enterprise without poverty
UBI-FIT aims to significantly reduce the gap between rich and poor within industrialized countries, and to effectively eliminate poverty. UBI-FIT stands for Universal Basic Income and Flat Income Tax. "Universal" (or unconditional) means applying to all taxpayers and all welfare recipients in the country in question - including children and pensioners. Under UBI-FIT, everyone would be treated equally with one exception: people with disabilities would get a special deal (as they do now).
At first glance, this seems impossible. Two questions arise immediately. (1) Why give money (basic income) to people who don't need it (the rich)? (2) Progressive income tax scales aim to reduce poverty, so how can poverty be reduced by getting rid of them? Let's briefly consider each question.
(1) For low income earners and the unemployed, unconditional basic income would replace current benefits. The money would be much the same, but the labels would be different. For high income earners, unconditional basic income would be much smaller than the tax that they pay, or should pay. They would pay more tax, because tax evasion and avoidance would be reduced through a general simplification of the system and increase in transparency, as I will explain in detail below. That would compensate several times over for the basic income that they also receive.
(2) Progressive tax scales may seem to benefit low-income earners, but the gradually increasing gap between rich and poor in most countries suggests that something is seriously wrong. In fact, the total amount that low earners gain (and high earners lose) from progressive tax scales and social benefits is smaller than the total amount gained by the rich through avoiding and evading tax. And in the end, it's the total that counts! Seen another way: The government gives low earners large numbers of small payments, but at the same time high income earners avoid paying small numbers of (very) large payments. The large number of small benefits for low earners gives them the impression that the system is fair, but in fact they are being tricked. A good example is value-added tax (consumption tax): low-income earners pay a higher proportion of their income in VAT, which in typical Western democracies approximately balances out the supposed advantages of progressive income tax. For this reason, VAT should gradually be phased out except for luxury goods, but that is another story.
So before we can consider reducing the rich-poor gap by giving low-income earners real benefits through the taxation and welfare systems, we have to create a level playing field in which everyone is treated equally. It is also important that people understand how the system works, so that they can vote for those political parties that truly support their interests. In short, we need more fairness and more transparency. Both of these points are goals of UBI-FIT, and of this document.Another important point: UBI-FIT incorporates a flat income tax, but effectively, taxation would be progressive - to about the same degree as at present. The effectivetax rate is the difference between gross and net income expressed as a percentage of gross income. Under UBI-FIT, this ratio would increase with increasing income, as it does in current progressive tax scales (see the graph below). If the acronom "UBI-FIT" is misleading, it can be replaced by "effectively progressive income tax".
When expressed in terms of the relationship between gross and net income, UBI-FIT is similar to the current system in modern industrial democracies. Initial values of basic income and flat tax would be determined by drawing a line of best fit through the current relationship between gross and net income (see graph below). Some individuals would initially have more money, others less, but the differences would be small and could be smoothed out during a transition period.
UBI-FIT would be superior to the current system in several important ways.
Introduction: The basic idea
Poverty is a serious problem. Even in the socially secure and apparently generous European Union, the rate of poverty varies across countries between 10% and 23%, depending on how poverty is defined. Given the general wealth of the EU, this is an embarrassing problem that must be solved. The study Vermögensbildung und Reichtum in Österreich found that 1% of Austrians own 34% of Austria's wealth. The situation is worse in the USA: to get a feel for how ridiculously rich the rich are in the USA, visit the L-curve page. Moreover, in most countries today, the gap between rich and poor is increasing. If nothing is done the situation will get even worse.
According to the Global Wealth Report 2010, Austria, a country of 8 million inhabitants, has 37 thousand (!) millionaires and 300 households with more than 100 million US dollars. (Please read that sentence again, there are no misprints!) The total private wealth of Austria is 656 billion US dollars. Worldwide there were 12.5 million millionaires in 2010, which was 12.2% more than in 2009. Given these figures, anyone who says we cannot afford a universal basic income is speaking pure nonsense, aka bullshit. Unfortunately, we often encounter nonsense in our daily lives, for example in advertisements (just turn on the TV), at the pharmacy (homeopathic medicines) and the church (Jesus was the son of a virgin, brought Lazarus back to life and rose himself from the dead). If we learn to recognize and reject all forms of nonsense, we might have a chance to get rid of poverty, which is a much more serious problem than misleading advertisements, placebo mediction, and perhaps even religious fantasy.
