Using a Negative Income Tax mechanism to deliver A Basic Income could decrease the tax burden, especially on those who work for a living.
The assumption of much of the discussion around Basic Income/Citizens Income is that it will require a huge increase in taxation. This is not an unreasonable assumption given that most Basic Income models argue for a significant cash sum to be provided to every adult citizen on top of all other public expenditure.
Some (such as the RSA’s Anthony Painter) have already countered this argument effectively by pointing out that the current benefits bill, plus the cost of tax allowances, already provides sufficient funding to provide a modest basic income to all citizens.
Below, I put forward the argument that by delivering the basic income via the tax system (i.e. as a negative income tax), the tax burden could be not just be kept stable, but in fact lowered.
Negative Income Tax
To start with, I will explain what I mean by a negative income tax. The idea has been floated before by Milton Friedman, among others, and is essentially a payment by government to people who earn below a given threshold. Much in the same way that government will take payment from your income above a certain level, with a negative income tax it will actually pay you money instead if your income is deemed sufficiently low.
I do not plan to get sucked into arguments about various models of negative income tax, but will simply set out my own simple plan below.
Current Income Tax Revenue and Benefits Spend
As luck would have it, the current tax revenue from personal income is broadly similar to the money spent on cash transfers to the less well off (i.e. ‘Benefits’)
|Income tax||£168bn||Benefit Spending||£224bn|
|Employees NI||£50bn||(Social Care)||(£34bn)|
|Capital Gains Tax||£7bn|
|Total Revenue||£232.9bn||Total Benefits||£224bn|
*Source – HMRC Tax and NI Receipts 2016
** Source – ONS (2015). The site also gives an interesting breakdown of where that money is spent if you’re interested. For the purposes of this proposal, I will exclude social care costs, for which I do not plan any changes, and simply include transfer payments to individuals (i.e. ‘benefits’)
This means that, in effect, pretty much all tax on personal income is spent on transfer payments to other citizens/residents, give or take £9bn. Please keep this in your head for comparisons later on.
The Citizens Income delivered via a Negative Income Tax
For arguments sake (or perhaps more honestly, for the sake of demonstrating what is possible within this model), we are going to award a Basic/Citizens Income of the following amounts
- £8,400 per year to every person over 65 years of age
- £6,000 per year to every person between 21 and 64 years of age
- £3,600 per year to every person between 18 and 20 years of age
- £2,400 per year to every person between the ages of 0 and 17 (for 16 and 17 year olds, the payment will be made directly to the recipient. For those 0-15, payment will be made to the named guardian/primary carer)
However, unlike many other Basic/Citizens Income models, instead of handing over a lump sum payment to each person, we will offset it against their tax liabilities in the following way:
- Each person can earn up to £24,000 per year tax-free across all forms of income (i.e. from work, savings, investments, inheritance, gambling etc. All other taxes relating to personal income will be abolished).
- For every £1 they earn over that, they will be taxed 35p (or 35%)
- For every £1 they earn under that they will receive a negative income tax payment of the following amounts:
- 35p/35% for those aged over 65
- 25p/25% for those aged between 21 and 64
- 15p/15% for those aged between 18 and 20
- 10p/10% for those aged 17 and under
So, if somebody earns £34,000, they are £10,000 over the threshold and so will pay tax of 35% on that – i.e. £3500 – and,therefore, have a take-home pay of £30,500.
Similarly, if somebody (aged 21-64) earns £14,000, they are £10,000 under the threshold and will therefore be paid 25% of that (£2,500) by the government, making their take-home pay £16,500.
This has the same effect as paying the above lump sums (Basic/Citizens income) to individuals and then taxing their income above that at a rate of 10%/15%/25%/35%. The rate of tax could be altered of course, but I have kept it flat above earnings of £24k because a) it’s simpler and b) the presence of the negative income tax makes the system extremely progressive, so further tinkering with rates in an attempt to make it fairer are entirely unnecessary. (see figure 1 in the Appendix below)
The Cost/Revenue of a Negative Income Tax
So how much will this proposal cost?
I have used the Office of National Statistics breakdown of personal income at each percentile in order to measure and demonstrate the effect of this tax system (See table 1 in Appendix).
It looks at all income which is potentially liable for tax, so this would include traditional income from work as well as all other sources such as capital gains, savings interest, inheritance etc. It also excludes those people who have no income of their own (around 10 million adults in the UK). This means that approximately 42 million people are represented in this table, and 420,000 in each percentile.
The numbers are only available up to 2014, so I have assumed (conservatively) a 4% rise in that income between 2014 and 2016. This is purely to allow us to compare with the 2016 tax revenues listed above.
I attach the full table below (see Appendix) but for those without the stomach for 600 cells of data, I summarise below, and add other considerations beyond the simple stats shown..
- The cost of paying a Negative Income Tax of £6,000 to those adults without any income (10 million people) is £60 billion (1).
