Three-stage transition to Basic Incomes.

Alison Marshall, August 1995.

1. Firstly and Immediately

(a)  Restore benefits to 1990 levels (before the last benefit cuts), adjusted for subsequent inflation and any change in GST*.

(b) Abolish the work test and the stand-down period for the unemployment benefit, change its name, and pay it to all low-income people, not just unemployed ones.

(c)  Increase taxes so that the top tax rate plus GST is equal to 50%.  For example, 50% income tax and no GST, or 44% income tax and 12.5% GST, or 33% income tax and 33% GST, or no income tax and 100% GST.*

2. The Transition (which may take many years).

(a) Introduce guaranteed minimum incomes for married women, and increase them until each woman has a guaranteed minimum income equal to the single person’s unemployment benefit.

(b) Introduce guaranteed minimum incomes for children, and increase them until each eligible child has a guaranteed minimum income equal to the single person’s unemployment benefit.  Two children per mother should be entitled to receive these basic incomes.  Any further children would not be eligible for basic incomes until they reach school-leaving age.

(c) Create jobs, including part-time ones, for all adults who want them

(d) Reduce benefit abatement, the superannuation surcharge, and any targeting of guaranteed minimum incomes until effective marginal tax rates for beneficiaries, superannuitants, and married women and children are equal to those for high income earners.*

Steps (a) to (d) should be started simultaneously, progress at the same rate, and finally be achieved at the same time, so that childcare including the work of mothers at home, work in the public sector, and low-to-average-paid work in the private sector are all promoted equally.

3. Conclusion.

When step 2 has been completed*, announce that “The tax and benefit system will be simplified by administering it as a flat rate income tax with a universal unabated adult basic income.  Incomes after tax will not be affected, because current benefits and tax rates combine to form a de-facto flat tax and universal unabated adult basic income system already.”

*Notes:

The GST and income tax rates in 1(c) are calculated using the equation:

total tax rate = income tax rate + (100 – income tax rate) x gst rate / (100 + gst rate)

so that

50 = 50+ 50 x 0 /100 = 44 +  56 x 12.5 /112.5 = 33 +67 x 33 / 133 = 0 + 100 x 100 / 200

In 2(d), the effective tax rate includes the benefit abatement rate, the superannuation surcharge rate, and any targeting of the guaranteed minimum incomes of married women and children.  The marginal tax rate is the rate of tax on any increase in income.

2(d) may be an impossible goal for people receiving housing assistance.  It may be inevitable that housing assistance is associated with higher effective marginal tax rates.

*Notes added in May 2001:

GST is the Goods and Services Tax in New Zealand.  It is a value-added tax similar to the British VAT.

In some tax and benefit systems, when stage 2 has been completed, there may still remain a middle income band where benefits have been fully abated but the top rate of tax is not paid. In these cases, to achieve the administrative simplicity of a flat tax, the middle tax rate should be increased to the top rate.

Alison’s Political Papers.


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