Universal Basic Income and Flat Income Tax (UBI-FIT)

Tax justice, work incentive, economic democracy

Richard Parncutt, Uni Graz

BIEN Congress, Ottobrunn/Munich, 14 September 2012

The context: Socialism vs capitalism

General features of group conflict– strong identities based on difference– ignorance of Other group prejudice, moral arrogance– unfair (one side is stronger)

General principles of conflict resolution– mutual recognition– fairness, transparency– contact and knowledge

• UBI-FIT approachIntegrate principles from both sides:– socialist: reduce wealth gap– capitalist: increase incentive

Cunning Strategy #1Avoid controversial ideologies

Not:

What would you do if you didn’t have to work?

anti-socialist knee-jerk

…but instead:

Let’s simplify tax-welfare system!

Make more efficient, transparent, democratic.

Both left and right wing are interested

Cunning Strategy #2Focus on universally agreed ideas

Two basic principles:

•Unemployed need enough to survive.

•The more you work, the more you get.

Who can disagree with that?

UBI-FIT simply realises these two principles.

Cunning Strategy #3 Focus on GINIR

Gross-Income-Net-Income-Relationship

- not the individual UBI rate or FIT rate

My bias

• Centre-left liberal-green

• Belief in – regulated free enterprise– eliminating poverty– left-right cooperation– transparency democracy

Dreamed up UBI-FIT in Australia in 1987

New to the current scene

Sorry for re-inventing the wheel

Problem #1Poverty

• One billion people are affected• High rate even in rich countries

• Rising wealth gap • Over 1000 US$-billionaires

UBI would (almost) end poverty

Problem #2Welfare traps

Die Zuverdienstgrenze als Sozialhilfefalle

As income passes the welfare cut-off… – welfare is suddenly or gradually cut– equivalent to a tax bracket of 100% or more!

Suppress incentive Reinforce class differences and conflict

UBI-FIT would eliminate welfare traps

Problem #3The cost of illegal activities

1. The poorWelfare fraud costs millions

2. Middle classTax avoidance costs billions

3. The rich Global financial games cost trillions

UBI-FIT stops #1 & tackles #2

Global transaction & wealth taxes tackle #3

Problem #4The cost of inefficiency

The cost of tax-welfare complexity:•Armies of accountants and bureaucrats•General public does not understand•Democracy does not work

The system is not inherently complex!•Origin of complexity: Politicians wooing voters

UBI-FIT reduces waste, increases transparency

Definitions

• Gross income does not include UBI

• Net income is disposable income

• UBI must be both universal and unconditional (as Van Parijs explained)

Progressive income tax in Austria2005-2009

Broken line: Extrapolated high rate BI = 8.5 k€/yr = 708 €/mo

Gross income (k€ /yr)

Ne

t in

com

e (

k€/y

r)

Progressive income tax in Australia1 € ≈ 1.7 $

Gross income (k$/yr)

Ne

t in

com

e (

k$/y

r)

23

0%15%

30%

40%

45%

Broken line: Extrapolated high rate BI = 23k$/yr = 13.1 k€/yr = 1090 €/mo

Progressive income tax in Canadafederal not provincial; 1 € ≈ 1.6 $

Gross income (k$/yr)

Ne

t in

com

e (

k$/y

r)

11.4

Parameter: marginal tax ratesBroken line: Extrapolated high rate 11.4k$/yr = 7.28 k€/yr = 607 €/mo

Unconditional Basic Income UBI

Advantages•Eliminates poverty•Reduces bureacratic interference•Wages more accurately reflect value

Disadvantages•May encourage long-term unemployment•Long-term unemployed are vulnerable

Flat income tax FIT

• Advantages– Payable immediately harder to evade/avoid– Perceived as fair by the rich politically stable

• Disadvantages (without UBI)– Increases wealth gap

• Disadvantages (with UBI)– ?

Universal Basic Income + Flat Income Taxcf. Friedman & Rose (1980); Atkinson (1995); Strengmann-Kuhn (2005)

0

1000

2000

0 1000 2000 3000

gross income (€/mo.)

ne

t in

co

me

(€

/mo

.)

Arbitrary parameters: BI = 500 €/mo., FT = 50%Could be: BI = 700 €/mo, FT = 40%

Main thing is the gross-net relationship, not the individual parameters!

basic income

break-even point

Setting the parameters

• Basic income (500…800 €/mo)– high enough to eliminate poverty

• poverty line in Austria: 60% median wage ≈ €900

– low enough to maintain incentive

• Tax rate (35…50%)– high enough to finance BI and the rest– low enough to maintain incentive

• Adjustment procedure– balance budget (zero deficit)– left-right negotiation

Progressive taxationUrgently need to reduce the wealth gap

• Flow– Consumption: Luxuries only! – Income: Flat (40%?) with UBI– Capital gains: Treat like income (gifts,

inheritance, interest, speculation…)– Transactions: To reduce speculation

• Stock– Households: none– Private wealth: flat (1%?), threshold ($1m?)– Companies, trusts: flat (1%?), no threshold

• Environment– Rich have bigger environmental footprint

Flat wealth taxesabove a threshold e.g. $1m

...are effectively progressive because only the rich have significant wealth

(middle classes have moderate income but low capital)

Example: 1% / year

Capital (€) Tax (€/yr)

1 000 10

1 000 000 10 000

1 000 000 000 10 000 000

Consumption taxes are regressivee.g. VAT, Mehrwertsteuer

Poor pay a higher & of income in tax

VAT contributes to growing wealth gap

VAT only on (genuine) luxuries!

•replace VAT by wealth tax

•UBI could be financed by wealth tax(or by combination of different taxes:

wealth, VAT, income, environment, transaction)

UBI-FIT is effectively progressiveExample: BI = 500 (€/mo) and FT = 50%

Gross income (K€/mo)

Net income (K€/mo)

Effective tax rate

0 0.5 - ∞

1 1 0

2 1.5 25%

3 2 33%

4 2.5 37.5%

5 3 40%

10 5.5 45%

100 50.5 49.5%

UBI-FIT:Progressive in only one way

• Allows for any level of progressivity or income equity• Progressivity can be directly adjusted transparency

Don‘t combine 2 progressive systems!• unnecessary complexity, reduced transparency• opportunities for clever tax advisers

Approaching UBI-FIT

Incrementalism

•Agree on long-term goal

•Gradually adjust GINIR over a few years

•Monitor effects of changes; adjust

Universal Basic Income and Flat Income Tax (UBI-FIT)

Tax justice, work incentive, economic democracy

Richard Parncutt, Uni Graz

BIEN Congress, Ottobrunn/Munich, 14 September 2012

Global Wealth TaxNational governments are steeped in debt, a billion people live in poverty worldwide, and urgent warnings about climate change are being ignored. In all three cases, the main problem is money. But the money is available - in abundance. Economic globalisation is making the rich megarich. Worldwide, there are now over a thousand US$-billionaires. As concerned citizens across the world, we call on relevant global organisations such as the UN, IMF, World Bank, and G20 to negotiate a global agreement to tax all wealth - including all companies, trusts, and wealthy individuals - at a single rate of about 1% per year, in addition to existing non-wealth taxes. Exceptions should be limited to genuine non-profit organisations and individuals whose assets are less than about US$ 1 million.

Global Wealth Tax

Please…

•Find the petition at change.org

•Sign it

•Forward the address!