Many people believe that an unconditional basic income at a level corresponding to the poverty line (in Europe: 800-1000 Euros per month) can eliminate poverty. But what about motivating individuals to work? And what about balancing the budget? Regarding motivation, the more you give to people who are unemployed, the more they lose when they get a job - which reduces the motivation to look for a job and accept job offers. It is no use blaming people and accusing them of being lazy - the problem is in the system, not in the people. Regarding the budget, basic income must be affordable. If it leads to a net increase in social security payments, the money has to come from somewhere. This are serious problems and they cannot simply be swept under the carpet. If we really want to eliminate poverty, we have to take these problems seriously.
We also need to think about the complexity of the system and and the implications of that complexity for democracy. Politicians regularly use "tax reforms" and "welfare reforms" to attract votes from particular target groups. The broader implications of such "reforms" for society and the economy may get lip service, but are essentially ignored if politicians are assuming that voters are selfish and care only about their income. Over the decades, these special offers and exceptions mount up. The system gets too complicated. Ordinary people tend to know only about rules that apply to them. The do not and cannot understand the entire system. Armies of accountants and bureacrats are need to administer it - and often spend their lives doing so. That is not only very inefficient - it is also undemocratic. When politicians talk about changing the system, people are not in a position to evaluate the changes. They don't know what they are voting for.
What have previous "tax reforms" achieved? We still have poverty, welfare traps, black markets, and time-consuming income declaration procedures that only experts properly understand. The taxation and welfare systems are regarded as fundamentally unfair by the rich, the poor, and those in between. Considerable government revenue is lost every year through welfare fraud - but much more is lost through the management of the complex tax-welfare system (just think of what all those bureacrats and accountants are earning, when you add it all up). And by far the most government revenue is lost through tax avoidance/evasion, facilitated by the system's complexity and its innumerable loopholes, of which new ones regularly emerge and are discovered by smart tax consultants.
The aim of this document is to present a radically new and simple idea that would largely solve most of these problems. The basic ideas are as follows:
Under UBI-FIT, everyone would receive a basic income (that is, basic income would be absolutely unconditional), and everyone would pay the same rate of tax on all other income. Both the level of basic income and the rate of income tax would be independent of income. The political debate about welfare and tax would be largely confined to one dimension, corresponding to the tradition left versus right distinction:
My bias. To avoid possible misunderstandings, let me be open about my own political bias, which could be described as centre-left liberal green. For me, the basic income aspect is more important than the flat tax aspect. I can imagine and accept a system in which unconditional basic income is combined with progressive tax scales, as proposed for example by the Basic Income Earth Network. This text is not intended to conflict with such approaches, but to complement and extend them. I am completely opposed to any form of flat income tax that is not coupled to an unconditional basic income, because any such system would presumably increase the gap between rich and poor. And that gap is already considerably larger than necessary to motivate people to work and improve their financial position.
UBI-FIT is mainly about eliminating poverty. In the Western world today, no-one questions the importance of democracy in the form of "one person, one vote". And not many would question that everyone should be treated equally and all kinds of discrimination should be gradually exposed and eliminated. Moreover, most agree that every person has the right to freedom from poverty. The Universal Declaration of Human Rights (1948), Article 25, provides 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." But since there is still so much poverty, even in rich countries, not many support the idea that everyone has the duty to contribute fairly to national budgets through taxes. The problem can be solved by giving everybody an unconditional basic income at a level that enables survival AND obliging everyone to pay tax in a fair way on all additional income and all wealth. By "survive" I mean no risk to life and no significant risk to health due to chronic lack of food, shelter, clothes, heating, medicine and so on. This is not a bad goal when one considers the relationship between life expectancy and income even in rich countries (link). In industrialised countries, we are close to achieving this goal, and at the same time maintaining and even promoting capitalist financial incentives. We can also eliminate welfare traps so that everyone has a good chance of raising their standard of living well above the poverty line. In that way, poverty can be sustainably eliminated. Just imagine a future version of the universal declaration of human rights that states that (i) everyone has the right to a basic income, (ii) everyone has the duty to pay tax on all earnings and all wealth, and (iii) in all these respects everyone has the right to be treated equally. That is essentially what UBI-FIT is about.
UBI-FIT embraces both socialist and capitalist principles. The goal of eliminating poverty is a classic socialist goal. On the capitalist side, UBI-FIT would motivate all members of society to work (harder or better) to the same extent. No-one would be demotivated by the possibility of moving to a higher tax bracket or being taxed more than someone else. More importantly, no-one would be demotivated by the possibility of losing a welfare benefit as a result of earning too much. Seen in this way, UBI-FIT represents and implements a new positive, constructive attitude to the relationship between socialism and capitalism. These two ideologies are no longer seen as contradictory. Instead, they are eminently compatible. They are like love and marriage, which the old-fashioned romantics among us assume to be inseparable:
and marriage (...)
