This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
Oliver Twist, famously asked for ‘more’. He did not challenge the system of workhouses – Dickens did – nor the authority of Beadle Bumble. He was only nine.
I am often struck how critics of the current income maintenance system are like Oliver Twist. They ask for more, but they rarely try to think through how we can actually change the system other than by paying more.
The exception is the proposal for a Universal Minimum Income (UMI) in which everyone gets a minimum benefit from the state to sustain their standard of living. But advocates rarely do the sums to calculate the tax rate to fund it.
I confess that in my salad days – I was older than nine – I proposed such a UMI to the Royal Commission on Social Security. My interest had arisen from a 1950's discussion on various related proposals such as a social dividend and a negative income tax. The royal commission was not interested.
When I did the calculations for the taxes necessary to fund my proposal, I kept getting very high average tax rates – 60% was typical. Eventually I found a nice little mathematical theorem which says that the average tax rate to fund a UMI of X percent of the average income (which is lower than the average wage) is also X percent.
I am not alone in this discovery. There are at least two New Zealand economists who have proposed a UMI, and then quietly withdrawn from the fray when they realised the high tax rates it required.
Instructively, The Opportunities Party (TOP) advocates a Universal Basic Income (UBI) but at the low rate of $250 a week so it is not really a UMI to sustain people of a minimum adequate standard of wellbeing. It is below what most beneficiaries and superannuitants receive who, under the TOP scheme, would continue to receive higher benefits; the current hodgepodge would continue. So the TOP proposal is not so much about guaranteeing a decent minimum income to everyone, but a negative income tax. I am not uncomfortable with that – I explored that too in my salad days – but it was not what I was proposing to the RCSS.
I have hunted around for years to find a practical way around the mathematical theorem – that is, how to provide a decent standard of living to everyone without very high tax rates which would discourage work and savings efforts (and encourage evasion). Here is one way of doing it.
Suppose we split the community up into two groups. The first group is expected to obtain their income from the earnings from a job. The second group are those who cannot reasonably be employed; they receive the UMI but their tax rate is higher – after all they do not need a disincentive to work. It would include those above a certain age (as applies already to New Zealand Superannuitants), permanent invalids, children and their full-time carers.
This dramatically reduces the necessary average tax rate – about halves it. Thus I have got around the theorem! However, you never get something for nothing – not in serious economics anyway. (Paul Samuelson once pointed out that the foundations of economics rest upon the laws of thermodynamics.)
This becomes evident when one tries to classify everyone because they do not all fit easily into the two categories. I illustrate it with one example. What to do with the unemployed?
Clearly the approach depends upon maintaining a high level of employment and adequate wages. But, inevitably, in a dynamic economy there are going to be workers in transition between jobs. There is no point putting them temporarily in the second category because the tax rate facing them is high and will discourage them from searching.
That means we have to design a system which provides income support for the unemployed while encouraging the employment transition. My guess is that the best way to do this is to develop an earnings-based redundancy (and sickness) system based on worker contributions. We have the beginnings of this in the accident compensation scheme.
In fact we have the glimmerings of the system already. New Zealand Superannuitants already belong to a category two. The next step would be a universal child benefit. (It would be at a lower rate than NZ Super of course, but still enough to sustain wellbeing – say 70 percent of NZS.) That would sweep away the shambles of complex taxes on families. NZS could then be extended to permanent invalids. We could extend ACC to cover those made redundant or who are sick. Step by step we can evolve the income support system towards a simpler, cleaner, less-bureaucratic system than we have today (with lower marginal tax rates on many people). Done properly it would also reduce income inequality.
It would take some skill to design it, considerably more than the team that designed the clumsy Working For Families system appeared to have. And yes it would involve some tricky anomalies.
More likely there will be resistance from those who will stress the problems of the anomalies. Lacking imagination and technical competence they would relapse to fiddling around the edges with solutions of just asking for more but keeping the current system with its brutal tax rates on the poor in place. They are the Oliver Twists of this world. They leave Mr Bumble in charge.
Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.