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

Tax justice, work incentive, economic democracy

Richard Parncutt, Uni GrazBIEN Congress, Ottobrunn/Munich, 14 September 2012

The context: Socialism vs capitalismGeneral 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 1987New 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 #2Global 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)

Net

inco

me

(k€/

yr)

Progressive income tax in Australia1 € ≈ 1.7 $

Gross income (k$/yr)

Net

inco

me

(k$/

yr)

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)

Net

inco

me

(k$/

yr)

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.)

net i

ncom

e (€

/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 02 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 GrazBIEN 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!