Go together like a horse and carriage (...)
You can't have one without the other
This text is intended as a quick introduction to UBI-FIT - just enough to whet your appetite. It is written in a clear, concise, popular style. You don't need a university degree in public economics to understand it (most other literature about "basic income and flat tax" is addressed to an academic audience). The arguments apply primarily to modern industrial democracies; the question of UBI-FIT in developing countries is beyond my scope.
Examples of gross and net monthly income under UBI-FIT
To understand UBI-FIT, it is important to distinguish between real and effective rates of taxation. The real rate is the way in which the tax is levied (e.g. "give me x% of amount y"). The effective rate takes into account gross income, which in UBI-FIT includes basic income.
The difference between real and effective tax rates is important when considering progressive taxation. In most countries today, the income tax rate increases incrementally as gross income increases - it is different in different income tax brackets. The table below shows that, with UBI-FIT, the effective tax rate would also be progressive, even though the real rate is constant. Moreover, the effective rate would increase continuously with income.
for the purpose of
argument that the basic income is 1000 Euro/month and the flax
tax is 50%. The effective tax rate
is defined as the difference between
gross and net income, expressed as a percentage of gross
income is income before both basic income and flat tax; net
is income after both basic income and taxation. Here are some simple
examples of the relationship between gross and net income, and the
corresponding effective tax rate:
gross monthly income (€/mo)
net monthly income (€/mo)
effective tax rate
Adjusting the basic income and flat tax rates
What is the right or optimal rate of basic income and flat tax? The values of 1000 Euros/month basic income and 50% tax rate in the table are arbitrary round figures - chosen to simplify the calculation. In a real application of UBI-FIT, they would be adjusted to satisfy the wishes of the electorate and government policy (right or left wing) as well as basic economic constraints (balancing the budget, managing the national deficit, and the predictions of economic models). An unconditional basic income of 1000 Euros could be supplemented by various conditional benefits, but the system of supplements could be much simpler than the present welfare system. A lower flat rate of tax (perhaps as low as 35%) may be possible depending on government income (including other forms of tax, for example wealth tax) and other expenses.
The main constraint on the exact level of basic income and tax rate is to balance the budget. Any increase in basic income will reduce the incentive to work (if you have enough money, why work?). Similarly, any increase in the tax rate will reduce the incentive to work (why work harder if I get less money for it?). So any increase in basic income or tax rate can reduce productivity, which reduces tax revenue. That in turn may necessitate a reduction in basic income, since there will be less money available to finance it (unless it partially financed from other sources such as wealth taxes). Arguments of this kind reduce the range within which basic income can vary.
How progressive is UBI-FIT? Although it is based on a flat income tax, the above table show that UBI-FIT is no less progressive than the system currently in place in most industrial democracies. The difference is that it is consistently progressive - it is not affected by welfare traps (currently, you lose your handout, either suddenly or gradually, if you earn too much). The progressivity of UBI-FIT can be adjusted by changing the basic income and tax rate. If basic income is increased, the tax rate must be increased to finance it, and the effective tax rate becomes more progressive. If both basic income and the tax rate are reduced, the effective tax rate becomes less progressive. In this way, UBI-FIT eliminates the need for different income tax brackets. The tax-welfare system becomes simpler, directer and more transparent, and the rich can no longer avoid tax by shifting income to different (virtual) income earners or different financial years.
Another way to make the system more progressive is to increase taxes on wealth and increases in wealth (capital gains), or conversely on sources of income such as speculation and inheritence. I am personally in favor of higher taxes for the wealthy, but the question is beyond the present scope. UBI-FIT would be essentially the same as the present system at high income levels
Benefits of UBI-FIT
Most socio-economic groups would benefit from UBI-FIT:
Short-term disadvantages of UBI-FIT
At first glance, UBI-FIT sounds just too easy - too good to be true. If UBI-FIT is so easy and so good, why didn't we convert to UBI-FIT long ago? I guess there are two main answers to that question.
Central issues and misconceptions about UBI-FIT
The idea of UBI-FIT can only catch on if people understand it. That is not easy, because UBI-FIT turns the familiar system of progressive tax scales and diverse, mean-tested social benefits on its head. It's one thing to understand the basic idea and another to revolutionize one's thinking about tax and welfare. That is the challenge of UBI-FIT.
The following central features UBI-FIT should be understood before getting into detail. Even if you are sceptical about UBI-FIT, please take the time to read and think about them, remembering that the most important aim of UBI-FIT is to eliminate poverty. (If you don't think that is a good aim, please keep surfing.)
