How a Basic Income would reduce taxation

The efficiency of a Basic Income would mean that less tax revenue would be required to support redistribution of wealth than the current tax and benefits system

complicated-or-simple

The most common criticism of a Basic Income is that it would be too expensive. “We simply can’t afford it,” “It would require a huge increases in taxes,” and “supporting everyone would cost too much,” are common responses from those who oppose a basic income. But they fail to take into account the cost of the current systems of welfare, taxation and general income redistribution.

In the UK at the moment, the government taxes personal income to the tune of £233 billion. It then spends the vast majority (£224bn) of that money on welfare payments of one kind or another.

Tax Revenue* Welfare Payments** Cost
Income tax £168bn Benefit Spending £224bn
Employees NI £50bn
Capital Gains Tax £7bn
Inheritance Tax £4.6bn
Shares/dividends tax £3.3bn
Total Revenue £232.9bn Total Benefits £224bn

*SOURCE – HMRC TAX AND NI RECEIPTS 2016

** SOURCE – ONS (2015).

If we were to introduce a Basic Income of £7,200 for each adult, what would the cost of this be? At first glance, it seems easy enough to calculate – simply multiply the payment by the number of adult citizens in the UK, plus pensioners living abroad (who  would be eligible) of 53 million, which would make it £381.6 billion. This is clearly a huge increase on the cost of benefits outlined above (£224bn) and is what leads to the cry that it would require a huge increase in taxation.

However, if the Basic Income payments were offset against people’s tax liabilities, something interesting happens – the amount that we actually need to pay out becomes much smaller, as does the amount we need to collect.

If we assume a flat rate of tax of 35% across all the forms of income counted in the figures above, but subtract the Basic Income from people’s liabilities, only around 55% of income earners will pay any tax at all. The remaing 45% actually receive payment from the government because their tax bill is less than the Basic Income of £7,200.

Here are 3 examples:

  1. Person 1 earns £20,571 per year across all forms of income. Their tax bill is therefore 35% of 20,571, which is £7,200. At the same time, they are eligible for a Basic Income of £7,200 from government. These two numbers cancel each other out, so they receive £0 from government and pay £0 in tax. Their take-home pay is £20,571 (currently, their take home pay is £17,155)
  2. Person 2 earns just £10,000 (approx 30 hours per week at minimum wage level). Their tax bill is 35% of 10,000, which is £3,500. Their Basic Income entitlement is £7,200, so their net payment is +£3,700 (Basic Income minus their tax liability). Their take-home pay is therefore £13,700. (currently, their take home pay is £9,767)
  3. Person 3 earns £50,000 per year. Their tax bill is 35% of 50,000, which is £17,500. Their Basic Income entitlement is £7,200, so their net payment is +£10,300. Their take-home pay is £39,700 (currently it’s £36,467)

As we can see from these examples, it is only Person 3 who pays any tax at all (£10,300), while only Person 2 actually receives payment (of £3,700) from the government.

So instead of collecting a total of £28,200 from these 3 people (the total of their tax liabilities) and then paying them a total of £21, 600 in Basic Income (3 x £7,200), it simply balances them out

The net amount is the same – government receives a net total of £6,600 in both situations, but the first approach cuts out the bulk of the administration, and avoids the situation where funds are flying back and forth (which happens in the current system).

Interestingly, under the current system, the government collects a total of £16,982 from these 3 people and returns most of it in terms of welfare payments in a variety of indeterminate ways.

So to compare:

  1. Currently, gov’t collects taxes  of £16, 982 and pays out about £16,500 in multiple benefits
  2. Under a basic income system, it could collect tax of £28,200 and pay out £21,600 in Basic Income and a further £6,000 in other benefits.
  3. But by setting Basic Income against Flat Tax liabilities, it will collect just £10,300 and pay out Basic Income payments of £3,700, plus the remainder in other benefits payments.

It is the simplicity of Basic Income and the Flat Tax that permits this. They are both equal, universal and simple to calculate and administer.

So what does this mean on a national scale?

Well, in the UK a flat tax on all personal income of 35% would raise £430 billion (total personal income is approx £1,230bn -calculated from ONS Personal Income Percentiles 2014). The total cost of the Basic Income of £7,200 per person would be £381bn, and the difference would be required to pay additional benefits to Pensioners, the Disabled, Children and Lone Parents. Critics would argue that this is a huge increase in taxes and benefits payments compared with the current situation (see table above).

But in reality, the amount raised in tax would fall to £167 billion (that’s £66 billion less than now), and the amount paid out in Basic Income + Retained Benefits would be £170 (£54 billion less than now). The full details are in Table 1 in the appendix.

