bift graph

Eliminate Poverty with Universal Basic Income and Flat Income Tax (UBI-FIT)
Armut abschaffen mit bedingungslosem Grundeinkommen und pauschaler Einkommenssteuer

Richard Parncutt
 2011, revised 2016
Another text about the same idea: html 

Presentation at BIEN Munich 2012 - pdf - ppt

Imagine an economic reform that eliminates poverty, reduces the wealth gap, motivates everyone to work regardless of their wealth or income, reduces meaningless bureacracy and invasions of privacy,
and improves transparency, democracy, and personal freedom. And to top it off: stops people voting for the far right! Too good to be true?

The bottom line

No one seems to have time to read anything properly these days. Who knows, my readers might be surfing elsewhere within seconds! So I will try to start with the "bottom line":

What is the main problem in politics today? There are many problems, but the main one is surely the rise of the far right, which has brought us Brexit and Trump, not to mention Lega Nord, FPÖ, AfD, Golden Dawn, Le Pen, Orban, and countless others. The far right is steadily undoing decades of social-democratic progress made by previous centre-left governments, which is exactly the opposite of what most far-right voters need. The far right is also failing to stop climate change. If the current fashion for imitating 1930s Germany continues, the results will be catastrophic -- for several reasons at once.

If we ask why the far right is so popular, different people give different answers. The far-righters themselves tell us that "foreigners" are (i) taking their jobs, (ii) diluting their culture, and (iii) even killing people (terrorism). These misleading ideas come from private media such as the Murdoch press, which are controlling public opinion to serve the interests of rich elites, just as political media in Eastern Europe
used to control public opinion to serve the interest of communist rulers. In fact, "foreigners" are (i) doing work that locals don't want to do (such as caring for the elderly), (ii) enriching local cultures everywhere, and (iii) often fleeing from terrorists themselves.

What is ultimately causing people to vote for the far right? The main reason is surely money. In the 1930s, a global depression was causing widespread unemployment. In Germany, Nazi conspiracy theorists blamed international Jewish networks for the 1929 crash. That was nonsense, but many Germans were looking for scapegoats and believed it. Meanwhile, the allies (including France, Britain, and Russia) had irrationally declared the Germans and her allies to be responsible for the first world war in
the treaty of Versailles, forcing them to pay massive reparations and shifting their borders. Without the depression combined with Versailles, the fascists (Nazis) would never have come to power.

Today, the gap between rich and poor (the "wealth gap") is growing in countries such as the US and the UK (more). In other countries, the income of working classes is stagnating or even going down in real terms. The unemployed and working poor are being unfairly treated, and they know it. Globalisation has left them in the lurch. Looking for scapegoats, they are blaming "foreigners".

The unemployed and working poor should be blaming the rich. It is the rich who are promoting and defending an unfair economic system. The global rich do not belong to a specific religion or cultural group, nor are they working together against the rest of us (there is no conspiracy). It is nevertheless true to say that the rich are collectively responsible for this problem, because they are best placed to solve it.

That may seem obvious, but it needs to be said. Again and again. The rich (in particular, the world's two thousand billionaires, more) are personally responsible for the rising wealth gap and its catastrophic consequences, including the rise of the far right -- at least to the extent that they are contributing to those consequences or failing to do anything effective to reduce them.

Why is the wealth gap growing?
One reason is globalisation. The rich have more access to international markets. Digital technology has helped them to increase profits without passing them onto workers (there is seldom a "trickle down effect"). The rich are increasingly avoiding taxation by transferring their wealth to secret accounts in foreign countries. That includes many leaders of developing countries whose people are living in poverty: tax havens cause poverty (more). 

On these points, most governments are dragging their feet and hardly anyone is telling the truth. The facts are clear:
All tax havens could and should be closed down by international agreement. Bank secrecy should be ended worldwide. The rich should obey the law like everyone else. Criminals should be identifed and fairly punished. Our governments should also be implementing wealth taxes (more). In general, the amount of tax that an individual pays should generally depend on their ability to pay, which depends on both wealth and income.

But the
rich like things the way they are, and they are pulling the strings in the background. 

Is progressive income tax really progressive?

A well-known instrument to reduce or control the wealth gap is progressive income tax. In modern democracies, people with low incomes pay no tax. The more income you receive, the higher the proportion you pay in tax. The tax rate increases from one tax bracket to the next.

The rising wealth gap suggests that progressive income tax is not working. Here are two possible reasons:
These are absolutely central problems in modern international economics and politics, and although the task seems enormous, it is possible to solve them. 