The underlying philosophy of UBI-FIT
In modern democracies, the relationship between an individual's gross income and his or her net income is complex. It depends on two interacting factors:
Enormous amounts of time and energy are devoted to the management of these two factors:
Much of this effort is pseudowork. It does not directly generate wealth or quality of life. Much of it could be prevented if the system were radically simplified. But would a simpler system be as fair? I argue that a radically simplified system would be even fairer than the present system, if it did the following two main things:
These two aims should not be regarded as contradictory. The key to a radical simplification of the tax/welfare system is the recognition that socialism and capitalism are not mutually exclusive, but complementary. History has shown time and again the one cannot exist without the other. Thus, an effective tax/welfare system should not pit these principles against one another, but instead integrate them seamlessly.
What are the main features of ideal socialist and capitalist societies? Opinions differ, but here is a possible interpretation:
History has shown that neither of these "pure" systems is stable. The purely socialist society is unable to sustain itself, because it does not motivate its citizens to work. The purely capitalist society destroys itself as extreme social injustice leads to violence. Clearly, a compromise is necessary. Modern tax/welfare systems incorporate both the socialist and the capitalist principle, but they combine them in a complex way. There are innumerable ifs and buts. The loopholes accumulate as politicians try to win elections by wooing specific groups of voters with financial rewards and moral proclamations. The tax dodgers and welfare abusers then find and take advantage of the loopholes. Imagine what would happen if such populist political tactics were no longer possible, and all those ifs and buts were removed. Too good to be true?
The main financial details of UBI-FIT
Transparency and democracy. Democracy only works when the voters understand the issues upon which they are voting. A truly democratic tax and welfare system must therefore be as simple and transparent as possible. Since the relationship between gross and net income is inevitably a mathematical relationship, we may ask the following questions: (i) What is the simplest, most transparent mathematical formulation of the complementarity of socialism and capitalism? (ii) What is the simplest, most transparent relationship between gross and net income? The following graph answers both questions:
The expression "gross income" on the horizontal axis refers to all monthly income before UBI-FIT, i.e. not including the basic income. The expression "net income" means on the vertical axis means monthly income after UBI-FIT, that is after basic income has been added and tax taken away. Under UBI-FIT, basic income and tax are always considered together.
The graph presents a fictitious relationship between gross and net income that is surprisingly close to the relationship as it already exists in modern democracies. Those with no gross income at all generally qualify for some kind of welfare benefit. Those on higher incomes pay tax at a rate that effectively increases as their income increases (progressive tax scales) and approaches some 40-50% in the highest income brackets.
The relationship between gross and net income in modern western democracies is complex, because benefits are means-tested: you lose your benefit - either suddenly or gradually - when you earn too much money. Here, I have replaced this complex relationship by a straight line of best fit. This line eliminates the welfare trap associated with means-tested benefits.
The diagonal line on the graph is the "bottom line". The important thing about the above graph is not the specific values of the two parameters "basic income" and "flat tax", which can be misleading when taken out of context, but the specific relationship between gross and net income (the line on the graph), which in the end is all that matters. For example, if your gross income (not including basic income) is €3000, according to the graph above you would take home a net income of €2500. At the end of the day, it doesn't matter whether you (i) pay €500 in tax in the current system or (ii) pay €1500 in tax and receive €1000 in basic income under UBI-FIT.
What exactly is basic income? "A basic income is an income paid by a political community to all its members on an individual basis, without means test or work requirement" (Van Parijs, 2000, p. 3).
Under UBI-FIT, everyone would receive a basic income, regardless of their current income - even the rich. For high income earners, basic income would be deducted from their total tax bill, and would therefore be a kind of negative income tax. For low income earners, basic income would correspond roughly to the existing concepts "poverty line", "long-term unemployment benefit", and "welfare benefit" and would make some of these concepts obsolete (or change their meaning). If everyone had access to an income corresponding to the poverty line, poverty would be effectively eliminated.
Can poverty be eliminated? It depends what you mean by poverty, which in turn depends on the definition of the poverty line or (poverty threshold). The monetary value of the poverty line (in currency units per unit time) depends on the general standard of living in a given country: in poor countries, the poverty line is lower than in rich countries. The poverty line is determined not only by the cost of essential goods and services in a given country, but also by perceptions of what is "essential" for an adequate standard of living in a given country. In the end, the poverty line is determined by consensus among experts, some of whom perceive it as higher and some as lower. The value usually quoted may thus be regarded as an equilibrium between competing perceptions. Poverty is relative in other ways as well. A person who has enough money to live on but lacks basic financial management skills or rejects interesting opportunities to supplement her/his income may appear to be poor. Everyone has (or should have) the freedom to self-define as "poor" or to deliberately avoid meeting their basic needs and therefore to appear to be "poor". If the poor (or under UBI-FIT, everyone) received a basic income, perceptions of basic needs would change, increasing the monetary value of the poverty line and perhaps making it impossible to completely eliminate poverty. Given these uncertainties, it might be more accurate to claim that UBI-FIT would come as close to eliminating genuine poverty as is reasonably possible.
