19 Feb 2017

Basic Income and Flat Rate tax - a viable solution

Following up from my recent suggestion that Benoit Hamon could finance a Universal Basic Income by a radical reform of the tax system, I've been trying to put some hard numbers on the calculations. A few years ago, Camille Landais, Thomas Piketty and Emmanuel Saez published a book with propositions for a reform of the tax system in France. Their propositions were interesting, but not very revolutionary (in my humble opinion). They nevertheless did a very useful service by providing a website including a simulator that allowed people to try out their own reforms for the tax system.

The website includes a very useful table that provides the mean annual revenue for each percentile of  the French population over 18 years of age. This shows, for example, that the bottom 7% of the popuation has no income at all and that the median value for annual income is about €20,000. It provides an even more detailed breakdown for the top 1% of earners in the population.

Such information is very useful, because it allows anyone to work out how much revenue would be raised by setting the tax rates for different income levels at different values. Indeed, the authors invite readers to see if they can come up with a good way to set the tax rates. They give the example of a truly flat rate income tax system where everyone paid 13% tax on all their income which would raise as much revenue as the current one involving multiple tax bands.

But I was interested in seeing what would happen if all citizens recieved a fixed unconditional basic income of say €400 a month, and then paid a flat rate income tax on all addititional earned income. My original suggestion from last week proposed a rate of 25%, and I was able to use the data in the table to calculate that with such a system, 48% of the population would not only pay no income tax, they would receive a net payment from the tax authorities. Those payments would range from €400 for the 7% of the population with no income at all, to zero for someone earning around €1600 a month. The remaining 52% of the population would make net payments to the tax authorities, increasing to virtually 25% of income for the top earners.

Such a system would raise about €64 billion a year in revenue, which is not bad for a system that will allow a very clear redistribution of income towards the half of the population on low incomes. However, that €64 billion is less than the current income tax system generates - €148 billion a year. To raise the same amount of revenue would simply require the flat rate tax to be increased from 25% to 32%. In that case, only the bottom 37% of the population would be net beneficiaries from the system, and the point where people end up paying some tax would drop include people earning over roughly €1260 a month.

The interesting thing about such a system is that there are literally just two numbers that need to be determined. The first is the level of the Unconditional Basic Income - in this case €400. The second is the flat rate tax level - in this case 25% or 32%.

But you can easily choose other numbers. For example, if we decide to give everyone a basic income payment of €600, the whole system would be neutral (i.e. it would raise the same amount as the currrent system) if the flat rate tax was set at 42%. In that case, 42% of the population would get a net payment from the tax system. If you decided that you could get the €148 billion raised by income tax from an alternative source (such as a financial transaction tax), a basic income of €600 a month for all over 18 years old could be paid for with a flat rate income tax of a little under 30%. In that case, the 62% of the population with the lowest incomes would pay no income tax at all. Indeed, anyone earning less than about €2000 a month would receive a net payment from the system. The cost of all those payments (roughly €65 billion a year) would be paid for by the 38% of the population earning over €2000 a month, but with big earners paying the lion's share (though never more than 30% of total income).

You would like to offer a basic income of €800? Easy. Just set the flat rate tax at just under 40%, and again, the 62% of the population earning €2000 a month or less would get net payments from the system. Again, the cost of providing net payments of up to €800 to everyone earning less than €2000 a month (about €158 billion) would be paid for by the top 38% of earners.

Let's make the basic income €1000 a month. In that case, a flat rate income tax at 49.5% would do the trick. It would again mean that 62% of the population would receive net payments from the system - those earning €2000 a month or less. The total cost of all the payment (over €198 billion) would be paid entirely by the top 38% of the population. But even someone earning €6000 a month would only end up paying about 30% in tax.

All of this seems very sensible, and seems to completely demolish the idea that a basic income is unaffordable. Sure it is unaffordable if you just say that the cost of the system is €1000 multiplied by the number of people to whom the payments are made. But combine the introduction of the basic income with a radical simplification of the income tax system, and the whole thing can be done with no extra cost.

Indeed, I think that this sort of simple flat rate tax system has lots of other advantages, including the fact that it is much simpler to understand than the current system.

If you are interested in seeing how the numbers work, do have a look at the Google Sheet document that I have uploaded here. Download the file, and you can even play around with the figures to choose the values for the Unconditional Basic Income and the tax rate that you would be happy with!


31 Jan 2017

Benoit Hamon and the Unconditional Basic Income

Things are getting interesting in France with the upcoming Presidential Elections on the 23rd of April and 7th of May this year. Today, it's the second round of the primaries for the Parti Socialiste, with a choice between Manuel Valls,  who until recently was François Hollande's primeminister, and Benoit Hamon who, despite having been relatively obscure until a few months ago, is likely to win.

Benoit Hamon has been stimulating a lot of debate because he has been arguing for the progressive introduction of an Unconditional Basic Income (Revenue Inconditionnel d'Existence). Many politicians and commentators have tried to argue that such a move would be unworkable, because it would not be possible to finance it. Hamon proposes to raise the current RSA (which is conditional on resources) by 10%  to €600 a month in 2018 but to provide the same sum unconditionally to those aged 18-25. Progressively, he would increase the coverage so that the entire adult population would get €750 a month. A quick calculation shows that this would cost between €350 and €450 billion a year, and some people claim that this is totally unrealistic.

Hamon himself has argued that one source of finance would be to recover something like €80 billion a year lost because of tax evasion, or a tax on robots. He has also said that he would not feel obliged to stick to the 3% deficit limit imposed by Europe.  But even I, a staunch supporter of an Unconditional Basic Income, don't find his replies very convincing.

