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

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.

*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 (o f £3,700) from the government.

So instead of collecting a total of £28,200 from these 3 people (the total of their income 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 Income 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 of the original blog article (Warning! There are lots of numbers!), but it might be easier to understand using this chart, which shows that government is paying out to only around 45% of earners (plus those who earn nothing — not appearing on this chart), while tax is only collected from the top 55%.

(x axis is percentage of income paid in tax, y axis is percentiles of income earners, poorest 1% to richest 1%):

In essence, 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, effectively, while those who earn more will mostly pay less overall.

In summary

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.
  6. The retained benefits would include around £26 billion worth of payments to pensioners, lone parents and the disabled, (also listed in the original blog post). They would not be means-tested according to income.