Parents would receive basic income both for themselves and their children. Thus, basic income would also replace current child benefits. At a certain age (probably 18), children would be required to open their own bank accounts and receive the basic income directly.
The exact amount of basic income for the average person would be determined by the usual democratic processes. Left-wing political parties would try to increase basic income (and increase the tax rate to cover it), right-wing parties to decrease basic income (and reduce the tax rate accordingly). It might also be a good idea to legally define the outside limits of these parameters: e.g. basic income should never fall below 80% of the poverty line (given a well-defined procedure for determining the poverty line) and the flat rate of tax should never exceed 50%.
Basic income would depend on the ability to work: pensioners and the disabled would receive more. Exactly how this would work is beyond the present scope (but see the paragraph on pensions below). Basic income would not depend on willingness to work. "Willingness to work" is an unsuitable criterion for a social benefit for the following reasons:
Basic income may also depend on age. Some argue that children generally spend less money (or cause less money to be spent), so basic income should be lower. Perhaps the real reason behind this assumption is that children have less political power. But one can equally argue that basic income should be higher for children than for adults:
Balancing and comparing the various arguments, it may be both fair and realistic to make basic income independent of age, at least for children (The question of basic income for pensioners is considered below). A system with fewer variables is more transparent and easier (cheaper) to manage. Remember that each variable would be periodically adjusted in a time-consuming political process. If the basic income for children is the same as for adults, the system contains one less variable.
Finally, basic income may depend on gender. The average women still earns considerably less than the average man for the same work, in spite of decades of attempts to solve this problem. So perhaps women should receive more basic income (or pay less tax - see below) in an attempt to redress this imbalance.
These details would have to be decided in a democratic process. I am concerned here only with the general principle of UBI-FIT, which involves a radical change in current thinking. There is little point discussing the details until the basic concept is understood, which is a big step.
Balancing the budget. When basic income is set at €1000 and flat tax at 50%, the numbers are round and calculations are easy. Of course these figures would have to be adjusted in a political process and would be different from one country to the next. For Germany, Strengmann-Kuhn (2006) calculated that a basic income of €500 per month could be financed by a flat tax of 35% (a typical right-wing setting of the two parameters), and a tax rate of 50% could support a basic income of €800 (a typical left-wing setting). For this calculation he assumed that children receive half the basic income of adults.
Pseudowork. Following the introduction of UBI-FIT, those many bureacrats who currently decide whether people get welfare benefits, and who check tax returns for accuracy and fraud, would need to be retrained to do something more interesting and productive, such as monitoring the introduction of the new system and its many social and economic effects. Tax advisors would similarly find themselves moving into new domains.
Resistance and misunderstanding. It's not easy to understand UBI-FIT when you are used to the current system. Both capitalists and socialists tend to object, sometimes vehemently.
Once the concept of UBI-FIT is understood and the above misunderstandings overcome, resistance to it is expected to come mainly from the rich. In spite of the inclusion of the capitalist concept of flat tax, the UBI-FIT concept is primarily a socialist one:
The right wing should nevertheless be pleased about the following central features of UBI-FIT:
Eliminating welfare traps. A welfare trap (aka poverty trap or unemployment trap) is a situation that discourages people from accepting offers of employment because their total income after accepting the offer would not increase enough to make the change worthwhile. In deciding whether to accept a job offer, they must take into account their total income from all sources - including the means-tested welfare support, their new income, any income they would lose due to the reduction in their free time, and any new costs such as the cost of child care for parents (especially single parents).
Anyone who has ever received welfare benefits knows what a welfare trap feels like. As every good capitalist knows, or should know, welfare traps are bad for business, because people who could be working are encouraged to stay on welfare instead. Not only that - a system that motivates people to do whatever they can to maintain their welfare benefits promotes a culture of dependency and deception.
The rational solution is not to reduce the amount of welfare, but to straighten out the line on the graph of net income against gross income so that no matter what your gross income is, you will always increase your net income significantly by increasing your gross income. That way, everyone is motivated to work, which will eventually increase the gross national product and hence the standard of living of everyone.
