• Should the unemployed be forced to beg on the streets? Or should they receive welfare benefits? In the terminology of the graph, should people with no gross income get enough net income to survive? Should the line on the graph pass through the origin, or should it cross the vertical axis at a higher point? 

• Should the unemployed lose their unemployment benefit when they start to work? Or should they be motivated to work by a system that gives them more net income when their gross income increases - regardless of their income? Should the principle "the more you work, the more you earn" apply to everyone, or should the poor and part-time workers be excluded?

• The first principle is socialist. Everyone should get a basic income, regardless of how much they are earning. 

• The second principle is capitalist. All income should be taxed at the same rate ("flat tax").

On the the graph, the basic income is the point where the line crosses the vertical axis. For the sake of argument I have set this at 1000 Euros per month; the exact amount would have to be determined in a separate political process. Similarly, the flat tax rate has been arbitrarily set at a round number, 50% - but it could be much less than that if for example tax deductions were phased out and wealth, carbon and transaction taxes were phased in.

Any country that wanted to introduce this idea would do it in two stages. They would first agree in principle to the idea of UBI-FIT, by which I mean a graph like the one above, with a straight line that does not pass through the origin, but well above it. In the first stage they would also agree that during the transition to UBI-FIT the relationship between gross and net income should change as little as possible (perhaps specifying limits on the size or rate of changes). The exact level of UBI and the exact rate of FIT would then be determined in a later process, after discussion between political parties, and guided by economic advisors. It would be periodically adjusted in response to changes in inflation and other economic circumstances.

Here is how UBI-FIT would work:

• If you had no gross income, you would get the basic income. UBI would replace all existing benefits for people who are unemployed, studying, disabled, retired, or without local citizenship, probably with different rates for different categories. Children would receive a lower rate, disabled higher.

• If you got a job, however large or small, or started earning money independently, you would keep the basic income and all further income (including capital gains) would be taxed at the same flat rate (FIT). 

Too good to be true?

After this tax reform to end all tax reforms, the relationship between gross and net income for individuals, which is what counts in the end, would change remarkably little. At the same time, it would be possible and feasible to eliminate the following: 

• Welfare traps, because people would not lose their welfare as their gross income increased. Incentive would be independent of income.

• Welfare fraud, because everyone would receive "welfare" in the form of UBI (also called negative income tax), and it would be linked to their ID card or passport.

• Income tax evasion, because income tax would generally be paid immediately and in full, with no later refund. Regular wage earners would not need to wait until the end of the year. (Capital gains would still be calculated yearly.)

• Yearly income declarations, for the same reason. Taxpayers, their advisers and tax officers spend an enormous amount of time on this annual ritual. This time would be saved ("tax weekend"?).

• Precarity: not only would people have the UBI to fall back on if everything else went wrong, but also any additional casual or part-time work would be protected by a contract. All wages and fees would be paid electronically, just as the basic income is paid electronically.

• The cash economy. Both employers and employees would be required by law to ensure that all wages are payed electronically and taxed immediately.

• Unfair wage structures. Wages at the lower end, some of which are currently protected by minimum wage legislation, would increase (typically double) to reflect the true value of the work (and the people doing it).

• Poverty, if UBI was close to the poverty line (however calculated). This would be the most important achievement. Poverty kills - in developing countries, by hunger, disease, and violence, and in industrial countries, by reducing life expectancy. It is hopefully a truism that matters of life and death are more important than financial matters.
  

In the process, one might also aim to eliminate tax deductions to cover expenses associated with earning money (e.g. the cost of setting up a business). The way tax deductions work in practice is generally complex and unfair - they tend to favor the rich. The easiest and fairest solution may be to get rid of tax deductions altogether. If the rich want a "free market", they should take responsibility for their own investments and stop accepting massive government rebates. That would allow the tax rate for everyone (FIT) to be reduced. Note, however, that UBI-FIT could work perfectly well without changing the current system of tax deductions.

Is this list of benefits too good to be true? Not really. The graph shows that these benefits are mathematically possible. They are also politically possible, because they would benefit both poor and rich, left and right:

• The left would celebrate the end of government interference in the lives of the unemployed, and a system that is so complex that no-one understands the whole thing, which ultimately benefits the rich because they can afford the best tax advisors. 

