complexity, tax evasion, expensive enforcement and general difficulty. Better to simply add to local body rates as for ordinary people.

Note that the Asset Tax must not be deductible for Income Tax purposes whether by companies, trusts or individuals. If it were to be deductible then individuals might form companies (which are only taxed on their profits instead of on their income) to hold their assets in order to get a tax deduction by treating the Asset Tax as an expense just like rates.

9. What happens to the State servants? There will be many state servants made redundant - probably several thousand. But this will be over several years. As a good employer Government would have to provide for redundancy, retraining and early retirement. In the early stages, to ensure that the transition went smoothly, the work in transition would require many of those who would be ultimately displaced to still be available. So the change in numbers would be spread out.

10. What about non-citizens? There are many rules at present about non- citizens and their entitlement to benefits. Precipitated by the ageing of our population and increasing migration the future costs of these benefits are alarming some economic commentators. At present, for example, permanent residents qualify for Superannuation.The conditions for this may need examination. Others such as refugees or those claiming to be refugees may be more difficult. So is the problem of those few with no birth certificate.

The UBI as proposed is a significant form of 'citizenship dividend' deserving very careful consideration of the eligibility criteria related to its availability. Detailed consideration of such criteria clearly will follow once the general principles of UBI introduction are accepted.

A related question is that of retirement income from overseas pension funds and the like. Where the individual is entitled to New Zealand Superannuation my view is that the overseas income should simply be treated as additional income to Superannuation and taxed accordingly.

11. Why have hardship allowances? Briefly, one size does not fit all. If the UBI is set high enough to allow all benefits and allowances to be discontinued without any hardship provisions then the tax burden will be excessive and there may indeed be many “layabouts”. On the other hand the 24 bureaucracy to decide whether people qualify for a hardship allowance and the surveillance needed to ensure that they continue to so qualify will not be required. The best compromise position, in my view, is to have a UBI which is below the minimum wage and above most of the existing benefits with revised hardship allowances administered in much the same way as at present.

There are many decisions to be made in this respect. Consider what used to be known as the Domestic Purposes Benefit. It is likely that the problem of collecting a maintenance contribution from the absent parent will be greatly diminished as ( on proper certification) their UBI could be paid, in whole or in part to the caring parent. Depending on the value of the UBIs for adult and children the caring parent should be no worse off than at present. But what happens when the absent parent has disappeared or is not known?

Again, if someone has a mortgage should they have a mortgage allowance which is not paid to everyone? That is unfair. But it would seem reasonable to allow a loan at a reasonable interest rate secured against the property. Such a loan would be limited to the equity in the property and intended simply as a “tide-over” until suitable arrangements could be made for employment or sale and the making of other accommodation arrangements.

12.Start-ups In the formative years taxes are particularly difficult for new companies. GST is a notable exception – when the company is buying more than it is selling it gets a net refund of GST. To the extent that it rents property an Asset Tax is not visible but will increase the rent that is due.

Forestry companies which will take 30 years or more to make a profit and computer software companies which must first bear the cost of development and then the possibly much greater cost of developing a market will require greater capitalisation if there is an Asset Tax on the properties they occupy. Both are industries that we would wish to have.

Fortunately in both these cases the Asset Tax would be a small part of their total capitalisation requirement. And it is not desirable to have the tax system favour one form of investment over another. If, as is often done with rates, the tenant has to pay the Asset Tax component of rent as a separate item then it is as easily identifiable as when the renter owns the property.

So, with the agreement of the IRD, it should be made possible to allow any company with a cash flow problem to defer payment of the Asset Tax for a period and to pay the “Use of Money” charge. IRD would need to have priority rights in the event of sale of all or part of the company or its liquidation.

13.Some Benefits of a Universal Basic Income Note that anything to do with people's behaviour is uncertain but the following benefits are either supported by a trial somewhere or seem to be reasonable 25 expectations. We are considering here the effect of tax-free payments to everybody of the sort described above, depending only on age. a) A UBI would directly improve income equality. b) A UBI would stop "beneficiary bashing "and humiliation. c) A UBI would improve health. A Canadian trial reduced the need for health care by nearly 10%. It also showed an improvement in school attendance. d) A UBI would reduce crime. A trial in Namibia reduced all crime by over 40% and the most extreme crimes by as much as 95%. e) A UBI would assist discharged criminals to re-integrate into society. f) A UBI at a sufficient level would enable many current welfare and pension benefits to be abandoned with a reduction in bureaucracy and surveillance. The financial savings could help to pay for the UBI. g) A UBI would eliminate the “poverty trap” since it would not depend on income or other circumstances. The tax on income and other things would not change the UBI payment. h) A UBI would empower workers by allowing them to survive without a job. It is expected that this would promote harmony for both workers and employers. i) A UBI would greatly empower women. j) A UBI for children and teenagers paid to the caregiver would reduce child poverty. k) A UBI would make child maintenance and fine collection easier. l) A UBI would reduce stress and concern about unemployment. m) A UBI would encourage innovation because people could get by with little additional income while they developed an idea. n) A UBI would stabilise the economy and increase GDP. Refer to OECD and IMF papers. With basic needs covered a UBI would give many people more discretionary income for consumer items and thereby stimulate the economy. o) A UBI could allow some people to leave expensive cities to repopulate country areas where they can get seasonal work p) A UBI could reduce gambling which is a desperate hope for financially hard- pressed people . q) A UBI would reduce Accident Compensation and Student Loan problems. r) A UBI could reduce suicide rates through the reduction of stress and increase in security. 26

Appendix 2. Higher Taxes on Higher Incomes Keith Rankin has pointed out that a UBI with a Uniform Income tax (UIT) automatically achieves a higher percentage of tax for those on higher incomes. For example, for someone with no taxable income there is no UIT to pay so the percentage tax rate is 0%.

With a 33% UIT rate, an income of $40,000 attracts a tax of $13,200. If the UBI is $9,080 then the effective net tax is only $4120 or 10.3%. At an income of $200,000, the net tax is $56,920 or 28.46%. The full percentage tax rate of 33% on one’s whole income is never in fact paid – because of the UBI.

Under this system because those below $70,000 would pay less tax than at present and those above it would pay the same there would be a net tax loss to the government, which must be made up somehow. Apart from Asset Tax we could increase income taxes for higher incomes. This could be done with various step changes. But we would then need to avoid the problem, described earlier, of the lower tax rates on lower incomes also benefiting those on higher incomes.

One way to achieve this is to have a higher tax rate above, say, $200,000 a year, by applying a further 1% to the tax rate at that point. However, the new rate could be applied to ALL the income, not just that above $200,000. There would then be no increase in the taxpayer’s after-tax income until their pre-tax income was above nearly $203,000. Similarly, a further 1% could be added to the total income for each extra $50,000 of income up to, say, $1,000,000, with that rate applied thereafter. If the low rate was still 33%, the top rate would then be 51% applied to the whole income. If the increases every $50,000 continued then at $3,500,000 the whole income would be taken in tax. Beyond that point the recipient would have to pay to go to work.

However, having different tax rates for different income levels leads to an "avoidance industry". The starting point for higher tax must be chosen with care so that there are not a great number of people above that level of income. It should then be possible to have more adequate surveillance and enforcement against any attempted avoidance or evasion, but to retain savings in the cost of administration.