Basic Income + Flat Tax - the practice

The Basic Income (BI) would replace all non-working, low-income and child-support welfare payments (including the basic state pension), so that the only other benefits remaining are top-ups for special cases such as disability, or additional state pension entitlements already accrued.

We pledge that support for vulnerable individuals, such as the disabled and the elderly, would be topped up to their current levels. But additional state provision (above and beyond the BI) for people who are able and young enough to have many working years ahead of them will be gradually reduced, to start to bring the state's liabilities back into line with the economy's capacity to fund those liabilities. Those young enough to be able to, will have to start planning to provide for their own old age.

Basic Income rates

The BI would be paid at a rate of £5,600/year, to every man, woman and child. There would be a single-person supplement of £2,250/year for each household where there was only one adult (payable to that adult).

These rates have been set to provide approximate parity with those parts of the current benefits system that would be replaced by the BI, plus some uplift for some additional costs that households would incur as a result of our proposals to move some services (e.g. education and primary healthcare) to the private sector, and to rebalance the tax burden by reducing taxes on employment and increasing taxes on consumption.

Flat Tax

We would replace our current Income Tax rates and employees' National Insurance contributions with a single-rate income tax (a "Flat Tax" [FT]). Its nominal rate will have to be 43% initially, to give similar tax revenues to present and to avoid an excessive give-away to the rich. But the rate should come down as cuts are made in public spending and more people gain employment through removal of the massive disincentives to work in the current system.

The combination of BI+FT gives an infinitely-progressive effective tax rate (from minus infinity for those out of work, through zero for those whose tax on their income is equal to the Basic Income, tending towards the nominal level of the flat tax for high earners).

The marginal effective tax rate (the most significant incentive to work) would be flat - equal to the flat tax-rate - removing all poverty traps and minimising disincentives to work, whether it's a few hours a week or full-time (helping to get the vast numbers trapped on incapacity benefit and the like back into work).

Minimum wage and personal allowances

We would do away with:

  1. the minimum wage (because it's up to you if you are willing to work for £1/hr so long as you can support a very basic standard of living without it on the BI) and
  2. all personal allowances on income tax (because the BI+FT ensures a negative effective rate of tax for couples earning upto around £26,000/year and singles earning upto around £18,000/year).

Retirement age

BI+FT does away with any change in incentives at an arbitrary retirement age, so when you retire is up to you (your savings) and your employer.

Married-couples tax allowance

And BI+FT does away with the need for any debate about married-couples tax allowance, because you are neither advantaged nor disadvantaged whether you live together or separately, wedded or unwedded. It is rarely observed that the cause of this debate is the personal allowance, because all the politicians are wedded to the current tax and benefit system. If anything, they want to increase the personal allowance and therefore increase the problem of discouraging people from entering a traditional, nuclear-family arrangement with one wage-earner and one person staying at home to care for dependants (children and/or parents, in this world of increasing dependance in old-age and lack of funds for public provision of decent care).

Maternity, childcare, education and children's BI

Children should be entitled to BI (paid to parents/carers until educational thresholds are crossed). A proportion (£1,700/year) would support parents/carers in the cost of care (food/clothing/rent), as per Child Benefit. The remainder (£3,900) would be used for different purposes at different ages.

In the months after birth, it could be used by the parent/carer towards the cost of childcare (for instance if both parents return to work), or for supplementary income and support (for those who decide to quit work to bring up the child), or to pay employers to keep a job open (for those wanting temporary leave for the first few months).

After the first year, until the children go to school, this part of the child's BI is either a supplementary income for stay-at-home parents, or help with the costs of childcare for working parents.

Once the child is old enough to go to school, £3,900/year of the child's BI goes towards schooling costs in a fully privatised education system, in which places at this rate are guaranteed. This is discussed under Education - Schools.

Support for good parenting

A small proportion (£100?) of each parent's BI should also be earmarked as dedicated to the upkeep of each child. If a child is taken into care, or moved from the care of one parent to another, not only does the child's BI transfer to the carer, but that small proportion of the failing parent's BI does too.

Rewards for maturity

Small amounts (like pocket-money) of a child's BI should transfer from the control of the parent/carer to the control of the child as the child achieves certain landmark educational thresholds, to provide incentives to study. The child should be rewarded with full control of its BI when it achieves a satisfactory level (equivalent to GCSE C grade) in the key subjects of English, maths and science, or when they reach the age of 18, whichever is the earlier. This marks the transition to adulthood, and again provides powerful incentives to study (and leverage for hard-pressed parents to control misbehaving children). If you are a smart kid bored by school (often the problem with troublemakers), it would make more sense to study and get the qualifications than to keep failing and have to stay in school for a couple of years longer than necessary. At the moment, the incentives are stacked in the opposite direction.

Continuing education

After they have achieved the necessary educational standard and gained control of their BI, young adults wishing to stay in education (academic or vocational) can use the part of their BI that is earmarked for education to contribute to the ongoing costs.

All universities and colleges would be independent. The government would declare how many places in each subject it is willing to fund fully in the interests of the nation each year. The top students would receive a bursary from the government equal to the average cost of courses in their chosen subject, and can use this to pay the fees at whichever university they go to. Anyone below this standard may still go to university if they can get a place, and can use their BI to assist with costs, but they will have to fund the balance privately (loans, parents, scholarships, part-time work, spending some time in work before going to university, or however).

Housing costs

The BI should also include a component for housing. Councils would be obliged to offer accommodation of a very basic, prescribed standard at rents set in accordance with the value of this component of BI (and adjusted to take account of family sizes).

Arguments against BI+FT

The usual argument against BI is that we couldn't afford it, but that is because people assume that the whole of a Basic Income would have to be paid to each person, and also because they assume it will continue to be partnered with a "progressive" taxation system roughly similar to what we have now. If you do a combined BI+FT and administer it for everyone in work through the PAYE system by netting off the BI against the FT, you will end up with costs that are not so dissimilar to present with vastly reduced bureaucracy and disincentives to work.

The other main argument against BI is that it will increase the disincentive to work if people have a guaranteed income regardless of whether they are trying to find work or not. But it isn't the headline rate that counts, it's the effective rate (the combined effect of tax and benefits, including withdrawal of benefits). And it isn't the gross effective rate that is most important when people are deciding whether it's worth trying to earn an extra pound, but the marginal effective rate (how much of the extra pound they would keep after allowing for changes to tax and benefits payments). BI+FT would dramatically increase incentives to work, not reduce them.

Welfare that works

This shows that a free-market, classical-liberal outlook does not preclude concern for the wellbeing of the less fortunate. In fact, the difference between socialists and classical-liberals is not whether they care, but whether they are interested in solutions that make them feel good about themselves, or solutions that work. Our strongest driver in promoting the classical-liberal case is that socialism (which is what we have had for the last 13 years and for much of the twentieth century, regardless of what people might have been fooled into thinking) has been reducing our quality-of-life, destroying our economy, and trapping ever more people in poverty and unemployment. The very things that Labour introduced to try to reduce inequality and poverty are the things that exacerbate it. This reality is only now beginning to dawn on people, and even then, most of the solutions proposed (for example, by the other political parties) are variations on the same theme - Managerialism and Paternalism, Mark II. We want to set people free to help themselves.