bift graph

Bring Back Progressive Taxation and Eliminate Poverty by Combining Basic Income with Flat Tax

Richard Parncutt

Left-wing readers will be thinking: What are the words flat tax doing in that heading? Isn't flat income tax what the radical right wants so the rich can get richer and the poor poorer, further increasing the wealth gap? Which is already catastrophically big?

Allow me to introduce myself. I am a leftie. I want to eliminate poverty, improve the lives of people on low incomes (the "working poor"), improve gender equality, and reduce the wealth gap. I also studied physics and do research in psychology. I am interested in clear thinking and the correct use of mathematical arguments.

Before we continue, I should explain "progressive income tax for dummies". In most countries these days, if your income is low you pay no income tax. When it passes a certain threshold you start paying income tax at a certain low rate. When your income is even higher and passes a second threshold you start paying a higher rate for the income beyond the last threshold. The intervals between the thresholds are called income tax brackets. The system as a whole is progressive, which means that when you earn more money, you not only pay more tax -- you pay a greater proportion of your income in tax.

Flat income tax is a system where there are no thresholds and no income tax brackets, so the system is not progressive. No
matter how much you earn, you pay the same proportion of your income in tax. Without progressive taxation, the wealth gap naturally gets wider, because it is easier to make money (income) if you already have some (capital). The rich naturally get richer and the poor either stagnate or get poorer. Which is exactly what I (and hopefully you too) want to avoid at all costs, although unfortunately in recent decades with the rise of neoliberal economic ideologies it has been happening under our noses.

The reason why I am presenting myself as a leftie and talking about flat income tax is that I am interested in combining flat income tax with basic income as a sustainable strategy to eliminate poverty. Let me explain:
That is not a political claim, nor is it a trick. It is a mathematical truth. Moreover, BIFT is not sometimes progressive and sometimes not. BIFT is always inherently progressive, provided BI corresponds roughly to the poverty line (or poverty threshold), below which people are regarded as "poor". BIFT is strongly progressive even for the lowest plausible estimates of the poverty line in any country, rich or poor. According to the World Bank, the international poverty line is $1.90 per day or $60 per month. But there is an enormous difference between rich and poor countries. In the USA the poverty line is about $1000 per month, according to the Census Bureau. In Europe, when the poverty line is defined as 60% of median income, it is about €1000 per month.

Imagine a world in which everyone, rich and poor, got a basic income of
€1000 per month and paid 50% tax on all other income. These two numbers (let's call them "parameters") have been chosen arbitrarily for the sake of argument, assuming we are in a rich country (although BIFT can work equally well in any country). In reality, the parameters would be adjusted in a democratic political process. It might be possible to eliminate poverty (for the first time!) even if both were lower (e.g. €800 and 40%), because BIFT would benefit unemployed people who supplement their income with casual work by eliminating welfare traps (of which more later; the disabled would of course receive a higher BI). But let's go with these initial estimates for the moment:
Under BIFT, the transition between welfare recipient and taxpayer would be completely smooth with no hiccups. Regardless of your income, if you earned more, you would take home more. There would be no demotivating, demoralizing "welfare traps". Benefits would not be means tested and would therefore never be cut.

Flat income tax by itself is far-right lunacy. But flat tax combined with basic income (BIFT) is a left-wing strategy. It is inherently and continuous progressive.

Most people don't know that, and here's something else that most people don't know: Value-added tax is inherently regressive. The more you earn, the less you pay in VAT relative to your income. In most countries the regressivity of VAT approximately cancels out the progressivity of income tax, so in the end people are effectively paying a flat income tax! Regardless of your income, roughly 40% of it ends up going to the government by different routes. The details vary from one country to the next, but the general trend is the same.

Just to drive that point home: Flat income tax is not a far-right dream. It is already here, in many countries. It has been created by combining progressive income tax with VAT. No wonder the wealth gap is increasing!
That must be one of the greatest scams of all time. 