A new approach to income-tax progressivity

There many misunderstandings about tax, but there is one misunderstanding that really takes the cake. Almost no-one understands the following proposition. But it could be the key to eliminating poverty for the first time! Imagine that: a world without poverty in which the rich are still rich! Here is the proposition:

Income tax becomes progressive when you combine universal basic income with flat income tax.

This is not a political or economic claim. It is purely mathematical, and the maths could not be simpler. To understand it, imagine what the world would be like if income tax worked as shown in this graph. It's the only graph in this document:

bift graph

The horizontal axis
is "gross monthly income". That is what employees get from their employers, before adding welfare and subtracting taxation. If you are self-employed, the horizontal axis is what you earn in the marketplace before adding welfare and subtracting taxation. (In the following, "gross income" does not include basic income.)

The vertical axis is "net monthly income". That is how much money you can spend every month, after adding welfare to, and subtracting taxation from, your gross income.

According to the graph, if you have no gross income (zero on the horizontal axis), you receive a benefit of 1000 euros per month. This benefit is called basic income (more precisely: universal, unconditional basic income; sometimes called negative income tax). Everybody gets it, rich or poor, so there would no longer be means tests for benefits. Imagine that: no stigmatization and no infringement of personal privacy. The value 1000 is arbitrary and has been chosen here for purpose of illustration. The exact amount would be adjusted by a democratic political process.

In this scenario, if your income was 2000 euros per month, your gross income and your net income would be the same. Effectively you would get no welfare, nor would you pay any tax. This is called the break-even point.

As your income increases beyond 2000 euros, you start to pay tax. If your gross income is 3000 euros, your net income is 2500 euros, so you are effectively paying
500/3000 = 17% in tax. If your gross income is 4000 euros, your net income is 3000 euros and the effective overall tax rate is 1000/4000 = 25%. If your income is much more, the tax rate approaches 50%. In other words, the effective tax rate gradually increases as your gross income increases. This is a progressive taxation scheme, but because there are no tax brackets, the scheme is continuously progressive.

The scheme has two main adjustable parameters. To draw the graph, these have been set to
50% (the flat tax rate) and 1000 euros (the basic income). These numbers are round and arbitrary. They have been chosen only for the purpose of illustration. I wanted to make the graph as simple as possible, to illustrate the basic idea. In reality, both numbers would be adjusted in a democratic political process.

Now, some people are worried about giving basic income to the rich. But in this proposal the income tax paid by the rich would be much bigger than the basic income. What matters in the end is the relationship between gross and net income, as shown in the graph. Please keep that in mind as you read on. Welfare and tax always interact. We need to focus on the final result of the calculation (the "big picture") and not get distracted by detail. 

Imagine what would happen if welfare and tax really worked like this. Everyone would be treated equally; there would be no stigma attached to poverty. In fact, there would be no poverty at all! Everyone would get the same basic income (with different rates for people with disabilities and children, see below) to cover their basic needs and everyone would pay the same rate of tax. Everyone would be motivated to work, so the economy would be healthy and stable (there would be no "poverty trap" when people lose benefits if they get part-time work). Most people would not need to file annual tax returns, because income tax would be paid in full with every dollar earned, and there would be no tax deductions to calculate at the end of the year.

You may be thinking that this will be too expensive. Governments won't be able to afford it. In fact, the cost of the system depends on how the two parameters (basic income and flat tax rate) are chosen. If the basic income is relatively low, the budget can be balanced with a relatively low tax rate. That's the right-wing approach. The left-wing approach is to aim for higher levels of both basic income and tax. In both cases the budget can be balanced.

Clearly, the best way to make income tax progressive is to combine basic income with flat income tax. The current relationship between gross and net incomes in most countries is remarkably close to the above graph (some examples are below), but unnecessarily arbitrary and complex.

If that is so obvious, why is no-one talking about it? Just to summarize two main points:

1. Progressive income tax scales are supposed to benefit the poor, but in fact they benefit the rich. Every unnecessary complexity in the system generates loopholes that the accountants of rich people use to reduce their taxation and thereby increase their income. A classic trick to avoid tax is to redistribute income so it falls in different tax brackets with lower tax rates. Money doesn't grow on trees: in the end, the less the rich pay, the more the poor pay. In the proposed system, tricks of that kind would no longer be possible.

