Why not Basic Income + Progressive Tax?

In principle, the benefits of a Basic Income can be combined as easily with a progressive tax as with a flat tax. Why do we argue for the BI+FT combination?

We have already shown that a BI+FT system is progressive in terms of the effective rate of tax. In our view, the added complexity off a progressive tax brings no benefits in terms of a more rational, "progressive" effect on incomes.

"Progressive" tax means higher rates on high earners or lower revenues

Some people would nevertheless prefer a "progressive" tax system, with different rates at different earnings levels, for reasons of "social justice". These people must declare what the tax bands should be. If they argue for lower levels of tax (than the proposed flat-tax rate) on low earners, they must accept that tax revenues will be reduced, which will make it impossible to fund the Basic Income without raising tax elsewhere.

Whether to compensate for this effect on revenues, or simply out of a desire to impose on the rich a greater share of the burden of government, it will normally be necessary for a progressive tax to impose higher rates of tax (than the proposed flat-tax rate) on the upper earnings band. Unless the social safety-net provided by the Basic Income is to be at a significantly lower level than under the current system, this will require upper rates of tax of over 50%.

High rates of tax on high earners damages the economy

At that level of tax, the government takes more than it lets you keep from any extra money that you earn. This is powerfully disincentivizing to the high earners who are responsible for providing most of the jobs in the market, either as businessmen who create jobs directly, or consumers whose spending pays for goods to be produced. It is also disincentivizing to the majority of people who hope to work their way up to that position one day. And for what? Not for any real social-justice benefit, because (as we have seen) this is not materially more progressive than a BI+FT system. Someone who insists on a progressive tax system once a Basic Income has been introduced must be more interested in their creed's dogma and in enviously depriving others of what they themselves do not have, than in the practical effect of the measure.

High rates of tax on high earners reduce government revenues

There is every chance that upper rates of over 50% will not even raise any more tax than lower rates. The Laffer Curve is a controversial and much abused concept, but at a basic level, it is logically undeniable. It is clear that, if tax on income is zero, it will raise no revenue. And it is clear that, if tax on income is 100% or more, there is no point in working, as you keep none of the income, so a 100% tax will raise no revenue because no one will be doing any work to tax. And at tax rates in between zero and 100%, it is clear that some revenue is raised. We do not know the shape of the curve between zero and 100%, or the level of tax at which maximum revenue is yielded, but we can say that broadly, a Laffer Curve such as that shown belows indicates some basic truth about the relationship between level of tax and revenues raised - that there is a point above which increasing tax levels reduce government revenues.

Laffer CurveIntuitively, one might suspect that the point at which the government keeps more of your earnings than you do is the point at which a lot of people stop trying to earn more or find ways to avoid the tax. And empirically, the recent decision of the Labour government to introduce a 50% top rate of income tax (over 50% once one allows for National Insurance as well) has resulted in some individuals and businesses relocating their homes and offices abroad, and in renewed interest and effort in tax-avoidance schemes, to the extent that a respected commentator on tax issues, the Institute for Fiscal Studies, concluded that the new rate of tax would probably reduce government revenues.

Complexities, inefficiencies and perverse consequences of "progressive" tax

Not only is a progressive tax system unnecessary, unhelpful and quite likely counter-productive when combined with a Basic Income, but there are practical ramifications from a progressive tax system in any circumstances, that can be avoided under a BI+FT system.

A progressive tax system introduces complexities and inequities in the tax-treatment of couples. Let's take a simple case of a progressive tax system, with two levels of tax, 20% and 40%, with the switch from one level to the other occurring at £25,000. In the case of couple A, both adults work and earn £25,000 each. In the case of couple B, one adult works full-time for £40,000 and the other works part-time for £10,000. And in the case of couple C, one adult works full-time for £50,000 and the other adult stays at home to look after the children. All three couples earn £50,000 between them, and it is hard to say that the choice of couple C is less socially-desirable than the choice of couples A and B. Yet couple A pays £10,000 tax, couple B pays £13,000 tax, and couple C pays £15,000 tax.

To rebalance against this disincentive to traditional child-rearing, more-conservative politicians support a Married Couples' Allowance, where the higher-earning member of a couple can use some of the lower-earners' unused entitlement to pay lower tax to reduce the amount of tax that the higher-earner pays. But this requires the taxman to track changes to couples' relationships and earnings, and to become interested in what qualifies as a valid relationship for the purpose. Such a system requires a level of bureaucracy and intrusion into people's private lives that is better avoided.

Flat tax inherently fairer and less bureaucratic

There is only one way to avoid it: a flat tax. If both members of a couple pay the same level of tax on their earnings regardless of how much they earn, the taxman has no need to know about people's living arrangements and how their earnings relate to their partner's. If we take couples A, B and C above, and a flat tax of 30%, all three of them will pay £15,000 tax, as will any other couple whose combined earnings are £50,000, regardless of circumstance. This should yield signficant benefits in avoided bureaucratic costs, simplified tax calculations, equitable treatment of people regardless of circumstance, and reduced intrusion of the state into people's affairs.