The problem is easily solved: end VAT on everyday consumption (especially regular groceries: vegetables, bread, milk and so on) and get the rich to pay reasonable amounts of tax. VAT is only ok for goods and services that are luxuries or environmentally damaging (e.g. expensive cars). The failure of rich individuals and corporations to pay up is a chapter of its own, of course. They are busy both avoiding tax (legally) and evading tax (illegally). This makes the system as a whole regressive. No wonder the rich keep getting richer.

Given this background, we can take a new look at the idea of income tax progressivity.
A tax system is only progressive for a given individual if the sum of all welfare for that individual minus the sum of all tax for that individual is progressive. As one supermarket chain once advertised: it's the total of the tape that counts. BIFT solves this problem.

From a human-rights perspective, BIFT is based two basic assumptions:
  1. Everyone deserves enough money to live on (BI).
  2. Everyone who earns money deserves to keep a reasonable proportion of it (income minus FT).
Both these points are obvious. You can hardly argue with them. Although the first point has a socialist flavor and the second seems capitalist, both the centre left and the centre right agree about both of them. From this viewpoint, BIFT is politically realistic.

Two objections to basic income

People have been talking about basic income for a long time, but it still isn't happening. The reason: fake news. The rich and their sidekicks are spreading rumours. We need a reality check!

1. Can we afford BI? Misleading question. It is the current system that is too expensive, first because it is too complicated (necessitating a giant bureacracy to administer both welfare and tax), and second because it makes it too easy for the rich to avoid or evade tax (after which the government cannot afford social services). In fact, any country, rich or poor, can afford BI. It's just a matter of drawing a line of best fit through the current relationship between gross and net (disposable) income on the above graph. The two parameters, BI and FT, need to be adjusted in a political process, making sure government expenditures are covered by government income. The question is rather: How do we want to set those two values? People on the right wing will prefer relatively low BI and low FT; on the left, high BI and high FT. In both cases, the budget can be balanced. Of course other taxes will be necessary (environmental, transaction, wealth), but they can be considered separately.

2. Won't BI make people lazy? Another misleading question. It is the current system that is making people lazy! Currently, if you have no income, you get welfare. If you then get a part-time job, your welfare is cut. So it's not worth working! This called the welfare trap. BIFT removes the welfare trap forever by giving BI to everyone and taxing all income at the same rate. So no matter how much income you have -- if you work more, you take home more. In other words, if your income before BIFT increases, your income after BIFT increases, as shown by the ascending line on the graph.

People have been conducting experiments to find out if basic income makes people lazy (e.g. in Finland). The people behind those experiments should learn something about formulating experimental hypotheses and creating experimental designs. Regarding hypotheses, it is the present system that is making people lazy. Really! There's nothing more demotivating than welfare traps.
The hypothesis is therefore that BI (corresponding to the poverty line) will make people less lazy. That's what we want to find out! But laziness is not necessarily the main point. Of course there is work to be done and of course BIFT motivates people to work. But what we really want from a modern economic reform is globally sustainable social well-being. There is one thing that all BI-experiments show: people are happier if their existential fears are removed and their freedom restored. Regarding experimental design, you can't perform a controlled experiment that compares the current system with basic income if the participants are simultaneously living in both systems. The confounds are large and impossible to avoid. The only way to test BI is to introduce it.

It's obvious that the world needs BIFT. Once you understand how it works (and nothing could be simpler), it is difficult to imagine what other system could possibly be better. That may sound arrogant, but I have been struggling with this question for many years. At some point, one has to draw conclusions and consider the implications.

The disadvantages of BIFT

None are currently known. Please write to the author if you know of any disadvantage.

The advantages of BIFT

BIFT would solve a long list of political and economic problems. 
For more details on these points, including the question of how best to transition from the current system to BIFT, click here.

The opinions expressed on this page are the author's personal opinions. Readers who know and care about this topic are asked to contact the author with suggestions for improving or extending the content: parncutt at gmx dot at. Back to Richard Parncutt's homepage