2. Inherent in the current system is the welfare trap: If you are receiving unemployment benefit and get a part-time job, you generally lose part or all of the benefit. Often, you are better off not accepting the job. No wonder the poor sometimes give the impression of not wanting to work! The current system directly encourages laziness and depression! The proposed system would make welfare traps a thing of the past.

If the entire system was simpler, more people would understand it and democracy would work better. If people were paid fairly for every bit of work they did, they would be more motivated. But the rich evidently don't want either of those things to happen, which is why we are struck with the current problematic system.

What would happen if our system of income tax and welfare payments followed the graph?

Everyone would receive a basic income. Most would receive the standard amount. The disabled would get more, children would get less, and there might be special rates for pensioners. For illustration, I have set the basic income in the graph to €1000 per month, which is where the straight line crosses the vertical axis. This number is arbitrary. The exact amount would be determined in a political process: the left would constantly want to raise it and the right would keep trying to lower it.  Everyone (rich, poor, and in between) would be motivated to work, because everyone's income would go up at the same rate as they earned more money. Any increase in net income (large, small, or in between) would produce a corresponding increase in gross income. That is not the case in the present system: welfare recipients lose their benefit at some point as their income increases (the "welfare trap"). No wonder the unemployed sometimes give the impression of not wanting to work! The fault is in the system, not the people.  The rate at which net income increased with gross income would correspond to the gradient of the graph. For purpose of illustration, I have set this rate to 50% -- an arbitrary value. It corresponds to a 50% income tax rate - similar to the highest tax brackets in current progressive tax scales. If the old, corrupt tradition of tax deductions was also ended (more of which below), a lower flat income tax rate would be possible, perhaps 40% or even 30%. That is a bargain if you consider that everyone would also receive the basic income. The final rate would be determined by a political process: the left would push for a higher tax rate, the right would push for a lower one, and they would meet somewhere in the middle. Incidentally, the combination of basic income and flat tax is progressive, as I will explain.

Both social welfare and income tax would be radically simplified, improving transparency. The new system would be easier for everyone to understand, especially those who cannot afford accountants; and easier to adjust democratically, making it harder for politicians to trick voters. For these reasons, both accountants and politicians may oppose this idea, which is another reason why hardly anyone knows about it.
Is this good economics?

Basically all I am saying is this:

1. No one should have to live in poverty.
Everyone, rich or poor, has the same intrinsic value and the same basic needs.

2. Everyone should be able to keep a reasonable proportion of every dollar they earn. 
Incentives are important. The system should motivate everyone to work. 

The first point is socialist in nature and no-one but the most extreme capitalist would dare to disagree it. The second point is capitalist in nature and no-one but the most extreme communist would dare to disagree with it. So just about everyone on both the left and the right should agree with the present proposal, which is simply an implementation of those two ideas. 

Many economists will dismiss this proposal because it is not properly embedded in economic literature. But the main two points that I am making are ethical, not economic, in nature, and the economic implications that I draw from them are direct and simple. The two points are even included in the Universal Declaration of Human Rights:

1. Article 25 (1) states that "Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control." An unconditional basic income is the simplest way of ensuring that this right is respected. 

2. According to Article 23 (3), "Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection." This article implies that the more or better one works, the higher one's income should become. 
The economic literature on unconditional basic income is enormous, but only a handful of articles and books considers the combination of basic income and flat income tax. Those contributions tend to be neutral about its benefits (Atkinson, 1996;
Scutella, 2004). The authors attempt to evaluate the proposal by considering its economic consequences: how will it affect the motivation to work, economic growth, inflation, umemployment? The results of such considerations are generally inconclusive and depend strongly on how the two free parameters (basic income and tax rate) are set. But I believe those articles are missing the point. The main point is ethical, not economic: every human being has the right to enough money to survive and every human being has the right to keep a reasonable fraction of each dollar earned. 

Economists may be curious about my economic qualifications. I never studied economics, nor have I published in an academic economics journal. Instead, I have many frequently cited academic publications in related disciplines (psychology, sociology) and a Master's degree in physics. My everyday teaching and research in the interdisciplinary area known as "systematic musicology" also involves neuroscience, philosophy, computer science, and philosophy of science, all of which are relevant to economics. I have a strong interest in history, politics, ethics, and law.

New ways of thinking

To understand this proposal, we need to radically change how we think about income tax and welfare. 

Effective progressivity

I am a strong supporter of progressive taxation - a tried and tested way to reduce the gap between rich and poor. The way the wealth gap is increasing today, progressive taxation is more important than ever.