• The right would celebrate the downsizing of government and the reduction of both public and private administrative costs (paying tax advisors). They would celebrate the end of welfare fraud, being recipients of welfare themselves.

• Both left and right would celebrate the end of demotivating poverty traps and a return to democracy: the system would become publicly comprehensible, making it possible to subject it to a democratic process whose outcome benefits the majority of voters.

Eliminating poverty would be the greatest achievement. Communism was supposed to do that, but failed; instead it made almost everyone poor. Capitalism pretends to be superior, but it too has failed to eliminate poverty. Capitalists believe that every individual should have the right and freedom to amass unlimited capital. From an ethical viewpoint, this stance can only be acceptable if poverty is eliminated. UBI-FIT would achieve this goal for the first time. It would take the guilt out of being rich, and make capitalism more sustainable.

The end of the cash economy

Things are changing, but many people are still living in the past. Union leaders and politicians are still dreaming of "full employment" although we knew decades ago that technology would gradually reduce the amount of work that had to be done, making unemployment unavoidable and intrinsic. The solution, of course, is basic income. And we are still defending the importance of the cash economy although, again for technological reasons, cash is on the way out. In Sweden, for example, people are seriously thinking of getting rid of cash altogether, and there are good arguments for that.

An unconditional basic income would not be paid in cash. Everyone would need a bank account. That being the case, it is also reasonable to require by law that any further earnings must be registered electronically in a bank account and taxed. The bank account should be in the same country, of course - not a foreign tax haven (I am  assuming that law and order will be restored and tax havens eliminated by global agreement, but that is not a precondition for UNI-FIT to work). This way, everyone would be treated equally. The unemployed would no longer be stigmatised. Low wages would increase to reflect the true value of the work being done. The foreign cleaners in middle- and upper-class homes, to take one example, would get proper contracts, insurance and security.

What is stopping this simple idea from catching on?

The most puzzling aspect of this simple proposal is the failure (refusal?) of many people to understand it. Most people, it seems, do not believe that things could be so simple. People on both sides of the political spectrum are astonishingly reluctant to accept that their financial dealings with the government are at present ridiculously complex and unfair, and could be much more transparent, and consequently much fairer. The left is reluctant to believe that a flat rate of income tax becomes effectively progressive when combined with a universal unconditional basic income. They think there must be a trick - but there is none. The right refuses to believe that the economy would get a boost if we gave welfare to everyone, no questions asked, but that again is a simple fact: people are more likely to find work that they enjoy and become productive if the government treats everyone with the same respect. The right believes that giving away welfare will make people lazy, but the reverse is the case: by eliminating poverty traps, the proposed system would give a constant incentive to everyone to work harder or longer regardless of their current income. The level of basic income would be adjusted to simultaneously maximize incentive and minimize poverty by a mathematical process of optimization.

In academic circles, the failure of the idea to catch on may be related to the failure of humanities and sciences to understand each other (sometimes called the "two cultures" problem). Many scientists have no idea, it seems, of the foundations of the humanities (literature, the arts, history, anthropology) and many humanities scholars can hardly tell you anything about the foundations of science (basic mathematics, physics, chemistry, biology). The core of this simple proposal is mathematical: it is about the quantitative relationship between gross income and net income. The beauty and elegance of the proposal lies in the simplicity of the proposed relationship: a simple relationship is fair, efficient, transparent, and hence democratic. The idea is based on the philosophical principle of parsimony known as Ockham's razor. Scientists intuitively apply this principle when searching for simple reductionist explanations of complex phenomena or datasets (physicists are still looking for a grand general theory of everything, apparently). 

Humanities scholars explicitly and enthusiastically contradict Ockham's razor when they relish in the complexity of social, historical, cultural or political phenomena. They point out correctly that one cannot possibly understand complex social phenomena without becoming intimately acquainted with their detail. Many people who are concerned with problems surrounding poverty, and political or economic strategies to reduce or eliminate it, were once students in humanities faculties or traditions. They may have no basic training in sciences at all, and consequently little idea of how scientists think. Their humanities-oriented brains may not grasp the mathematical significance of the present proposal. 