There are a number of reasons for this, but the main one is that we will stop collecting taxes from people on low incomes, only to give them some or all of it back in the form of welfare programmes/benefits (which we also have to pay to administer). Under these Basic Income/Flat Tax arrangements, those earning less that £20,571 will not pay any tax, while those who earn more will mostly pay less overall.

In summary

Current Tax and benefits system  With Basic Income/Flat tax approach
Tax raised £232bn  £167bn
Benefits paid out £224bn  £170bn

So those who claim that a Basic Income would be too expensive need to take a look at just how inefficient the current tax and benefit systems are. They also need to accept that because taxes raised in this way are paid back to citizens via the Basic Income, for most people who currently pay tax, this represents a very simple and efficient tax cut or transfer payment. Therefore, the cost to them via the tax system would be either zero, or less than it currently is.

So no more trying to justify higher taxes or complex schemes of administration. Let’s be clear that Basic Income is a very effective way to reduce the nation’s tax bill!

A well administered Basic Income scheme should reduce taxation, reduce the interference of government and empower individuals who, up until now, have relied upon it.

Assumptions

  1. The Basic Income would apply to all UK citizens resident in the UK, and UK pensioners resident abroad.
  2. Tax would apply to all income of those resident in the UK including non-citizens.
  3. Non-citizens would not receive a Basic Income, but would not be taxed on first £20,571 of income so would be treated equally within the tax system
  4. The Basic Income would be less for 16-21 year olds and more for those aged over 65. The amounts outlining the changes in cost of the Basic Income as a result of this are at in table 2 in the appendices
  5. I have not included in this calculation other savings a Basic Income might bring, such as the reduction in admin costs, reductions in poverty, increases in entrepreneurship, reductions in crime etc. The financial benefits of these things could be huge, but even if we assume it brings about no further social or economic change, a Basic Income could at the very least reduce the required tax take.

Appendices

Table 1: Personal income by percentile, with a flat tax of 35% and a Basic Income of £7,200 per year.The last column shows how much the scheme would cost government (or actually what it would raise for gov’t: the minus numbers are basic income payments made for each percentile,  net of tax; the positive numbers are the tax amount raised from each percentile)

