Keith Rankin
is a political economist and economy historian |
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http://www.oocities.org/RainForest/6783/ |
A taxbenefit regime that provides publicly sourced income to all adults - whether as pensions, cash benefits, tax allowances or a combination - can be called a basic income system; the guaranteed income can be called a social dividend, a monetary return on collectively inherited resources. A social dividend can be more, less or equal to an adequate benefit. A full universal basic income (UBI) is an adequate social dividend, equivalent to at least an unemployment benefit, whereas a partial basic income is a social dividend that must be supplemented by an income support 'transfer' in order to adequately sustain an adult lacking a private income.
The realisation of a social dividend, per se, is not a costly reform. Choosing between costed income support proposals is a matter of politics - of public values - not economics. For any tax rate and level of committed public expenditure, a social dividend can be calculated. Likewise, for any level of benefit to be distributed as a social dividend, there is a calculable cost in taxes and/or public expenditure and/or employment. This paper details two alternative budgets for New Zealand in 1996/97, based on flat income tax rates of 33% and 43%, each of which yields social dividends as partial or full basic incomes.
A social wage accounting framework is needed through which different taxbenefit proposals - including proposals that do not provide unconditional benefits - can be easily compared and contrasted, and which can be understood with reference to other items of public expenditure. By applying such a framework to current New Zealand tax scales, an effective tax credit of $3,933 per annum can be discerned as a social dividend. An effective low income surtax, a clawback on some individuals' social dividends, is also revealed.
The existing taxbenefit regime can develop, given time and productivity growth, into a generous basic income system. Juliet Schor's idea (Schor 1991) of a historically rising productivity dividend is suggestive of the means by which a full UBI should be able to emerge from a simple social dividend arrangement. Future productivity growth will be unsustainable, however, if high and growing levels of labour supply continue, as both a rational response to and a cause of increased relative poverty.
Basic income reforms suggested by social wage accounting principles
- a necessary though insufficient step towards the achievement
of economic justice and sustainable growth - can become to public
economic welfare what the recent introduction of Mixed Member
Proportional (MMP) elections is becoming for representative democracy
in New Zealand. Such reforms will naturally incur resistance,
as all progressive reforms do, but, as Hirschman (1994) has shown,
conservative interests generally adapt well to reforms, often
embracing them once their fears have been mollified.
A common subset of social dividend proposals come under the rubric of 'Basic Income / Flat Tax' through which the progressivity of personal taxes derives from the interaction between the unconditional basic income and the flat tax, rather than from graduations in the tax scale. Tony Atkinson (1995) calls the proposal 'BI/FT', distinguishing it from the welfare states created midcentury which he labels 'social insurance / graduated tax' (SI/GT). In the context of New Zealand, where the concept of social insurance is not common parlance, the prevailing approach to benefits and taxes can be called 'CI/GT' (conditional income / graduated tax).
Atkinson fails to address the important issue of the difference
between social dividends ('earned income') and transfer payments
('unearned benefits'); that is, the difference between distribution
and redistribution. He simply sees basic income payments as "refundable
tax credits", a term which fudges the distinction. Atkinson
sees the simplicity of converting the British tax system into
one based on a flat tax set at the present upper rate of 40% combined
with a standard tax credit. Likewise, the present New Zealand
taxbenefit system can easily convert into a BI/FT system
funded by a 33% flat rate of income tax and a 12½% GST.
Social wage accounting takes the BI/FT system one step further,
into a system based around a social wage of which the social dividend
becomes just one essential part. Thus, the standard tax
credit (STC) is a name for a social dividend constructed
from existing tax allowances. The STC is an integral part of a
social wage which is a factor income
like wages, salaries, interest and company dividends. The STC
is an earned income, a share of an equal return on social assets;
public domain assets that cannot be freeholded and publicly owned
assets that have not been privatised. The social wage fund, by
definition, is the equal property of all citizens, including children.
Thus the individual social wage is simply an equal share of the
total fund.
Gross Domestic Product (GDP) is the total income derived from the sale of goods and services produced from domestic resources. GDP is the tax base; the fund from which a social wage must be drawn. While GDP is an important concept for the analysis of income distribution, it is at best a crude measure of living standards. Much unpaid work contributes to the GDP total, but is not acknowledged as such. For example, while family 'breadwinners' are made more productive through the assistance of other family members, only the breadwinner is acknowledged by the Statistics and Inland Revenue Departments as an income earner.