That sounds negative and pessimistic, but there is also a positive side. One of the points that distinguishes humanities from sciences is the role of context. Claims made by humanities scholars are generally made relative to a given social, historical, cultural or political context. Claims are considered "true" only relative to such contexts - not in any absolute sense. In other words, humanities scholars like to see the big picture. 

UNI-FIT is also about the big picture. To develop a fair public financial system, it not enough to consider welfare by itself, or to consider income tax by itself. It is necessary to consider both of these things and their interaction. To understand UBI-FIT, is not sufficient to consider the rate of UBI by itself, because the overall benefit of UBI for individuals also depends on whether they retain or lose that income when they earn additional income. It follows that UBI may be less than current welfare rates, and recipients may still experience a net benefit. Similarly, it is not enough to consider the flat tax rate by itself; the effective tax rate is what counts in the end, and that depends on both the FIT rate and the UBI rate. Humanities scholars who are aware of the importance of seeing the big picture can surely resonate to these ideas.

These issues may become clearer if I explain some personal background. I came up with the idea of combining unconditional basic income with flat income tax in the 1980s, when I was studying and researching on an interdisciplinary PhD project combining music, psychology and physics at the University of New England (Armidale NSW Australia). As part of this project, I was working on some mathematical modeling problems. The challenge was to find the mathematically simplest model that accounted best for a complex data set. By comparison to those problems, the problem of how best to organise income tax and unemployment benefits, and the solution I am proposing here, seemed trivially simple. 

Perhaps the failure to understand and communicate across the humanities-science boundary could be solved in the long term if all university students learned the foundations of both humanities and sciences in their first year - something along the venerable lines of the Humboldtian model of higher education? I experienced something like that when I was working at Keele University in England in the 1990s ("foundation year"). But that would be a long-term project, and it is beyond the present scope.

What about economics? This academic discipline is highly interdisciplinary, combining not only humanities and sciences, but also theory and practice. The first impulse of economists in response to the idea of combining unconditional basic income with flat income tax may be consider a comprehensive assessment in relation to the present system, and then to answer the question: Would it really be better? That is an admirable stance, but it is missing the point. It is surely obvious from the above simple description that the proposed system would be better. The interesting questions are instead (i) how to explain to the general public that this system would be better for everyone as well as for society in general, which is a pedagogical and sociological question; (ii) how to adjust the tax and welfare rates in the new system, which would involve an interesting new interaction between economic expertise and democratic process; and (iii) and how to manage the transition, which is primarily a practical problem that involves the needs and issues of specific interest groups. Questions of this kind are awaiting attention by experts who care about broad issues of poverty, quality of life and democracy, and are prepared to promote and defend a vision of a better society.

Myth no.1: Only rich countries can afford an unconditional basic income

Once you understand UBI-FIT, it seems obvious. You will ask yourself why we have tolerated the current crazy system for so long, and why so few people know about UBI-FIT - let alone accept or promote it. It seems that every time someone proposes something like it, people respond with misleading counterarguments. 

If you dig deeper, you find the real reason for this behavior. People are defending the right of the rich to get richer, in the hope of sharing some of those riches - an impulse that may be driving a lot of economic theory. Watch out for it!

Take the idea that only rich countries can afford an unconditional basic income. This is clearly not true. The proposal is to reorganise the existing system of welfare and taxation. In the long run, and considering all aspects of the problem, the change may not cost anything at all.

Let me explain. Most countries have progressive tax scales. It is always possible to draw a graph of net income against gross income that applies to most people, and is non-linear. Below are three examples. The exact numbers are out of date (from the mid 2000s), but the basic shape of the curves is correct.

In every case, you can start from the highest tax bracket and draw a straight from there to the vertical axis (the broken line in the figure). The point at which it crosses the line is a first estimate of the unconditional basic income. After that, you can slightly shift or rotate the straight line to balance the budget. For individuals, the relationship between gross and net income would change remarkably little. This change could be made immediately in most countries.

An even better solution is to add some wealth tax into the equation. Wealth tax will only work if the rates are similar in different countries, to stop capital flight. Clearly, our national leaders should be trying to solve this problem at global financial meetings. Other promising and neglected sources of revenue are transaction taxes and carbon taxes. But the first point to be made here is that unconditional basic income can be introduced without any wealth taxes at all. 

