18 Feb 2018

My Negative Tax proposal for a Universal Basic Income in France

Following my recent talks and presentations, I've been getting a number of questions about the details of my proposal for implementing a basic income in France via a radical reform of the tax system.
The basic idea is shown in this figure.

The blue curve shows the income distribution for people aged 18 and above (extracted from a table provided by Landais, Piketty & Saez). It shows that about 10% of the French population have virtually income at all (apart from welfare payments). The curve increases roughly linearly up until about the 75th percentile, before shooting up. Roughly 2% earn more than €10000 a month, and I didn't plot the graph above that point to keep things in scale. 

The red curve shows what people's income would be with a Basic Income set at €600, and a flat tax of 30% on all earned income. I note that the French government recently voted to impose a flat tax on all income from capital (rents, dividends etc). So really, all I am proposing is to extend the same principle to all forms of income, including salaries.

The green line is the neutral point that occurs when someone is earning €2000 a month. At that point the €600 of basic income is cancelled out by the need to pay €600 (i.e. 30% of €2000) in tax.  The 61% of the French adult population who earn under €2000 a month would thus receive a net payment from the tax system - effectively a negative tax.

Amazingly, by choosing the numbers in this way, I was able to set things up so that the money needed to make those payments is provided by the tax paid by the 39% earning more than €2000 a month. In other words, the Basic Income can be financed with no additional input. Indeed, the income tax system becomes a purely redistributive mechanism - channelling money from the 39% who earn the most to the 61% who earn the least.

As I said, these ideas have triggered a number of questions. So, lets look have a look at some of them/

Is the Negative Tax system progressive?

Despite being based on a 30% flat rate of tax, it really is a progressive tax.
Think about it.
  • Someone earning nothing will get the basic €600. 
  • Someone earning €1000 would get the €600 plus 70% of €1000 (€700) making a total of €1300 (effetively a tax of -30% on their earnings!)
  • Someone earning €2000 would keep all their earnings (tax = 0%)
  • Someone earning €2500 would keep €2350 (tax =  6%)
  • Someone earning €3000 would keep €2700 (tax = 10%)
  • Someone earning €4000 would keep €3400 (tax = 15%)
  • Someone earning €6000 would keep €4800 (tax = 20%)
  • Someone earning €10000 would keep €7600 (tax = 24%)
  • Someone earning €20000 would keep €14600 (tax = 27%)
That seeems to me to be a very progressive tax scheme with no need for arbitrary tax bands. Indeed, it's actually pretty close to the current situation where less than half of the French population pay income tax, and where the effective tax rates rarely go above 20-30% except for very high earners.

Furthermore, that person earning €10000 a month will know that their tax cut of €2400 would be directled exclusively  to people earning less than €2000, but with a much larger share going to those right at the bottom. They would be able to look themselves in the mirror and know that they were doing something directly to help those less fortunate. It might encourage them to pay their taxes normally like the rest of the population, rather than attempting to hide their wealth in tax havens.

In addition, those at the top end of the scale would be paying a marginal tax rate of 30% that is in fact lower than what they currently have to pay - 45% in France. In other words, everyone is better off. Who would vote to keep the current system?

Would there be a Basic Income for under 18s?

Many people want to know what I think should happen for those under 18. While I think that you could have a smaller amount (say €300), my preference would be to keep the same number but to divide the Basic Income into two parts. One part would be given to whoever was legally responsible for the child. The other part could be put into a sort of savings account that would allow the child to have a sizable pot of money when they reach 18, a pot that could be used for a wide range of projects including paying for higher education, other forms of training, setting up a business, travelling or indeed any other activity that could be justified. I would probably want to prevent young people from simply cashing in and spending everything on a drink and drug splurge.

Let's take a simple case where the €600 is divided into two equal parts - €300 for the parents or guardians, and €300 for the savings scheme (other splits are of course possible).

The part for the parents and guardians would only be provided to people who were prepared to commit to providing the basic necessities for the child's welfare. All children would need to have a predefined set of things that might include at least 2 pairs of shoes, underwear, trousers, shirts, jumpers and rainproof clothing. Any parent or guardian who did not meet those minimum requirements would no longer receive the money. In such cases, the money would be diverted to someone else (a relative, friend or a foster parent, for example) who was prepared to take responsibility for the child's wellbeing. Making the payments conditional in this way would, I believe, avoid the temptation to have excessive numbers of children to simply increase revenue. Anyone who did that would know that there was a serious chance of losing that revenue later on, if they failed to behave responsibly.

Normally, for a child with two parents, the €300 would be split between the two parents. But in the case where there was a separation and one parent only looked after the child for part of the time, the allowance could be split to reflect that amount of time that each parent was looking after the child.

Single parents would of course receive the full sum for each child in their care.

You could even have a situation where a child was living in a community with several adults (not just parents) who could share the funding between them. They would simply need to agree on the way the money was split for such variants on the standard two parent model to work.

What about the €300 a month put into a savings account? At €300 a month over 18 years, this would add up to a total of €64800 - enough to pay for a university education for those who want it. Or to help launch a business project.

In principle, young people would have to wait for 18 years to be able to get the full amount. And one year after the introduction of the scheme, someone reaching 18 would only get 12 times €300, i.e. €3600.

However, personally, I would be in favour of opening the scheme up straight  away, so that all youngsters would be able to count on a large sum from day one. I really think that much of the divisions in society and the problems in the suburbs could be reduced by convincing young person that they really do have a stake in society and that, effectively, the rest of society really does want them to be able to make a success of their lives.

Sure, with around 800,000 people reaching 18 every year, this would cost a lot - around €50 billion, to be precise. But it might be worth it.  The alternative, of course, is to reduce the €300 sum reserved for the savings pot to a more affordable amount.