Economic historians have repeatedly demonstrated that the dominant contributing inputs to modern economic growth are social; eg technology, scientific knowledge, culture, social overheads, public institutions, public policy. Along with the natural environment, these are the resources of the public domain. While income taxation can be justified on a number of grounds, the most important in my view is that it is a royalty payment to the owners of the public domain. To maintain the public domain it is necessary to plough back part of this royalty - this rent; it is necessary to invest part of the social wage.
It is our propensity as social and creative beings, to make voluntary contributions to the public domain; to our common resource base. We are better able to make our own contributions to the health of the public domain if we each receive a cash income - a social dividend - as a part of the social wage. Such income can act as an increment to our earnings or a means of procuring time. We enrich the public domain, for example, by conducting public discourse on this subject. UBI activists do not expect to make a profit from the promotion of the basic income concept.
A tax justified as an economic rent for the use of public domain resources should be a flat rate tax. Otherwise some users would be paying a different price for the same resource. A pragmatic graduated tax scale can too easily be seen as an arbitrary confiscation of private wealth. A flat tax on all producers' contributions to GDP yields a simple slice of gross market income. This slice forms the major part of the social wage fund. The other parts come from indirect taxes and the profits of New Zealand's dwindling inventory of publicly owned enterprises.
GST can be accounted for as a levy paid by consumers for their
use of public domain resources. Already a flat rate, it fits seamlessly
into a social wage accounting framework. Some basic income proponents
prefer a high rate of GST to a high rate of income tax, or at
least emphasise that the two are substitutable. I prefer a high
rate of income tax, because foreign owned enterprises use New
Zealand's public domain resources to make profits for their shareholders.
Those shareholders should pay an adequate rent for their use of
New Zealand's resources.
While I use the term social wage, with which most New Zealanders have an intuitive understanding, an alternative name would be 'social profit'. It represents collective property income; as such it has nothing at all to do with the labour market. Profits can be retained by the directors of a company for future investment, added to reserve funds which buffer the company from the frequent upturns and downturns of the market economy or added to a sinking fund used to repay longterm liabilities. The government's role, likewise, is to manage the public domain on behalf of the public's interest. Democratic governments, like boards of directors, therefore have the prerogative to decide how much of the social wage to distribute as cash income as well as what price - ie tax rate - to ask for public domain resources. Public domain resources are valued through the political process (Rankin 1996c).
The social dividend is the distributed part of the social wage,
fully analogous to company dividends. Each person's social dividend
is simply a fraction of a social wage which in turn is a fraction
of GDP. The remainder of the social wage - the retained or undistributed
social wage - is used to fund supplementary benefits, public services,
public administration, public debt service, and public debt repayment.
New Zealand already has a social dividend of sorts, a standard tax credit (STC). Like that other quasiuniversal payment, New Zealand Superannuation, it is subject to an effective tax surcharge ('clawback' or 'surtax'). Hence the STC is not apparent to most New Zealanders. From July 1, all New Zealand taxpayers earning over $34,200 receive a tax allowance of $3,933. The first $34,200 is taxed at a concessionary rate of 21½%; ie a rate below the company tax rate of 33%. That means that the first $34,200 of income secures a tax credit of 11½ cents per dollar - $3,933 in total. For middlehigh income earners, a simple BI/FT system holds in New Zealand:
Net Income = Gross Income less 33% [FT]
plus $3,933 [BI]
The tax cuts, which came into effect in July 1996, give all persons
grossing over $34,200 an increased social dividend of $22 per
week. Those whose salaries do not reach $34,200 gross are denied
a full tax credit; thus we can think of the shortfall as a low
income surtax (LIS). It is because of the LIS that low
income earners receive a much smaller tax cut; a heavily clawed
back social dividend. Persons grossing less than $9,500 per annum
will have their entire tax cut clawed back.
Table 1 shows the present, immediate past, and future tax scales from (a) the orthodox graduated tax perspective and (b) from a social wage accounting perspective. In (b), as earnings get higher, the LIS gets lower. Persons earning $33,200 now pay a low income surtax of $90 per annum; 9% of the $1,000 shortfall below the $34,200 threshold. (9% represents the difference between the 33% and 24% tax rates.) They receive a surtaxed social dividend of $3,843.