- The cost of paying it to the 12 million children in the UK is £28.8bn
- The cost of paying it to all other adults who have an income between £1 and £24,000 is another £38.2 billion (2)
- The extra cost of paying a higher rate of Negative Income tax to Pensioners is approximately £8.75bn (3)
- The cost of payments to pensioners residing outside the UK is £2.5bn (4)
- The saving made from paying 16-20 year olds a lower rate is approximately £9.75bn (5)
- The tax collected from all those who earn over £24,000 is £140 billion.
- But, the cost of permitting tax deductions for charitable contributions will be £3.3bn (6)
- So, in summary:
- Negative Income Tax paid out is £128.5bn
- Positive Income Tax collected is £136.7bn
(1)The criteria for receiving the Negative Income Tax is that the person is a citizen of the UK, and resident in the UK.
(2)This is calculated for UK citizens only. So, the 4 million non-citizens who live in the UK can still earn up to £24,000 per year tax free, but will not receive negative income tax. Above £24,000 they will pay the same rate of tax (35%) as UK citizens. I have assumed that non-citizens are represented equally in each percentile (i.e. 40,000 in each percentile not receiving Negative Income Tax, but paying 35% tax on income over £24,000)
(3)This assumes that the average pensioner earns £17,000 from private (non-state pension) sources. At the higher rate of negative income tax of 35%, this means the average pensioner would be receiving £2,450, rather than £1,750, or an extra £700 each. Multiplied by £12.5m pensioners in the UK, gives us an increase of £8.75bn overall. If every pensioner receive the full £2k then the cost would be £25bn, but the vast majority of pensioners do have other personal incomes so this is in fact much lower
(4)Those 900,000 UK citizens aged over 65 and living abroad will receive the payment, but will have to provide proof of income. I have assumed the same income distribution as the ONS figures for those residing in the UK
(5) Assuming the 3.75m people in this age category earn an average of £12k (many will earn much less or nothing at all), which means that at the lower rate they will be paid on average £1,800 each, instead of £4,200. A saving of £2,600 per person, or £9.75bn in total.
(6) Average charitable donations in the UK are approximately £11bn per year (old figures admittedly), which given our average tax rate of around 30%, would reduce the tax take by around £3.3bn. No other deductions will be permitted.
So, using this approach, the amount of tax levied on income is just £136.7bn, compared with £233bn under the current system.
Similarly, the amount of transfer payments/benefits paid out is £128.5bn, compared with the current bill of £224bn.
Income tax receipts would be around £8.2bn greater that ‘benefits’ paid out – very similar to the £9bn differential that exists now.
However, this is assuming a pure model where all previous transfer payments/benefits are replaced by one single basic/citizens income payment.
In reality, some other specific top-up payments will still be required to support those who cannot earn more than the Negative Income Tax would provide, or who cannot reasonably be expected to adapt to the new approach.
Therefore, I would also suggest retaining the following existing benefits:
- Housing Benefit for those over 65 (approx £5.4bn)
- Half of Disability Benefit (approx £8bn). This needs greater detail, but I have assumed that the Negative Income tax will increase the incomes of many poor disabled by more than the current value of DLA/PIP payments. Nonetheless, some resource will still be needed to support disabled people who will meet extra expense
- Lone Parent ‘top-up’ payments of £4,000 per lone parent household, of which half would probably have to be met by the state, the other half by the absent parent. (£3.6bn)
- Attendance Allowance in full (£6.1bn)
The total costs for these retained benefits would be £23bn
My own preference for meeting this extra cost would be to raise the funds from a Land Value Tax (this is a whole other topic, but a shift in taxation from personal income to Land would be beneficial in other respects, not least the increased ability to raise revenue).
However, even if we loaded this extra £23bn on to Income Tax, the total Income Tax burden would still only be £159.7bn, a mighty £73bn less than the current level of tax on personal income
Similarly, if we add the £23bn cost of retained benefits to the cost of the Negative Income Tax (£128.5bn) that gives us a ‘benefits’ bill of just £151.5bn, a whopping £73bn less than the current benefits spending level.
So, when viewed against the current levels of income tax and benefits expenditure, a Basic/Citizens Income scheme administered via a Negative Income Tax would REDUCE both taxes on personal income, and state expenditure on welfare.
There are 3 main reasons for this
1.The tax-free allowance of £24,000 would remove about half of all income earners from income tax altogether, allowing low earning people to keep more of their own money >> 2. This in turn would hugely reduce the need for welfare/top-up payments >> 3. Which also then requires lower taxes to be levied to fund these payments.
It is a peculiar feature of the current tax and benefits system that we tax people on low incomes, so that they are reduced to poverty, and then we make them claim some or all of that money back through a complex series of benefit applications. We then claim that we have ‘lifted them out of poverty!’
Negative Income Tax payments would act as an income top-up to the bottom two-thirds, and the higher threshold would increase the take home pay of all income earners, thus providing a benefit to all, and not just the lower paid.