UBI-FIT abolishes all welfare traps. Given the central importance of this point, objections to the system are unlikely to be well unfounded. What could possibly be wrong with taking the current relationship between gross and net income in a given country and drawing a straight line of best fit through it? Any objection to that would be an argument in favor of bending that line, which goes against fundamental economic and democratic principles. The economic or capitalist principle is that every bend creates a welfare trap or other disincentive, for a given socio-economic group (defined purely according to their income). The democratic or socialist principle is that there can be no good reason for negatively targetting any socio-economic group.
Both socialists and capitalists will agree that a tax-welfare system should allow and even encourage socioeconomic mobility. There should be no barriers to those striving to change their "class". UBI-FIT promotes socioeconomic mobility by removing all correlates of socio-economic class from the tax-welfare system. Both means-tested benefits and progressive tax scales are completely avoided.
Pensions. Under UBI-FIT, pensioners would receive the basic income just like everyone else. But their basic income would be higher due to their reduced ability to work. Let's assume for the purpose of argument that it is €1500 per month. Beyond that, they would receive pensions from state and private funds as in the current system. Under UBI-FIT, this could be done in a number of different ways.
Tackling poverty. One of the biggest problems facing the modern world is the large and expanding gap between rich and poor, both within and between countries. There is no easy solution to this problem, because the rich generally have the power to determine how wealth is distributed. In other words, democracy is not working very well. (It especially does not work between countries, where the distribution of wealth is primarily determined by multinational corporations. So far, international democratic controls are weak or non-existent. But that is another issue.)
UBI-FIT would contribute to a solution of these problems by making the financial relationship between individuals and national states more transparent. This makes it easier for voters to bring about changes that are in the interest of the majority.
But that would not be UBI-FIT's main achievement. UBI-FIT could eliminate poverty altogether if basic income corresponded to the poverty line - which of course depends on the definition of poverty. At one extreme, the OECD and EU define the poverty line as 50% of median income. At the other extreme, the world bank regards people whose purchasing power is equivalent to less than one US dollar per day as poor. Depending on definition, the poverty line in central (western) Europe currently lies between €800 and €1000 per month. To eliminate poverty, a basic income should lie in this range. Even if it were set slightly below the poverty line, an unconditional universal basic income would go a long way toward eliminating poverty (recall that parents would receive more than one basic income).
Foreigners and the underground economy. Some consider UBI-FIT to be unworkable, because all work would have to be legal and controlled. The benefits of the underground economy (illegal cash economy, shadow economy) would disappear. But this may not be such a bad thing:
Public discussions about foreigners tend to be dominated by xenophobia - the irrational fear of cultural groups who are in some way different. It is important to remember the following two points:
The first step would be to abolish work permits. Why should someone be prevented from working? The work permit system is irrational for the following reasons:
How could the cash economy be brought under control so that workers who are receiving a basic income also pay their income tax? Currently, the responsibility for ensuring that income taxes are payed is shared between employees and employers. Under UBI-FIT, the responsibility could lie entirely with employers (which of course includes the self-employed). They would deduct the flat rate of income tax from every pay packet and forward it electronically to the state. Employees would never see this money.
How much basic income would asylum seekers and citizens of other countries receive? In richer countries, the amount would have to be reduced to prevent a flood of asylum and immigration applications from poorer countries. Perhaps asylum seekers should receive 1/3 of the basic income, and "resident aliens" (those granted asylum and citizens of other countries with residence permits) should receive 2/3 of the basic income. But these numbers are little more than preliminary guesses; appropriate values should take into account current equivalent benefits and the social and economic impact of abandoning the work permit system. Different countries with UBI-FIT schemes might agree that the citizens of each other's countries should receive the entire basic income. These details would have to be worked out. In any case, everyone would be allowed to work, and all employers would be legally required to pay the income tax of their employees.
Effect on the minimum wage. UBI-FIT would not only reduce the gap between rich and poor - it would also reduce the gap between low and high wages. Recipients of unconditional basic income, would be less likely to accept poorly paid jobs, forcing up wages for such jobs. Companies who rely on cheap labor would of course argue that that is bad for business. The advantage of the change in the long term would be that wages would more accurately reflect the market value of the corresponding work.
Exposing illusions. The importance of transparency becomes evident when one considers the illusions inherent in the current system. These would be exposed and rectified by UBI-FIT.
Two aspects of the current system of seem, on the surface, to favor the poor:
This apparent benefit is an illusion:
UBI-FIT is an improvement on the present combination of means-tested benefits and progressive income tax in the sense that:
The transition to UBI-FIT
The main problems to be addressed during the transition from the current system to UBI-FIT would be:
The bottom line
Most people have a problem with UBI-FIT, but find it hard to explain what the problem is, exactly. To criticize UBI-FIT, it is necessary to explain what is wrong with the above graph. If the graphical relationship between gross and net income should not be a straight line that is shifted away from the origin, what should it be, ideally? Should the line include bumps (welfare traps)? If so, what is their function? Should the line sometimes be flat, i.e. should some people be expected to work for nothing? Should some people be able to keep more of their additional income when they work harder? If so, who and why?