Flat income tax: A crazy right-wing dream?

Modern income tax scales are generally progressive. People with higher incomes are supposed to pay higher proportions of their incomes in tax. There are several income "brackets" within which a different rate of income tax applies. This idea is based on the general principle that taxes should be primarily paid by those who are in a good position to pay them. The more you can pay, the more you should pay.

Flat tax is the opposite of progressive tax. In a flat-tax system, everyone pays the same rate of tax, regardless of their income. This is fundamentally unfair and tends to increase the gap between rich and poor. In many countries, that gap has been steadily increasing over the past few decades. It has become far, far bigger than it should be, which is one of the causes of the "global financial crisis" that we have been experiencing. If the rich paid more tax, national governments could pay their debts.

I am assuming that a gap of some kind between rich and poor is necessary to motivate people to work. But the rich-poor gap does not have to be very big to achieve that goal. If the rich are ten times richer than the poor, by whatever measure (income or wealth), the goal has surely been achieved. Perhaps a ratio of only 2:1 would suffice. After the gap reaches a certain size, increasing it further does not further increase the incentive to work, because it is already near to its maximum value. In scientific jargon we would say that incentive saturates or approaches an asymptote. But in most countries today the gap is far bigger than 2:1 or even 10:1. The rich are hundreds, thousands or millions of times richer than the poor. However you measure the ratio (by wealth or income, for example), it is far too big. For that reason, a flat income tax of the kind proposed by the far right is completely out of the question.

But still there are people out there who believe in flat tax. Why? There are two main reasons. First, they are selfish: they want to pay less tax although they are rolling in money. Second, they habitually distort the truth: they claim that the poor are poor because they are lazy, so they deserve to be poor. Evidently some people really believe this to be true. In fact, no-one wants to be poor, so of course the poor want to work and earn money - at least as much as the rich. Poverty is created by economic systems, not by individuals. 

Unconditional basic income and flat income tax: A rational centre-left dream?

UBI-FIT is a surprising and radical approach to flat tax. I wish to show that flat tax can be the solution to poverty, but only when both of the following conditions are fulfilled:

• The flat rate must be relatively high (e.g. 35 to 50% - instead of the 10 to 20% commonly advocated by flat tax fans).

• The flat income tax must be combined with an unconditional basic income that corresponds approximately to the poverty line.

If that is true, the implications are enormous. The political left now has the historic opportunity to eliminate poverty - not merely reduce it. The combination of unconditional basic income and flat income tax (UBI-FIT) is a path to that goal. 

UBI-FIT is about just one kind of tax: income tax. Another way to address poverty is to increase government revenue through wealth, carbon and transaction taxes, which can then be used to balance the budget and improve social security. There is an urgent need to increase the level of all these taxes at a global level. This article is also confined to industrial countries but the basic principles may also applied to any country (e.g. basic income could be financed globally through carbon credits). I consider the problem of poverty in developing countries in more detail elsewhere.

In recent years media and politicians have been presenting the "international financial crisis" as a mysterious economic problem that only economists can understand and only large payments of public money to private banks can fix. But the basic problem is relatively straightforward. National economies have fallen too far into debt. Governments have been living beyond their means. Meanwhile, the rich have been getting richer. They have been doing that in part by speculation on global markets that should have been taxed, but was not. Of course it is always possible to make governments more efficient, but that will not make a big difference. It is also possible to regulate markets, to some extent. But the most efficient and appropriate solution in both cases is simply taxation. The rich should pay more tax on wealth and income, and we urgently need tax on international financial transactions and carbon. I will return to these points below.

The basic idea of UBI-FIT

Below is a graph of net income against gross income. If we are genuinely interested in eliminating poverty, this is the central relationship that we need to consider. In discussion of this proposal it is important not to get sidetracked by considerations of the separate rates of tax and welfare. In the end, the separate tax and welfare rates are not the primary issue. What matters primarily is the final relationship between gross and net income. As one supermarket chain said in their advertisements, it is "total of the tape"that counts, not the prices of individual products.