The above graph shows an effectively progressive relationship. The tax paid, expressed as a percentage of gross income, increases as gross income increases. At low incomes, the tax is effectively negative (basic income is sometimes called "negative income tax"). At medium incomes (€2000 in this example), a break-even pointis reached where gross and net income are the same. At higher incomes, the effective tax rate increases with income, approaching the flat rate for very high incomes.

Here are some examples, based on the arbitrary values of basic income and tax rate in the graph. If you earn €4000 gross, your net income is €3000 and your effective tax rate, averaged over all earnings, is 25%. If you earn €10 000 gross per month, your net income is 6 000 and the effective tax rate is 40%. At very high incomes, the effective tax rate approaches 50%. Recall that all these figures are tentative and approximate. The numbers would be adjusted in a political process. 

The point is this: The system is progressive although the line is straight ("flat tax"), because the line does not pass through the origin. The offset from the origin is the basic income. The bigger the offset, the more progressive the system becomes. In a democratically regulated system, the left would try to make the system more progressive by increasing the basic income, and the right would strive for the opposite.

We have to stop thinking about income brackets. They are not necessary to create progressivity! Another way to create progressivity is to shift the line on the graph so it no longer passes through the origin (the point where the two axes intersect). Voilà.

Difficulties of understanding

The graph illustrates a simple mathematical relationship between flat tax and progressive tax. To understand this proposal, you have to understand this simple relationship. Unfortunately, many don't. No longer how long you try to explain it, they still don't get it.

Left-wingers may object to giving basic income to the rich. That is missing the point. The main thing is not the basic income, nor is it the tax rate. It is the relationship between gross and net income. It is the straight line on the graph! It doesn't matter whether the rich get their basic income as a payment or a tax deduction, because the result in the end is the same, namely the line on the graph. In any case, the basic income that the rich receive would be small compared to the tax they pay. It would also be small compared to the tax deductions they normally get today. The whole system of tax deductions is problematic and needs to be phased out.

Right-wingers may object to giving basic income to the poor. That again is missing the point. The unemployed are getting unemployment benefits anyway. This proposal merely eliminates a bureacratic system that is constantly trying to get the unemployed into jobs that don't exist anyway. Those right-wingers who want to reduce the size of government and make it more efficient should love this proposal, as should all those who believe in preserving personal liberties and preventing government interference in the private lives of citizens. Moreover, technological advances mean that there is less work to do than there used to be; trying to "create jobs" won't change that. Besides, it doesn't help anyone when the unemployed have no money. They are consumers and part of the market. You can't make money out of selling to consumers if they haven't got any money. 

You can avoid the pitfalls of both the left and the right by trying to stand in the middle and understand both sides. That can solve the political bias problem. But there is another problem. Some people cannot understanding the simplest of mathematical concepts, it seems. Such as how a simple graph works.

Imagine this: What if our ability to eliminate poverty depended on a simple mathematical idea? What if we failed to eliminate poverty because we failed to understand that idea? Or refused to take that idea seriously or give it a chance?

Conversely, what would happen if both the left and the right suddenly realised that the elimination of poverty serves the interests of both, because welfare payments "trickle up" into markets? What if both decided together to implement a simple strategy that combines socialist and capitalist principles? What if both jumped at the chance of reducing the administrative load of both welfare and taxation? Imagine that: Freedom from meaningless paperwork! Freedom from the stigma of unemployment!

Bringing together capitalism and socialism

You may be surprised to see a "capitalist principle" in a paper about unconditional basic income. I am a lefty, but I am also self-critical. Capitalism, for all its problems, is the motor that generates the necessary finance. I also know that an idea like this will only work if a majority of people support it. It so happens that half the population tends to vote for the right wing, often against their personal interests. To be successful, a proposal of this kind needs to balance left and right wing ideologies. Left-wing friends: please don't stop reading. 

Humans have made big progress before. Slavery was banned, women got the vote, human rights were signed into law. Now it is time for the next big step. It is time to eliminate poverty. We have taken a while to get to this point - but we can now do it, by combining socialism and capitalism in the right kind of way. With the above graph in mind, the task is easier than most people think.

Of course there will be other details to consider. For example, basic income may be different for children, pensioners, the disabled, or foreigners; and the tax rate may be different for income, capital gains, and company tax. But the main point that I want to make is made in the graph. The graph is like the proverbial picture that paints a thousand words. So please be sure to understand the graph before proceeding.