From this point of view, there is no alternative to UBI-FIT, and it is obvious that UBI-FIT would work. The question is not whether UBI-FIT would work. The question is what values of its two free parameters - the basic income and the flat tax rate - would work.
The transition to UBI-FIT would not be easy. But after we got used to the new system and learned to enjoy its simplicity and transparency, we would wonder how we had survived for so long without it. In this sense, the conversion to UBI-FIT may be compared with the conversions to the metric system of weights and measures and to decimal currency that took place in several countries in the late 20th Century.
That UBI-FIT would work is conclusive proof that there is something very wrong with the present system of means-tested welfare benefits and progressive tax scales. Both of these systems aim to alleviate poverty, but they are obviously not achieving that aim. By contrast, UBI-FIT would eliminate poverty by treating everyone equally. There would no longer be any need to allocate people to different social classes. Just imagine: no more stigma, no more condescension. Moreover it would finally become clear why the poor are poor. If UBI-FIT works by treating everyone equally, then the current system must be perpetuating poverty. The fault lies not with individuals, but with the system.
Do the upper and middle classes want to eliminate poverty? If so, we should be thinking openly about alternatives to the current welfare and tax systems. The fact that we are not doing that (or not doing it enough) suggests that we feel good about having more money than the poor. That is why we are clinging to the present system and its complex web of arrogant work-ethic morality, illusion and deception. UBI-FIT will have achieved its purpose if it does no more than expose these problems and stimulate progress toward a realistic solution.
Acknowledgements. I am grateful to John Parncutt, Russell Parncutt and Rosanna Scutella for helpful suggestions.
This account of UBI-FIT is intended to be popular in nature. It aims to interest people with little or no academic background in the idea of UBI-FIT. The following sources are more academic and research-oriented.
Atkinson, A. B. (1995). Public economics in action: The Basic Income/Flat Tax proposal (Lindahl Lectures). Oxford, England: Oxford University Press.
Strengmann-Kuhn, W. (2007): Finanzierung eines Grundeinkommens durch eine Basic Income Flat Tax. In G. Werner (Hrsg.): Symposium Grundeinkommen: bedingungslos. Universitätsverlag Karlsruhe.
Van Parijs, P. (2000). Basic income: A simple and powerful idea for the 21st Century. Background paper, 8th International Congress, Basic Income European Network (BIEN), Berlin.
Questions of income tax and social welfare are part of the discipline of public economics. A standard text:
Atkinson, A. B., & Stiglitz, J. E. (1980). Lectures in public economics. London: McGraw-Hill.
About the author
When I first dreamed of UBI-FIT , I was on unemployment benefit in Australia in the mid 1980s. Luckily, that only lasted a few months, during which I managed to convert my PhD thesis into a book manuscript. If the unemployment office had known that, they would presumably have cut the benefit! After all, I was supposed to be doing nothing and feeling depressed.
Every week I went to a little office (hoping that no-one would see me), filled in a form on which I was supposed to declare any other income, and worried about whether to declare the cash I earned playing the piano in a restaurant, which would reduce the amount of the benefit (then about 100 Australian dollars per week). I guess the woman across the counter was constantly confronted with people lying about their income and I wondered hoiw she dealt with it. I now live in Austria and earn about €4000 gross per month, which in both the current system and on the above graph translates to about €2500 net.
I first published these ideas in a rather long letter to Neucleus, the student newspaper of the University of New England, Australia, in the mid 1980s. Little did I know that the Basic Income European Network (BIEN) had established itself at the same time and held its first conference in Louvain-la-Neuve in September 1986. My original concept was different in that it involved the combination of basic income and flat tax, which I regarded as an equal balance of socialist and capitalist principles. I was never especially interested in either basic income or flat tax by itself, and I still regard the two as inseparable.
Appendix: Flat wealth tax
The ability of UBI-FIT to close the gap between rich and poor is limited, because it considers only income. The gap between rich and poor also depends on wealth, or capital. Thus, additional elements may be needed to generate the finances necessary for a universal basic income. These elements are capital gains tax and wealth tax (also called capital tax, equity tax, net worth tax, net wealth tax, solidarity tax, or property tax).
Capital gains taxes are already common in many countries. Wealth taxes are less common, perhaps due to the difficulty of estimating a person's wealth, which is strictly only possible to do when a buyer agrees to buy that person's estate. The amount that a buyer is prepared to offer depends on many factors.