Under UBI-FIT, most peopl would get the same basic income, regardless of any other income. That is where the diagonal line intersects the vertical axis. The value of 1000 Euros per month is arbitrary. It is a round figure that has been chosen to simplify the calculation. Of course it would need to be adjusted in a political process; it would depend on changing democratic and financial constraints. If it is too low there is poverty, and if it is too high the motivation to work is reduced.

Even the rich would get basic income, which is unconditional. But for them the amount of basic income would be small by comparison to the amount of income tax. If we want to extract more money from the rich, we must focus attention on the tax rate, not basic income. We must also simplify the taxation system to make it more transparent and increase the chance that taxes will be paid and not evaded or avoided by cunning accountants. UBI-FIT is a step in that direction, but many other simplifications are possible.

The amount of basic income would not be the same for everyone. The main exception is people with disabilities that prevent them from working or reduce their ability to work. Their basic income would be increased accordingly. Basic income may also depend on age (children may get less, pensioners more) . On the whole, UBI-FIT would radically simplify social security payments. Many of the bureacrats who currently investigate the "willingness to work" of unemployed people would find themselves unemployed.

Everyone would pay the same rate of tax on all gross income (FIT). That is represented by the gradient of the line in the graph. The lower the tax, the faster your net income increases as your gross income increases, and the steeper the line. For the purpose of argument and for drawing the graph, the flat rate has been set at 50%. The exact value would be determined by democratic processes and financial constraints. It could be 40%, and with significant increases in wealth, inheritance and transaction taxes it could even be 30%. 

The welfare trap

The first thing to notice about this graph is that it is similar to the current relationship between gross and net income in modern democracies. At the left end of the line, most people get social security payments. In general, net income rises as gross income rises. The change from the current system to UBI-FIT would not make much difference, if we simply drew a line of best fit through the current relationship between gross and net income for the average person, as it already exists in different countries.

But there is an important difference. In the current system of means-tested social security and progressive income tax, the gradient of the line on the graph is not constant. The line is not straight. That is partly because of progressive tax scales, but there is a much bigger departure from linearity at the so-called welfare trap. Currently, if you are on welfare and start earning money, your welfare is reduced accordingly. During this transition, your gross income increases significantly, but your net income increases little. Depending on the system, your net income may stay the same or even fall as your gross income rises. So it is not in your interest to work! There is no incentive.

Sometimes the welfare trap is called the poverty trap, because it perpetuates poverty. A system that motivates people not to work is doomed to fail. The welfare trap is inherent to all modern systems of means-tested social welfare and progressive tax. This inherent fault is a guarantee that these systems will never eliminate poverty. Eliminating this problem would be an important step toward eliminating poverty.

Is UBI-FIT fair?

At first glance UBI-FIT seems unfair. We are used to a system of income tax and social security in which different people are treated differently. The system is periodically twigged before elections in order to attract votes from particular groups. UBI-FIT makes it impossible to win elections this way. Everyone has to be treated equally. If the rate of basic income is reduced, everyone is affected. If the rate of tax is increased, everyone is affected. Is that fair?

Is it fair to tax low income earners at the same level as high income earners? Well, the current system is even worse. Welfare traps mean that for incomes between typical levels of social welfare and typical levels of low-earning jobs, the effective rate of taxation is as high as 100%. Every increase in income is taken away by reducing welfare payments. From this point of view, UBI-FIT is a big step forward for low-income earners.

Is it fair to give basic income to the rich? In UBI-FIT that is unavoidable because UBI-FIT avoids welfare traps. Not giving basic income to the rich would mean finding a cutoff point below which basic income is paid. But that would cause a welfare trap. Giving basic income to the rich is no problem because the only thing that matters in the end is the relationship between net and gross income shown on the graph. Moreover, for the rich basic income is small compared to income tax.

How can UBI-FIT be adjusted to reduce the gap between rich and poor? The solution is to increase basic income and at the same time increase the tax rate to finance it. But this can only be done to a limited extent, because both these actions reduce the incentive to work, which ultimately reduces the total productivity and wealth of the country. To increase productivity, it is necessary to reduce basic income and the tax rate, but this again can only be done to a limited extent, otherwise the incidence of poverty will increase. Between these extremes there is a happy medium in which poverty is eliminated but a moderate rich-poor gradient remains. If the electorate understands how UBI-FIT works (and it is certainly much simpler than the present system) that happy medium can be found by regular democratic processes.

