## 19 Feb 2017

### Basic Income and Flat Rate tax - a viable solution

Following up from my recent suggestion that Benoit Hamon could finance a Universal Basic Income by a radical reform of the tax system, I've been trying to put some hard numbers on the calculations. A few years ago, Camille Landais, Thomas Piketty and Emmanuel Saez published a book with propositions for a reform of the tax system in France. Their propositions were interesting, but not very revolutionary (in my humble opinion). They nevertheless did a very useful service by providing a website including a simulator that allowed people to try out their own reforms for the tax system.

The website includes a very useful table that provides the mean annual revenue for each percentile of  the French population over 18 years of age. This shows, for example, that the bottom 7% of the popuation has no income at all and that the median value for annual income is about €20,000. It provides an even more detailed breakdown for the top 1% of earners in the population.

Such information is very useful, because it allows anyone to work out how much revenue would be raised by setting the tax rates for different income levels at different values. Indeed, the authors invite readers to see if they can come up with a good way to set the tax rates. They give the example of a truly flat rate income tax system where everyone paid 13% tax on all their income which would raise as much revenue as the current one involving multiple tax bands.

But I was interested in seeing what would happen if all citizens recieved a fixed unconditional basic income of say €400 a month, and then paid a flat rate income tax on all addititional earned income. My original suggestion from last week proposed a rate of 25%, and I was able to use the data in the table to calculate that with such a system, 48% of the population would not only pay no income tax, they would receive a net payment from the tax authorities. Those payments would range from €400 for the 7% of the population with no income at all, to zero for someone earning around €1600 a month. The remaining 52% of the population would make net payments to the tax authorities, increasing to virtually 25% of income for the top earners.

Such a system would raise about €64 billion a year in revenue, which is not bad for a system that will allow a very clear redistribution of income towards the half of the population on low incomes. However, that €64 billion is less than the current income tax system generates - €148 billion a year. To raise the same amount of revenue would simply require the flat rate tax to be increased from 25% to 32%. In that case, only the bottom 37% of the population would be net beneficiaries from the system, and the point where people end up paying some tax would drop include people earning over roughly €1260 a month.

The interesting thing about such a system is that there are literally just two numbers that need to be determined. The first is the level of the Unconditional Basic Income - in this case €400. The second is the flat rate tax level - in this case 25% or 32%.

But you can easily choose other numbers. For example, if we decide to give everyone a basic income payment of €600, the whole system would be neutral (i.e. it would raise the same amount as the currrent system) if the flat rate tax was set at 42%. In that case, 42% of the population would get a net payment from the tax system. If you decided that you could get the €148 billion raised by income tax from an alternative source (such as a financial transaction tax), a basic income of €600 a month for all over 18 years old could be paid for with a flat rate income tax of a little under 30%. In that case, the 62% of the population with the lowest incomes would pay no income tax at all. Indeed, anyone earning less than about €2000 a month would receive a net payment from the system. The cost of all those payments (roughly €65 billion a year) would be paid for by the 38% of the population earning over €2000 a month, but with big earners paying the lion's share (though never more than 30% of total income).

You would like to offer a basic income of €800? Easy. Just set the flat rate tax at just under 40%, and again, the 62% of the population earning €2000 a month or less would get net payments from the system. Again, the cost of providing net payments of up to €800 to everyone earning less than €2000 a month (about €158 billion) would be paid for by the top 38% of earners.

Let's make the basic income €1000 a month. In that case, a flat rate income tax at 49.5% would do the trick. It would again mean that 62% of the population would receive net payments from the system - those earning €2000 a month or less. The total cost of all the payment (over €198 billion) would be paid entirely by the top 38% of the population. But even someone earning €6000 a month would only end up paying about 30% in tax.

All of this seems very sensible, and seems to completely demolish the idea that a basic income is unaffordable. Sure it is unaffordable if you just say that the cost of the system is €1000 multiplied by the number of people to whom the payments are made. But combine the introduction of the basic income with a radical simplification of the income tax system, and the whole thing can be done with no extra cost.

Indeed, I think that this sort of simple flat rate tax system has lots of other advantages, including the fact that it is much simpler to understand than the current system.

If you are interested in seeing how the numbers work, do have a look at the Google Sheet document that I have uploaded here. Download the file, and you can even play around with the figures to choose the values for the Unconditional Basic Income and the tax rate that you would be happy with!

Enjoy!