Many think that a wealth tax applies, or should apply, only to the wealthy - say, those with a total capital of more than one million Euro. According to this concept, the rich should regularly part with a small percentage of that wealth. Politically, this option is difficult to achieve, although it has operated successfully in some countries. The reason is that wealthy have too much influence to allow the state to introduce a reform that they perceive as targeting them directly.
It is more realistic to propose that everyone, regardless of wealth, pays an annual wealth tax corresponding to the same proportion, say 1%, of their total estimated capital worth. To make this work, everyone with any capital would have to declare that capital each year, just as they currently declare their income. The advantage of this approach is that the rich could not complain that they are being treated unequally. The tax would nevertheless have the effect of reducing the gap between rich and poor.
This is another form of flat tax that is neither capitalist in nature nor associated with extreme right-wing politics. On the contrary, a flat wealth tax has a socialist flavour. But is not communist. In communism, everyone is supposed to have the same capital, or no capital at all. By comparison to the communist ideal, a flat wealth tax at the proposed rate would have relatively little effect on the gap between rich and poor. But it would have some effect, and the poor would feel the positive effect much more strongly than the rich would feel the negative effect.
Those who object to wealth tax may support their argument by reference to specific cases such as the following:
In other words, a person with capital should be using it to generate more capital, which should enable her or him to pay wealth tax without losing capital. If they are unable to do this, it is their own problem and not that of the state.
Ever since taxation began, people who have more money have paid more tax - or have been supposed to pay more tax - whether that money was in the form of income or capital. That is ultimately where national states get their income from. Because the rich have often managed through influence or cunning to evade taxes, it has often been the middle classes that have paid most of them. For example a wealth tax that is only payable above a capital of say one million euros can be evaded by distributing capital between husband and wife, among other family members or among companies. A flat wealth tax reduces the chance that the rich will get away with such strategies.
Like flat income tax, flat wealth tax can be considered part of a strategy to eliminate poverty. Those fellow left-wingers who think it unfair that everyone should pay the same rate of wealth tax are asked to consider the following analogy. According to Newton's law of gravitation, the gravitational force between two objects is proportional to the mass of each object: the rate of gravitation is a flat rate. That means that there is a gravitational force between any two objects, for example between a person and a nearby mountain. But since the earth is so much more massive than a mountain, the force of gravity exerted by mountains on humans has no noticeable effect (although physicists have been known to measure such things). Similarly, a flat wealth tax at a low rate of around 1% is a small and perhaps negligible burden for people with little capital. Nor is it much burden on the wealthy (although they perceive it that way). But government revenue from wealth taxes can be considerable, and comes mainly from the rich. Consider the extreme case of Bill Gates, whose net worth is estimated at 50 billion dollars. If he paid a wealth tax of 1%, that would be 500 million, which is $2 for every person in the USA. With that kind of money the US government could do something about inner city poverty - if wasn't wasting it on military foolishness such as the 2003 invasion of Iraq. But that is another story.
A disadvantage of wealth tax is that it forces individuals to spend a lot of time calculating their net wealth, and periodically revising their calculations. One of the reasons why UBI-FIT is so interesting is that it reduces the amount of pseudowork. Readers may wonder why am I promoting the introduction of a new kind of pseudowork, having just gone to considerable lengths to get rid of another kind. If, however, these calculations become public knowledge (as suggested below), society becomes more transparent. It becomes easier to understand the gap between rich and poor and to develop appropriate strategies to reduce it.
Transparency and public access
In Sweden, all income tax declarations are published in the internet. The advantage of this procedure is that it forces people to be honest. If they are not, others (journalists, ordinary citizens...) can complain, which can lead to investigations. The legal provision that makes this possible is the principle of public access.
The proposal of combining universal basic income with flat income tax, capital gains tax and wealth tax would be easiest to achieve in conjunction with the principle of public access. The wealthy have a responsibility to share a part of their wealth with the general public, because if they do not, there can be no modern social democracy. Society is where their wealth comes from and what gives their wealth meaning, so society has a right to some of it, too. A first step toward this goal is for the rich to make their wealth known. And if the wealthy are forced to do that, then it is only fair that everyone should do it. Thus, the declared income and capital of all citizens in previous taxation years should be public knowledge. This in no way affects the right of any individual to amass wealth; free enterprise is surely ok, provided it is fair and transparent.
can also solve the problem of estimating a person's net worth in the
absence of a buyer-seller relationship. If everyone is required to
declare their net wealth and is taxed on the declared amount, of course
they will tend to underestimate that wealth. But if the declaration is
public and can be legally challenged, the degree to which wealth
declarations can be underestimated will be limited.