The main points again

This idea is so great it is worth repeating the main points in a different way. Here goes:

Both welfare and income tax can be radically simplified by combining them into a single system called UBI-FIT: Universal (i.e. unconditional) Basic Income and Flat Income Tax. Under UBI-FIT, the relationship between gross and net income is a straight line, as shown in the graph (above left). 

bift graph

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 at1000/ 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 a stepwise transition from the current system 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:

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: 

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:

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.

Managing the transition from the current system to UBI-FIT

A sudden transition to UBI-FIT is not possible in many countries because of differences between social security systems in neighboring countries. If basic income in a neighboring country suddenly becomes very attractive, many people will try to migrate. This might be prevented by giving different levels of basic income to nationals and foreigners, but it may not be legally possible to give a different level of basic income to nationals of different countries.

Take the example of Austria. EU law would require that all EU citizens in Austria get the same (higher) level of basic income and all non-EU citizens get the same (lower) level. It is legally possible to discriminate in favor of nationals and against foreigners, but not to favor one group of foreigners over another group. Countries within the EU differ considerably in cost of living and average income.

The solution might be to introduce basic income gradually. After each incremental increase, evaluate the result for a year before introducing the next increment. The transition to flat tax might also happen incrementally. The transition would reduce differences in cost of living between different EU countries, promoting European "unity in diversity".

This is clearly a complex issue that requires economic expertise that I do not have. But the advantages of UBI-FIT are surely clear enough that it is worth investing time and effort into carefully designing and monitoring a stepwise transition.

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 and the relationship between social benefits in nearby countries and the effect of introducing basic income on migration. 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.

australia austria canada

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:

I also wish to show that the combination of unconditional basic income and flat income tax is effectively progressive. This is not a political claim; it is a simple mathematical observation.

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 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%. 

bift graph

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 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.

gross monthly income (€/mo)
net monthly income (€/mo)
effective tax rate
1 000
1 500
2 000
2 000
3 000
2 500
4 000
3 000
5 000
3 500
10 000
6 000
100 000
51 000

A short history of income tax and social security

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.

The social benefits of flat tax

We are used to right-wingers talking about the advantages of flat income tax (FIT) - presumably for selfish reasons. But FIT can also have important advantages from a left-wing viewpoint, when combined with UBI. (Dear left-wing reader: Before rejecting this idea out of hand, please read to the end of this section!)

For low income earners, UBI-FIT is far better than the current system, in which you lose your unemployment benefit as you earn more - either gradually or suddenly. It is even possible to lose income as a result of earning more! UBI-FIT would put an end to that. Income would always increase in proportion with earnings. This change would be enormously valuable to people with low or precarious income. It would give them a kind of security that they never had before. They would be motivated to work more, knowing that their efforts will always be rewarded.

Another benefit of FIT is that it can be paid immediately - as soon as the money is earned, or as soon as it changes hands. So it is possible to require that it must be paid immediately, just as consumption tax (value-added tax) is paid immediately. Once it is paid, the transaction is complete. There is no chance of a refund at the end of the financial year. That not only saves a lot of time preparing tax returns (for both taxpayers and accountants), it also reduces the rate of tax evasion and avoidance. The rich are constantly evading or avoiding tax by playing tricks with their annual statements, e.g. shifting income from one person to another, or putting it into different categories - not to mention the use of private equity funds and hedge funds by corporations. In a complex taxation system, there is always the possibility of finding loopholes that others have missed and using them in creative ways. The more complex the system, the more loopholes.

In general, only people with enough money to pay (good, creative, discrete) accountants and lawyers have the opportunity to play these games. The more money you give to creative expert advisers, the more good ways you can find to avoid or evade tax. Of course there are no official figures about this, because it is generally secret or covered up. But the little information we have suggests that these practices cost governments enormous amounts of money, because the contributions that they lose tend to be large contributions from the rich.

Flat taxes that reduce levels of tax evasion and avoidance could greatly increase funds available to governments for social services of all kinds. According to this principle, it is not only income tax that should be flat. Other forms of tax such as wealth, inheritance and transaction taxes should also be flat. In every case, the tax would be payable immediately and no later refund would be possible.

Consider the case of wealth tax. It is possible to calculate the total private wealth of an entire country and then to demand a small percentage of that wealth in annual tax. If that is done using a flat rate, it is possible to calculate in advance the total amount of tax that should be received, and easily track down missing payments.

A flat wealth tax would primarily affect the rich. The effect on lower and middle earners would be negligible, because their net wealth is usually close to zero (at least by comparison to high earners). Given the enormous and growing gap between rich and poor within modern democracies, and the fiscal problems being experienced by democratic governments, wealth taxes are urgently needed.