Its simplicity and transparency mean that UBI-FIT is much fairer than the present system. Everyone is treated equally and with dignity, and everyone is encouraged to work. The rules are clear, and it is harder to break them.


Right-wing distortions

It is common for right-wing voters to claim or believe that the poor are poor because they are lazy. In fact, the poor want to work just as hard as the rich - probably more so because they need the money more. It is the system that is causing poverty, not any assumed differences in personality between the rich and the poor. Until the rich and the right wing understand or admit this simple fact, there will be no progress.

The idea that poverty is the fault of the poor is an old one. Before the French revolution in the 18th Century, it was common to believe in inherent differences between rich and  poor people, or between nobility and ordinary people. The aristocracy somehow had aristocracy in their blood. The French philosopher Rousseau was one of those who exposed this idea as nonsense (e.g. in his "Discourse on inequality"), and it was objections of this sort that provoked the French revolution, which of course changed the world. But crazy ideas do not disappear overnight. The modern version of the nobility fallacy is the idea that the poor are poor because they are lazy. Many still seem to believe that if the poor only took advantage of the opportunities that a free society offers them, they could drag themselves out of poverty. We forget that everyone is born with different opportunities and for this reason it is much easier for some people to make money than others. Statistically, there will always be large numbers of people who fail to break through the poverty line. Unless we radically change the system, that is.

The stigma of unemployment

The welfare trap is not only a financial problem, it is also a psychological and social one. Current systems of means-tested social welfare and progressive income tax create two classes of people: employed and unemployed. The employed have many freedoms that the unemployed do not have. The unemployed are stigmatised. They get "handouts", which are embarrassing. They are made to feel like failures. They are given the impression that they must be lazy or stupid or both. If they don't feel like working, or lack confidence in their ability - no wonder. 

These fundamental problems would be eliminated by UBI-FIT. Everyone would be treated equally. Everyone would have the same rights and obligations. Everyone would be equally motivated to work. Everyone would also be free not to work, and take responsibility for the consequences. The poor would be free to do what the rich always expected them to do, namely to drag themselves out of poverty. Just imagine: a system that treats everyone equally, but at the same time eliminates poverty. This is not a strange dream, but a realistic solution to a big problem. 

Of course, the rich would get a  bit of a shock if these things actually happened. The effect on their wealth would be minimal. The psychological effect would be much greater. They wouldn't feel so special anymore, just like the residents of West Berlin did not feel special any more after the wall fell - no matter how much they had wanted to wall to fall.

Effectively progressive income tax

Progressive income tax means that the rate of income tax increases as income increases. The more you earn, the higher the proportion of income that is taken away in tax. 

UBI-FIT is not progressive, because the tax rate is flat. But the following table shows that it is effectively progressive. 

The calculations are very simple, based on a basic income of 1000 Euros per month and a tax rate of 50%. These are round figures that have been chosen for convenience and they figures would of course be changed if UBI-FIT were introduced. 

The table shows that when you look at the relationship between gross and net income, the tax rate effectively increases with increasing income. That is what I mean by "effectively progressive". The higher your gross income, the higher the effective proportion of your gross income is paid in tax. In this regard, UBI-FIT is no different from the present system.

Social security and progressive income tax belong to the greatest achievements of the workers' movements of the early 20th century. The appalling poverty produced by the industrial revolution was finally brought under control, without resorting to communism. Poverty still existed, but it was more tolerable.

Today, poverty is no longer tolerable. New technologies of all kinds are gradually increasing the wealth of the entire human race. If this wealth were shared, it would be easy to eliminate poverty while at the same time maintaining free enterprise. Moreover, the rich would still be rich. They have little to fear from UBI-FIT.

Given this historical context it is now possible to see that current systems of means-tested social security and progressive income tax are maintaining poverty. They are based on the assumption that there will always be poverty. They incorporate welfare traps that guarantee that a certain proportion of the population will not enjoy the same incentive to work that most people enjoy, so a certain proportion of them will automatically stay or become poor. UBI-FIT offers a realistic solution.