So, here, for anyone who is interested (including perhaps Benoit Hamon himself!) are a few other ideas that can make the whole idea more satisfactory.

The first point to make is that Mario Draghi, president of the European Central Bank, has been merrily pumping between 60 and 80 billion euros of freshly created money into the financial markets every month since March 2015. By the end of 2016, the total had reached €1532 billion. The vast majority of this money was used for the Public Sector Purchase Program, essentially buying up government bonds on the secondary markets, which totalled nearly €1272 billion. For France, the total has reached €241 billlion. You might have thought that by buying French government bonds, this might have reduced the level of French Public Sector debt, but you would be wrong. When the ECB's program started in March 2015, the debt was €2089.4 billion. The latest numbers for the end of the third quarter 2016 stood at 2160.4 billion, an increase of 71 billion euros. No, the only real beneficiaries were the financial markets, although I suppose you could say that the ECB's purchases helped keep the interest rates on French Government debt low - they are currently running at 0.75% per annum.
The fact is that this massive injection of fresh money into the markets has done almost nothing to improve the Eurozone economy. It may have boosted the markets, and allowed Companies to pay out massive dividends to sharesholders - totalling €55.7 billion in 2016 for the top 40 companies on the French stock market - the CAC  40. But there is precious little evidence that it did anything to boost the general economy, where inflation was 1.1% at the end of 2016, well below the 2% target imposed on the ECB.

Many economists are starting to say that if Draghi really wanted to use his almost unlimited abilty to create new money to really boost the economy, he should stop pumping money into the financial markets, and instead put it directly into the  economy. For example, he could be funding direct infrastructure projects including renewable energy programs. But he might also simply put money directly into the pockets of Eurozone citizens. The €80 billion a month that he is currently injecting into the markets would, if split between the 340 million Eurozone citizens, provide €235 for every man, woman and child. For a family of 4, the total cash injection of €940 would be considerably more than the minimum wage in several Eurozone countries, including Greece (€579.08 a month Portugal (€530 a month) and Spain (€655.20).

So, that's one place that Benoit Hamon could go to look for ways to fund the Basic Income. And, given the precarious state of Europe at the present time, and the real risk that the whole thing could fall to pieces with the rise of post-Brexit independence movements including Marine LePen's Front National in France, it might be a very good move to force the EU and the ECB to start thinking more about citizens and less about the banks and financial markets.

A second idea that seems to have been almost totally forgotten is the idea of imposing a Financial Transaction Tax. This was an idea that several European Governments had been talking about, but which seems to have stalled. In France, the BIS figures over the past 10 years reveal financial transactions averaging  €275 trillion per year. OK, the figure was down to a mere €213 trillion in 2015.

Such figures are certainly modest compared with the UK which managed £979 trillion in 2015, or the USA which systematically reports around $3 quadrillion a year. Nevertheless, a modest 0.05% tax applied to French transasctions  could raise €100 billion - enough to finance a substantial proportion of the cost of the Unconditional Basic Income.

But the final, and most simple solution to the problem of financing a Basic Income would be to combine its introduction with a radical reform of the tax system. In many ways a Basic Income payment can be compared with Negative Income Tax, an idea that was proposed as long ago by no lesser person than the freemarket proponent Milton Friedman - as you can see in a famous interview from 1968. The idea is that when an individual earns less than a certain critical amount per month, they actually recieve money from the tax system.  Suppose that with no income at all, we fix the negative tax payment at €400. What happens when someone starts earning extra income, for example €400? Well, suppose that additional income was taxed at 25%. Instead of €800, they would earn 400 + 75% of 400 = €700. If they earn enough, the taxation they pay on their additional income would be compensated by the Basic Unconditional payment. In this case, this would happen if their earned €1600, because at that point they would be neutral because the 25% tax on the €1600 would exactly match the amount paid as a basic income.

Above €1600, they would continue to pay 25% tax on any additional income  such that at €2000 they would pay €100 in tax, at €3600 they would pay €500 in tax, at  €5600 they would pay €1000 in tax and so forth. This can be seen int the following graph. The green line provides a reference corresponding to a situation with no tax and no basic income. The red line shows how, for people earning less than €1600 they get a boost from the   system in the form of a negative income tax that reaches a maxium of €400 for someone with no earned income  at all. Above €1600, people become net tax payers.

Functionally, this is something very close to a normal tax system with a tax threshold set at €1600 and a tax rate set at 25%. But an important point is that there are simply no threshold effects in such a system. At no point would anyone be forced to ask whether, by working a bit more, they would run the risk of losing some conditional support only available to people earning up to a certain value. This surely has to be a major advantage. Another point is that the adminstration costs of such a system are almost non-existant - no need to employ large numbers of staff to verify that citizens are indeed eligable for handouts.

The vast majority of commentators apparently fail to understand that all tax systems are just an elaborate way of trying to determine who pays most and who gets the most support. More importantly, it is simply ridiculous to claim that providing an unconditional basic income of €400 would cost €400 * 12* 52 million  =  €249.6 billion a year. Everything depends on the structure of the tax system, which can be set as you wish. If you want 75% of citizens to get no additional money, you just need to adjust the tax rates so that net taxation is unchanged by the introduction of the basic income payments. If you want the top 25% to contribute enough to pay for the 25% who get a net boost by the payments, again it's just a question of setting the tax rates to fit.

Hopefully it is clear that this sort of system doesn't need to cost any more than the current one.