Effectively Progressive Income Tax (EPIT)aka Basic Income + Flat Tax (BIFT)

Richard Parncutt, Uni Graz, 14 June 2009

Progressive income tax in Austria2005-2009

Broken line: Extrapolated high rate BI = 8.5 k€/yr = 708 €/mo

Gross income (k€ /yr)

Ne

t in

com

e (

k€/y

r)

Progressive income tax in Australia1 € ≈ 1.7 $

Gross income (k$/yr)

Ne

t in

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e (

k$/y

r)

23

0%15%

30%

40%

45%

Broken line: Extrapolated high rate BI = 23k$/yr = 13.1 k€/yr = 1090 €/mo

Progressive income tax in Canadafederal not provincial; 1 € ≈ 1.6 $

Gross income (k$/yr)

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e (

k$/y

r)

11.4

Parameter: marginal tax ratesBroken line: Extrapolated high rate 11.4k$/yr = 7.28 k€/yr = 607 €/mo

Welfare trapsSozialhilfefalle Zuverdienstgrenze

Limited extra income of welfare recipients – welfare is cut suddenly or gradually– rising gross income constant/falling net income– local implicit tax rate of 100% or more

• Suppresses incentive

• Reinforces rigid class identity

• Generates resentment and class conflict

Basic IncomePhilippe Van Parijs, 2000; Basic Income Earth Network

• Features– unconditional– individual– as handout or tax

deduction

• Questions– citizens?– children?– pensioners?

• Advantages– no means test

• no welfare traps

– less bureacracy• “willingness” not tested• less class stigma• open and honest

– freedom• no poverty• more risk taking

Disadvantages: reduces incentive, changes wage structure

Flat income taxneo-cons, neo-libs…

• Advantages– can be paid immediately– reduces tax evasion/avoidance– promotes economic growth– the “poor rich” don’t feel “discriminated”

• Disadvantages– increases rich-poor divide– linked to neo-liberal and far-right politics

My hidden agenda

• Centre-left liberal-green

• Eliminate poverty

• Resolve left-right conflict

• Transparency, democracy

• Political realism

Co-supervision of PhD?– Topic: detailed economic consequences

Basic Income + Flat Tax BIFTaka negative income tax plus flat tax

cf. Friedman & Rose (1980); Atkinson (1995); Strengmann-Kuhn (2005)

0

1000

2000

0 1000 2000 3000

gross income (€/mo.)

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(€

/mo

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Arbitrary parameters: BI = 500 €/mo., FT = 50%Could be: BI = 700 €/mo, FT = 40%

basic income

break-even point

Effectively Progressive Income Tax(EPIT) with BI = 500 (€/mo) and FT = 50%

Gross income (K€/mo)

Net income (K€/mo)

Effective tax rate

0 0.5 - ∞

1 1 0

2 1.5 25%

3 2 33%

4 2.5 37.5%

5 3 40%

10 5.5 45%

100 50.5 49.5%

Just one kind of progressivity

BI plus progressive tax? two simultaneous sources of progressivity!

Just one progressive system allows for any• level of progressivity • progress toward income equity

Combining two progressive systems creates• unnecessary complexity, reduced transparency• opportunities for clever tax advisers

Setting the parameters

• Basic income (500…800 €/mo)– high enough to eliminate poverty

• poverty line in Austria: 60% median wage ≈ €900

– low enough to maintain incentive

• Tax rate (35…50%)– high enough to finance BI etc.– low enough to maintain incentive

• Adjustment procedure– left versus right politics– economic models

Basic income for childrenreplaces other comparable benefits

• Less than for adults?– lower expectations; less political power

• More than for adults? Childcare wage:– 10 hours x 30 days x €10 = €3000/month!– high rate of poverty among single parents

• Same BI for adults and children? less arbitrary; democratic ideology (equality)

• Problem low work incentive for large unemployed families

Special casestypical low income earners

• Single parents– BI for parent and each child– free creche, kindergarten, school, university

• Pensioners– same BI as everyone else– other pension schemes in addition (taxed)

• Disabled– higher rates of BI– BI depends on ability, not willingness to work

Realism and equity in taxation

Amount depends on ability to pay • income tax (variable capital)• wealth tax (constant capital)

Flat wealth taxes

...are effectively progressive because only the rich have significant wealth(middle classes have relatively high income but low capital)

Example: 0.2% / year

Capital (€) Tax (€/yr)

1 0.002

1 000 2

1 000 000 2 000

1 000 000 000 2 000 000

Flat wealth taxes

• What about the family farm?

• What about Granny’s house?

Anyone with wealth – can convert it to other forms of wealth– is better off than those with less wealth– should compete equally in a free market

Treat everyone equally

Flat taxesthat reduce the rich-poor gap

• Capital gains tax (incl. income tax)– only progressive with basic income– one flat tax for all people and all income– wages, gifts, inheritance, interest, speculation…

• Wealth tax – one flat rate for all all people and all wealth– bank, home, farm, company, yacht…

Flat wealth tax: Advantages

• reduces rich-poor gap• accesses large resources• reduces tax evasion

– shifting wealth around doesn‘t help

• easier to control– total wealth tax α total taxable wealth

Taxing the poorvalue-added tax VAT (MWSt)

VAT on basic commodities is regressive

VAT on luxury goods is progressive

Problems that BIFT addresses

• Poverty– scandalous!

• Welfare traps – suppress incentive and class mobility

• Inequity, injustice– black markets– tax avoidance, welfare fraud

• Inefficiency– complexity dependence on advice– armies of accountants and bureaucrats– uninformed democracy

BIFT Priorities (1)

• More important– gross-net relationship

• Less important– terminology for BI and FT– history of terms & ideology– specific levels of BI and FT

BIFT Priorities (2)

• More important– reducing rich-poor gap (left politics)– motivating productivity (right politics)

• Less important– needs or desires of specific groups

• Rules of thumb– “no such thing as a free lunch”– advantage for me = disadvantage for you

BIFT Priorities (3)

• Standard of living– no poverty

• Freedom– choice, privacy, mobility

• Democracy– rights, transparency, people power

• Socialism– fair distribution of resources

• Capitalism– incentive, production, wealth

• Efficiency– waste reduction

Socialists and capitalistscf. humanities & sciences, Palestine & Israel…

Like any other major conflict:– strong identities based on difference– ignorance of Other group prejudice– assumed moral superiority

Conflict resolution– mutual recognition– fairness, transparency– reduction of distance

Global inclusive politics: Approach

• Global– focus on biggest global problems– rational, co-operative, global solutions– “think globally, act locally”

• Moral– universal religious and secular morality– altruism, honesty, human rights

Global inclusive politics: Issues

• poverty reduction – local and global• environment, global warming• intercultural conflict, weapons• global distribution of resources• population growth• global democracy