Social wage accounting shows that the first $3,933 of the incomes of beneficiaries and pensioners is in fact a social dividend, the STC. Thus the present STC is paid without any clawback to beneficiaries as well as aboveaverage earners.
Supplementary benefits paid to lowmiddleincome working
families - eg Family Support, Guaranteed Minimum Family Income,
the Independent Family Tax Credit, the Accommodation Supplement
- act as a crude somewhat "Kafkaesque" offset to the
LIS paid by caregivers and lowerincome workers. Many people
out of the labour force - mainly caregivers of children, and students
who do not qualify for an allowance on account of their parents'
income or their having been in receipt of a student allowance
for more than five years - get neither a social dividend nor a
supplementary benefit; in effect, they pay an LIS equal to the
STC. While the STC is distributed social wage earnings, the LIS
is confiscation of those earnings, to a large extent a marriage
tax.
All public expenditure is social wage funded. Thus public education, for example, is neither free nor taxfunded. It is part of the social wage; it is social wage funded. It is funded by every man, woman and child in New Zealand.
Social welfare expenditure has become very complex in New Zealand. The retained social wage, plus the LIS and other surtaxes, is used to fund supplementary benefits. This social contract to redistribute part of the social wage is the commitment by all to support those whose earnings and imputed intrafamily transfers together fall below some socially determined minimum. It also represents a commitment to pay abating benefits to lowincome recipients whose incomes may not be below the social minimum (eg parttime workers), so as to facilitate the social integration of beneficiaries and employed workers. This social contract between paid workers and beneficiaries breaks down, however, when abatement rates add up to create enormous disincentives for some people to act to reduce their dependency. Benefit costs become unnecessarily high, while the victims come to be seen as undeserving 'bludgers'. Public sentiment becomes selfish, exacerbating the pressures that create dependency.
Removing the LIS would dramatically reduce the need for supplementary assistance - especially the accommodation supplements which tend to go into landlords' pockets, and would provide the opportunity to rationalise the abatement regimes. The best means to rationalise transfers under social wage accounting principles might be to have a single supplementary benefit, which would be assessed by a points system. There would be only one abatement regime, and all surtaxes could be abolished. Points would be 'awarded' for circumstances such as senior age, disability, number of children. Where social dividends fall short of unemployment benefits, everybody would receive enough points to ensure entitlement to an adequate basic income on becoming unemployed. Because the benefit would be abated in accordance with private income, a lack of income would not be a criterion for awarding points.
With all public expenditure being social wage funded, all 3½ million New Zealanders equally fund, for example the bureaucracies that test means, 'count beans', and push up interest rates to dampen down an economic recovery that might otherwise lead to wage claims in excess of the inflation rate. From a social wage accounting perspective, all of us have an equal financial stake in publicly owned institutions, so we all have an equal right to determine how they are run, to have free access to information about how our social wages are being spent, and to be able to judge whether social wage expenditure (including subsidies to companies) conforms to some principle of economic justice.
An important but often neglected part of the social wage is foreign
aid. Much of the public domain is global, not national, although
nations with welleducated populations get much more value
from global resources such as the Internet than do 'Third World'
populations. A commitment by all nations to paying a proportion
of the social wage to multilateral institutions that can provide
international public goods' and environmental investment should
be seen as integral to any version of social wage accounting.
One advantage of social wage accounting is that a flat base rate tax of income tax equal to the company tax rate gives a reference point through which we can see hidden subsidies and surtaxes. Thus we can say that any contribution to GDP that is not taxed at the company rate (ie 33% at present) constitutes either a tax credit or a business subsidy. Social wage accounting reveals 'corporate welfare'.
One area of considerable interest is owner occupied housing. All property rentals - including imputed rentals for owner occupiers - are rightly a part of GDP. Income paid to landlords and mortgagees is taxed (and subject to local government rates). The subsidy only comes to the income derived from the owneroccupiers' equity. In practice this is a straight out subsidy to freehold property owners. While I do not favour imposing additional burdens on superannuitants who own their own homes, this subsidy should be recognised for what it is, an income transfer to the richest members of society. Removing this subsidy can be one means to funding a higher social dividend.