Are there any losers?
What table 1 doesn’t show is those who would lose out. These fall into two main categories:
- Those who receive exceptionally high levels of benefits under the current system – i.e. a household that receives well over £20,000 in benefits. Even at its peak, this was only around 0.1% of UK households, so even if every one of these households continued to be subsidised at that level, the cost would only be an extra £300m approximately. My view is that the system should be seen to be fair, so even this tiny number of exceptions might corrode support for it. However, exceptional cases should always be considered on their individual merits, so some contingency should be made for this eventuality. Under this Negative Income Tax model, a household of 2 working age adults and 2 children would have a minimum disposable income of £16,800; for a lone parent with 1 child it would be £12,400. They would both be able to claim further benefits for disability, but this would still leave their minimum income between £15,000 and £22,000 at most. The days of headlines exclaiming families living expensive lifestyles on the back of benefits payments would be over.
- Tax avoiders. There has been much heat generated around this topic in recent years, but the fact is that most taxpayers avoid tax in some ways, be it with tax-free savings, untaxed profit from house sales or other tax free allowances. With the Negative Income Tax, most of these allowances and avoidance loopholes would be closed. The £24,000 tax free limit is very generous by current income tax standards, but not as generous as some loopholes (£300,000 for inheritance income for example). Also, self-employed people who pay themselves with share dividends or capital gains, rather than salaries, in order to pay a lower level of tax, would find themselves now paying the same tax either way. This is only fair. Equal treatment across all people and all forms of personal income is a stance that is easily defended, but those who profit from the current unequal arrangements might not feel so supportive of the change.
Advantages of the Negative Income Tax approach
The Negative Income Tax has all the advantages over the current Tax and Benefits setup that most Basic/Citizens Income proposals have. I don’t plan to go into them all here, but here’s a brief recap:
- There is no disincentive for those who are out of work to gain employment. There is no additional loss of benefits to bear when income rises. All citizens (within the same age group) face the same effective tax rate on extra income, whether they are working or not.
- Labour Market Flexibility. People are automatically supported when they are between jobs, without having to fill in forms, meet complex criteria or justify their personal decisions.
- Simplicity of administration. There is one rule applied to everyone that is easy to understand and administer
- The system can’t be ‘gamed’ or manipulated by those who understand it better and exploit it. This is another advantage of its simplicity.
- Everyone benefits. All citizens receive the basic income/negative tax. Every single citizen is supported for their entire life, no matter what. Nobody falls through the gaps in the system
- It will virtually eradicate real poverty. This is a big topic that one bullet point can’t cover completely, but the minimum household incomes outlined above would be sufficient to ensure that no households would fall below 80% of the poverty level. For citizens, the absolute destitution currently experienced by 1.2 million people each year (an utterly shameful statistic for a developed country in 2016) would be a thing of the past. All those people who currently find themselves falling between the gaps in the current welfare safety net will be caught by a Negative Income Tax.
However, the Negative Income Tax has other advantages over most Basic/Citizens Income proposals
- It does not require any additional administration/bureaucracy. It makes use of infrastructure that is already in place (i.e. income tax collection, tax rebates, child benefits). If anything, the approach outlined above is much simpler than existing income tax arrangements so could potentially allow for efficiency savings.
- The rewards to all levels of income earners is clear. People are already used to calculating their disposable income after tax so will be able to see more easily how a Negative Income Tax could benefit them.
- It doesn’t need to be presented as ‘money for nothing’ as Basic/Citizens Income often is, but can be presented as a much fairer and more efficient tax system.
- It permits the case that a Basic/Citizens Income would allow us to reduce taxation and spending. Never underestimate the power of this argument to those who are suspicious of endless government expansion, interference and bureaucracy.
A Negative Income Tax gives proponents of a Basic/Citizens Income an opportunity to gain support from an audience that thus far has proven to be the most hostile to the idea, thus broadening its appeal and making its future adoption much more likely.
Table 1: How the Negative Income Tax impacts each percentile of income earners.(Source: ONS Income Percentiles 2014)
|Personal Income||Amounts: £|
2013-14 Income (£)
|2016 Income (£)||Tax paid (£)||Income After tax (£)||% income paid as tax||Tax Collected (£bn)||Total tax collected (£bn)|
|Total UK personal income (£bn)||1,229,160|
Figure 1: Distribution of Income Tax under the Negative Income Tax model (among income earners – does not include those who have zero earnings and for whom Negative Income Tax makes up 100% of their income)
It doesn’t get much more progressive than that!
I am well aware that many of the calculations above are ‘back of the envelope’, but I have tried to use up-to-date official figures, and where estimates were necessary I have tried to be conservative in my numbers. However, undoubtedly these numbers could do with a more serious, in-depth examination, but I will stand by them until someone else can provide a more reliable analysis. I’m happy to be challenged on them, but would take the challenge more seriously if it came with the relevant data.