Left-wing governments like to appeal to their voters with the idea of progressive wealth tax - a tax that will only be paid by people whose wealth exceeds a certain amount, e.g. half a million euro. "Grannies" who own houses should not be taxed. This emotionally charged argument is fatally flawed, in ways that I have already argued. Moreover, a flat  tax on all wealth (no exceptions!) would be much less than 0.1% per year, perhaps more like 0.01%. A "granny" with €1m in combined assets would pay much less than €1000 per year in wealth tax (perhaps only €100) and she could easily afford that given that she would normally have independent income and would not have to pay the rent like other "grannies". At the same time very large amounts of tax revenue would be collected from the rich, by applying the same flat rate.

The popular idea of progressive wealth tax is an example of the rich fooling the poor. People who are constantly playing games with large amounts of money know that a flat wealth tax that must be paid (no exceptions, no rebates, no special conditions...) would hit them harder than a progressive wealth tax. But they also know that the general public is easily fooled by the alleged advantages of a progressive tax, so they keep quiet about it. Lefties, wake up!

A discussion of wealth tax would not be complete without mentioning the international dimension. Wealth taxes will only work if applied universally in different countries, otherwise the rich will simply move their wealth to another country to avoid tax. There is an urgent need for the closure of tax havens and for international agreements on wealth tax. It is clear that such international agreements are possible, the only thing that is lacking is the political will. If left-wing movements in many countries consistently attract attention to this problem, progress will be made. Further information here.

Incidentally consumption taxes (value-added tax), which are usually flat, tend to increase the gap between rich and poor and unless confined to luxury goods (not everyday Toyotos, but Ferraris and Lamborghinis). From a socialist viewpoint, any form of non-luxury-VAT is a bad thing. If the government needs revenue it should tax the rich, not the poor.

The bottom line

The political left wants to reduce poverty. On the whole, modern democracies have made significant progress in this direction. Today the left has, or should have, a new goal. The new goal should be to eliminate poverty completely. Steady improvements in technology and associated steady increases in total wealth mean that this new goal is easier to achieve today than it has ever been in the past.

The ideas I have presented here suggest that poverty can be eliminated if we take a new look at the idea of "flat tax". Flat tax is not necessarily about laissez-faire capitalism. If and only if it is combined with unconditional basic income, it is a powerful force to generate the income that governments need to eliminate poverty.

I wrote above about truth distortion by the political right. But to be honest, sometimes the left is no better. I have spoken to many well-meaning left-wing friends and colleagues about UBI-FIT, and many times I never got past their automatic negative reaction to the term "flat tax". I could not utter these words without them freaking out. Dear friends, you will have to start thinking more rationally and objectively if we are to make progress toward eliminating poverty. Politics is not about clichés, it is about contructive proposals.

For further information on UBI-FIT, click here

Other UBI-FIT proposals

Here is an interesting proposal for a European Basic Income, combined with flat income tax. There are also good proposals for UBI-FIT in Canada.

And now a word of warning: In Britain, UBI-FIT is being proposed by the British Freedom and Responsibility party. While I am all for freedom and all for responsibility, and I essentially agree with their version of UBI-FIT, I disagree with their other policies and would never vote for this party. There is a serious flaw in their philosophy: they blame their country's problems on inefficient government and quietly forget the main reason behind those increasing government deficits. That main reason is simply that the rich are not paying enough tax. This is especially true in Britain, a rich country with a high rate of poverty and surprisingly poor infrastructure. The crass difference between rich and poor is obvious to anyone with eyes to see. Publicity of this kind is bad for UBI-FIT, because it associates UBI-FIT with angry, arrogant right-wing politics. I have argued instead that UBI-FIT is the best way to eliminate poverty in modern industrial democracies. It should therefore be considered a centre-left or centrist proposal.


Atkinson, A. B. (1996). Public economics in action: The basic income/flat tax proposal. Oxford University Press.

Carter, M. R., & Barrett, C. B. (2006). The economics of poverty traps and persistent poverty: An asset-based approach. Journal of Development Studies, 42(2), 178-199.

Sachs, J. (2008). The end of poverty: Economic possibilities for our time. European Journal of Dental Education, 12(s1), 17-21.

Scutella, R. (2004). Moves to a basic income-flat tax system in Australia: implications for the distribution of income and supply of labour. Melbourne Institute Working Paper No. 5/04., accessed 4 March 2018.

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