Social wage accounting principles do not suggest that work produced
and consumed within the household economy should be included in
GDP. Therefore, such domestic production should not be subject
to income tax - nor should voluntary work performed outside the
home. Unpaid work is exclusive to either the private domain or
the gift economy. All production - paid or unpaid - should be
recognised, however, as contributing to a nation's average standard
of living. Recognition can come through attempts to impute a total
value to such domestic production, and then including such a value
in a measure of living standards. At a more immediate practical
level, recognition should also come through the removal of the
low income surtax that claws back the social dividends of many
women. Recognition would come by paying all adults their social
dividend, not by assessing the productive contribution of each
unpaid worker and making rewards conditional on individual contributions.
Social wage accounting reveals a society in which publiclysanctioned redistributive transfers flow, on balance, from women, from families and from the poor. They flow to big companies, to higher salary recipients, to home owners, to beneficiaries. This is in addition to the publicly promoted transfers from lowerincome recipients brought about through gambling, through abovemarket interest rates, through the Employment Contracts Act, through the role of Housing New Zealand in establishing an exploitative market in lowincome housing, and through a formula for indexing benefits that continually diminishes each beneficiary's share of national income.
Taxbenefit reforms based on social wage accounting principles
- namely the introduction of an explicit social dividend - firstly
seek to redress these imbalances. In addition, they make an adequate
universal basic income into a politically feasible objective.
A move towards a UBI would return income to women, families and
those in parttime, low wage and casual employment. Social
wage accounting ensures this is done without discrimination. Simply
targeting women places male caregivers and low wage male workers
at a disadvantage while creating subsidies for the many affluent
women in modern New Zealand. Targeting families leaves some individuals
- eg single low income liable parents - in a hopeless position.
Targeting the poor with a maze of conditional benefits keeps the
very poor less poor but still poor, while reinforcing their dependence.
One advantage of a flat rate of income tax is that it removes
any reason for distinguishing between gross earnings and net earnings.
Why should meanstested benefits and surtaxes be assessed
against gross earnings, a large part of which have already been
placed into the social wage fund through PAYE? By accounting for
all income tax as company tax, all our personal incomes can be
received net of tax. Companies, universities etc. would pay company
tax to the effect of 33% (or whatever) of their contribution to
GDP, and pay salaries net of income tax, adding the standard tax
credit as a separate item on the pay slip (see fig. 2 as an example
payslip for a person grossing $50,000 in today's language).
Employers would continue to be the main delivery agents of tax
credits, reflecting the direction we have been moving in since
the introduction of PAYE and withholding taxes. The only barrier
to completing that reform is the existence of multiple rates of
personal income tax. A tidy, easily understood, social accounting
system makes it much easier for citizens to debate issues of public
policy.
Tax Code Primary Annual Salary $33,500.00 Fortnightly Earnings $ 1,288.46 Standard Tax Credit (STC) $ 151.27 Net Income for Fortnight $ 1,439.73
The poverty trap, while real, is in some respects a statistical
artefact. In particular, the alleged disincentives of standard
income tax rates do not stack up. If incomes were paid on a net
rather than a gross basis - as today's taxable benefits are -
then genuine increments to private incomes would be retained.
The exception would be persons in receipt of a supplementary benefit.
Social wage accounting reforms will correct the artefact while
significantly easing the abatement problem.
The Appendix Table presents two costed examples of universal basic income. They apply to income tax rates of 33% and 43% respectively. Estimates of public expenditure and revenue are taken from the May 23 Budget documentation. The proposals are conservatively funded, in that subsidies and the budget surplus have been treated as committed expenses, and the effects of contractionary Reserve Bank policies have been factored into the Budget estimates. Neither proposal relies on the removal of hidden subsidies to fund the social dividend.
I conclude that, at the present 33% tax rate, New Zealand could fund a UBI of over $6,000, so long as all transfers were abolished and no additional funding was made available to traditional social wage expenditure areas. On the other hand a lesser social dividend of $4,000 - about the same as the present standard tax credit - can be funded with adequate supplementary assistance. Thus, the "centreright" STC proposal in the Appendix Table is essentially an accounting change, with some redistribution of supplementary assistance. Some lowmiddle income families would lose some transfer income while gaining a greater incentive to raise their private incomes. By rejigging the 1997/98 tax cuts already accounted for, noone need be worse off next year than they are today.
I believe that such a policy would be ideal for a party seeking to become the minority partner in a centreright coalition. Such a policy, while costing nothing, would give people a positive reason to vote for the smaller party. If enough people vote for, say, the United Party, then it is likely to become part of a governing coalition. As part of the Government, it would expect to implement some of its policies. National, although "fiscally responsible", is essentially pragmatic. National implemented electoral reform; they could just as easily implement the 33% basic income / flat tax proposal.