Percentile
Personal Income (£) Tax Paid (35% -BI) (£) Take-home pay (£) Tax/% of income Total Govt revenue (£bn)
Non-earners 0 0 0 -100 -72
1 10,098 -3640.7 13,739 -36.1 -1.38
2 10,400 -3535 13,935 -34 -1.34
3 10,712 -3425.8 14,138 -32 -1.3
4 11,024 -3316.6 14,341 -30.1 -1.26
5 11,232 -3243.8 14,476 -28.9 -1.23
6 11,440 -3171 14,611 -27.7 -1.2
7 11,648 -3098.2 14,746 -26.6 -1.18
8 11,856 -3025.4 14,881 -25.5 -1.15
9 12,064 -2952.6 15,017 -24.5 -1.12
10 12,272 -2879.8 15,152 -23.5 -1.09
11 12,480 -2807 15,287 -22.5 -1.07
12 12,688 -2734.2 15,422 -21.5 -1.04
13 12,896 -2661.4 15,557 -20.6 -1.01
14 13,104 -2588.6 15,693 -19.8 -0.98
15 13,312 -2515.8 15,828 -18.9 -0.96
16 13,520 -2443 15,963 -18.1 -0.93
17 13,728 -2370.2 16,098 -17.3 -0.9
18 13,936 -2297.4 16,233 -16.5 -0.87
19 14,144 -2224.6 16,369 -15.7 -0.85
20 14,456 -2115.4 16,571 -14.6 -0.8
21 14,664 -2042.6 16,707 -13.9 -0.78
22 14,872 -1969.8 16,842 -13.2 -0.75
23 15,080 -1897 16,977 -12.6 -0.72
24 15,392 -1787.8 17,180 -11.6 -0.68
25 15,600 -1715 17,315 -11 -0.65
26 15,808 -1642.2 17,450 -10.4 -0.62
27 16,120 -1533 17,653 -9.5 -0.58
28 16,328 -1460.2 17,788 -8.9 -0.55
29 16,536 -1387.4 17,923 -8.4 -0.53
30 16,848 -1278.2 18,126 -7.6 -0.49
31 17,056 -1205.4 18,261 -7.1 -0.46
32 17,368 -1096.2 18,464 -6.3 -0.42
33 17,576 -1023.4 18,599 -5.8 -0.39
34 17,888 -914.2 18,802 -5.1 -0.35
35 18,096 -841.4 18,937 -4.6 -0.32
36 18,408 -732.2 19,140 -4 -0.28
37 18,720 -623 19,343 -3.3 -0.24
38 18,928 -550.2 19,478 -2.9 -0.21
39 19,240 -441 19,681 -2.3 -0.17
40 19,552 -331.8 19,884 -1.7 -0.13
41 19,864 -222.6 20,087 -1.1 -0.08
42 20,072 -149.8 20,222 -0.7 -0.06
43 20,384 -40.6 20,425 -0.2 -0.02
44 20,696 68.6 20,627 0.3 0.03
45 21,008 177.8 20,830 0.8 0.07
46 21,424 323.4 21,101 1.5 0.14
47 21,736 432.6 21,303 2 0.18
48 22,048 541.8 21,506 2.5 0.23
49 22,360 651 21,709 2.9 0.27
50 22,776 796.6 21,979 3.5 0.33
51 23,088 905.8 22,182 3.9 0.38
52 23,400 1015 22,385 4.3 0.43
53 23,816 1160.6 22,655 4.9 0.49
54 24,128 1269.8 22,858 5.3 0.53
55 24,544 1415.4 23,129 5.8 0.59
56 24,960 1561 23,399 6.3 0.66
57 25,376 1706.6 23,669 6.7 0.72
58 25,792 1852.2 23,940 7.2 0.78
59 26,208 1997.8 24,210 7.6 0.84
60 26,624 2143.4 24,481 8.1 0.9
61 27,144 2325.4 24,819 8.6 0.98
62 27,560 2471 25,089 9 1.04
63 28,080 2653 25,427 9.4 1.11
64 28,600 2835 25,765 9.9 1.19
65 29,016 2980.6 26,035 10.3 1.25
66 29,536 3162.6 26,373 10.7 1.33
67 30,160 3381 26,779 11.2 1.42
68 30,680 3563 27,117 11.6 1.5
69 31,200 3745 27,455 12 1.57
70 31,824 3963.4 27,861 12.5 1.66
71 32,448 4181.8 28,266 12.9 1.76
72 33,176 4436.6 28,739 13.4 1.86
73 33,800 4655 29,145 13.8 1.96
74 34,528 4909.8 29,618 14.2 2.06
75 35,256 5164.6 30,091 14.6 2.17
76 35,984 5419.4 30,565 15.1 2.28
77 36,712 5674.2 31,038 15.5 2.38
78 37,544 5965.4 31,579 15.9 2.51
79 38,480 6293 32,187 16.4 2.64
80 39,416 6620.6 32,795 16.8 2.78
81 40,352 6948.2 33,404 17.2 2.92
82 41,392 7312.2 34,080 17.7 3.07
83 42,328 7639.8 34,688 18 3.21
84 43,160 7931 35,229 18.4 3.33
85 44,200 8295 35,905 18.8 3.48
86 45,552 8768.2 36,784 19.2 3.68
87 47,008 9277.8 37,730 19.7 3.9
88 48,568 9823.8 38,744 20.2 4.13
89 50,440 10479 39,961 20.8 4.4
90 52,624 11243.4 41,381 21.4 4.72
91 55,224 12153.4 43,071 22 5.1
92 58,240 13209 45,031 22.7 5.55
93 62,088 14555.8 47,532 23.4 6.11
94 66,976 16266.6 50,709 24.3 6.83
95 73,216 18450.6 54,765 25.2 7.75
96 81,952 21508.2 60,444 26.2 9.03
97 94,952 26058.2 68,894 27.4 10.94
98 114,400 32865 81,535 28.7 13.8
99 165,360 50701 114,659 30.7 21.29
Total personal income in UK 1,229,160  Net Gov’t Revenue (total from percentile 1 -99) 63.15

It might be easier to understand it in a chart (x axis is percentage of income paid in tax, y axis is percentiles of income earners, poorest 1% to richest 1%):

incidence-of-ci-plus-flat-tax

 

Table 2 – Other Benefits/Payments

Net tax revenue 63.15 (from table 1)
Add young persons ‘discount’ saving 8.55
Minus cost of Pensioner supplement -16.5
Minus Charitable allowance -3.85
Minus Child Income -28.8
Minus Other Benefits -26.72
Total -1.45 (almost balances!)

 

 

 

 

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2 Comments Add yours

  1. Hi Martin,

    I would love if you could get in touch with me about how to go about doing a study of a Land value tax in my city. Thanks!

    Like

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