The "centreleft" proposal in the Appendix Table is based on a 43% tax rate. At this rate, it would be possible to fund a full UBI of $9,000. Once again, I prefer a lesser amount of $7,000 as a standard tax credit, with the remaining $2,000 per adult being retained to fund supplementary benefits and new social policy initiatives. I see the 43% option as a politically realistic programme for a centreleft party, more easily sold to the public if the centreright version were to be implemented first.
In both proposals, the funds required for transfers and new initiatives
are only available by retaining children's social dividends. This
is not a problem for children - they are already better off under
either STC proposal - in that their caregivers will have a social
dividend as of right, plus, in many cases, an entitlement to supplementary
benefit determined by the number of children in the family. However,
I see that it is important that the retained children's social
dividends - eg $4,008m in proposal (a) - should be acknowledged
in the public accounts, set against existing expenditure in education
and children's health. Thus, such existing programmes would be
seen to be childfunded. Allocating this money to existing
children's expenditure frees up an equal amount for other social
wage expenditure, some or all of which might come under the rubric
'investing in children'.
In conclusion, I argue that New Zealand (and other nations with
graduated income tax scales or income tax exemptions) already
has a standard tax credit system, albeit complex,
crude and unjust in its present form. New Zealand, given the simplicity
of its basic tax scale if not its welfare entitlements, is better
placed than most nations to convert to an unconditional partial
basic income, essentially through the removal of the effective
low income surtax and the recognition of social wage accounting
principles. A combination of increased transparency to the public
and rising productivity dividends can make the parameters of such
a basic income system politically contestable, leading to a culture
of public welfare; a culture which embraces collective income
and social contracts as key parts of the capitalist economy rather
than as charity paid out to "losers" and "victims".
Atkinson, A.B. [Tony] (1995) Public Economics in Action: the Basic Income/Flat Tax Proposal, Oxford: Clarendon Press.
Berryman, Warren (1995) editorial The Independent 22 September.
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Ironmonger, Duncan ed. (1989) Households Work: Productive Activities, Women and Income in the Household Economy, Sydney: Allen & Unwin.
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Marshall, T.H. (1949) "Citizenship and Social Class", Alfred Marshall lectures, in Class, Citizenship, and Social Development, Westport, Conn., Greenwood Press, 1963/73.
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Rankin, Keith (1991) "The Universal Welfare State; incorporating proposals for a Universal Basic Income"; Policy Discussion Paper No.12, Department of Economics, University of Auckland.
Rankin, Keith (1992) "Escaping the Poverty Trap", New Zealand Political Review, April.
Rankin, Keith (1995a) "The Equal Property of All" New Zealand Political Review, July/August.
Rankin, Keith (1995b) "It's simply common sense; Tax Cuts are our Just Reward", The Independent (NZ), 29 September.
Rankin, Keith (1995c) "SelfRefuting Prophecies" New Zealand Political Review, October.
Rankin, Keith (1996a) "So Little Relief" New Zealand Political Review, May.
Rankin, Keith (1996b): "What's cheaper; placating the poor with welfare or
imprisoning the rich?" The Independent, 10 May.
Rankin, Keith (1996c): "The Social Wage as a Definitive Component
of Political Parties' Philosophies", paper presented to the
conference of the New Zealand Political Studies Association, July
10. [return]
Rankin, Keith (1996d) "Investing in our Children" New
Zealand Political Review 5(3):14-19, August.
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public", New Zealand Sunday Star-Times, August 11.
St. John, Susan (1994) "The Welfare Mess", Policy Discussion
Paper No.15, Department of Economics, University of Auckland.
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Paradise Lost or Guiding Light?", Economic Papers
[Australia] 5(Sept.):2532.
Smith, Nigel (1996) NZ Sunday Star Times, 17 March, p.D5.
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Basic Books.
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in A. Asimakopulos ed. Theories of Income Distribution,
Boston, Kluwer.
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Appendix (Two costed examples of universal basic income. They apply to income tax rates of 33% and 43% respectively.)
{[ Requires MS Excel ]}
© 1996 Keith Rankin
The Appendix Table referred to in the Discussion Paper is: Appendix. . Note: It requires MS Excel, or an Excel Reader
The section of the Discussion Paper that deals with criticism of the UBI concept is available here.
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