What would happen to other welfare payments? 

It seems to me clear that if there was,a radical reform of the taxation system that allowed everyone over 18 to have a basic income of  €600  (€300 for under 18s), it might be possible to get rid of a significant proportion of the current mechanims. This issue is clearly critical. If the Basic Income was used to get rid of all the current social security system, it could be viewed as a very right wing liberal agenda aimed at rolling back the role of the state. On the other hand, if the Basic Income was only used to replace benefits that were clearly redundant, it really could be just thought of as a useful simplification of what is currently a very unwieldy and complex system.

The fact is that the take up of many of the exisiting benefits is often poor. In many cases, potential claimants are simply unaware that they are entitled to receive the payments. In other cases, they may know about the scheme, but find the administration too daunting.

Rolling benefits into a single Basic Income could thus have very beneficial effects by avoiding such problems and making sure that everyone gets treated in the same way.

So, let me be more specific. I have looked carefully at the range of welfare payments that currently exist in France with an aim to choosing those ones which could reasonably be dropped following the introduction of a Negative Taxation based Basic Income scheme.

I took the latest figures from the French Government that details spending on social security in 2015. There are a set of documents that can be found here that break spending down into 8 different areas

In all, there are some 75 different types of State aid schemes in France, that together cost close to €600 billion. You can find my analysis in a public Google Sheet file here.

Over three quarters of the nearly €600 billion budget goes on Pensions and Health care, and I think that we can safely ignore this expenditure as being something that cannot be replaced by the Basic Income payments.  When people have contributed to a Pensions scheme, they have a right to expect that they will get the pension they saved for. Likewise, payments for health care are, at least for me, something that should not be covered by a basic income. I am definitely not proposing a system like the one proposed in Trump's America, where individuals have to finance their own health care plans.

On the other hand, many of the other types of welfare payments could perhaps be integrated into the Unconditional Basic Income via a reform of the tax system. For example, many of the payments made to those with disabilities (totalling nearly €20 billion) could be integrated into a Basic Income scheme by simply having a higher Basic Income than the standard €600 a month for anyone unable to work. For example, currently €8.6 billion a year is paid to the roughly 1 million people eligible for the AAH (Allocations aux adultes handicapés). That works out at an average of around €700 a month. By increasing the Basic Income from €600 to €1300, this could allow those payments to be made withnin the same system.

A further €1.5 billion is spent on PCH (Prestation de Compensation du Handicap) and ACTP  (Allocation Compensatrice tierce personne) payments for people under 60 years old. These payments, made to around 250,000 people, work out at about €527 a month. Again, providing a larger Basic Income for such people would be a simple way to include such payments in a reformed system.

Similar arrangements could be used to compensate people with other disability payemenst such  as the ASI (Allocation supplémentaire d'invalidité) which pays about €265 a month to about 78,000 people, and the SSIAD (Service de soins infirmiers à domicile) that pays an average of €120 a month to about 212,000 people.

However, there are a number of other payments that could reasonably be dropped and replaced by the standard Basic Income. These include the Allocation Familiale (AF) which costs €12.8 billion and involves payments to over 5 million people, which averages aound €213 a month. Over 3.1 million people also receive an allocation de rentrée scolaire, costing nearly €2 billion a year and amounting to about €50 a month. These numbers are below the proposed €300 a month for looking after children under 18.

There is another scheme called the Prestation d'acceuil pour Jeune Enfant, which has various forms. The basic version costs over €4 billion a year, and is paid to over 1.8 million people, which averages €188 a month. There's a PAJE "Complement d'activité" costing €5.7 billion a year, paid out to 455,000 people and is about €151 a year.

Note however, that there is another PAJE - "assistante maternelle" that costs €5.7 billion, is paid to 750000 people and costs an average of €638 per month per person. It may be that to cover such costs, it might be necessary to increase the Basic Income payment to people with young children to compensate. But I note that there is another solution. Why not simply subsidise the creche system and make direct payments to the creche rather than making payments to parents, who then need to pay the creche? A similar solution may already be in place in the case of the "Acceuil des jeunes enfant (creches)", that costs over €5 billion a year. 

The state also spends a lot to provide people with help to get into work, with benefits like the ARCE (Aide à la reprise ou à la création d'entreprise) costing €612 million.
The Allocation d'aide au retour à l'emploie (ARE), costing nearly €29 billion a year, involves payments to nearly 2.5 million people. This works out at around €970 a month on average - above the proposed €600 a month proposed here. So it may be that a complement would be needed to prevent such people losing out.

Other benefits are aimed at reducing extreme poverty.  They include the RSA (revenu de solidarité active), costing over €10 billion a year and paid to 1.9 million people (an average of around €450 a month), and the RSA activité, costing €2 billion a year and paid to 915,000 people (an average of €194 a month). Over 5 million households receive the PPE (Prime pour l'Emploi), which costs over €2.1 billion a year, and provides an average of €34 a month.

Substantial sums are involved in pension payments. For example over €20 billion a years is spent on special payments for retired people who were not paid a salary, and around €3 billion for the so-called Minimum Vieillesse - a sort of basic income for the retired.

But overall, if we take the 60 or so different payment mechanisms currently in place that are not related to pensions or health, there is a total of around €169 billion  in payments that could potentially be integrated into a Basic Income scheme that involved a fundamental rewrite of the tax system.

It seems almost incredible. How is it possible to cover much of the costs of these benefits using a reform to the tax system that is itself self-financing? Actually, when you think about it, in makes sense. The current version of the income tax system currenty provides money for the government. The amount it provides is pretty close to the numbers I have been talking about here (for example, income tax provided around €146 billion in revenue for the French goverment in 2010). By reworking the whole system, we have simply diverted that same amount of money into peoples' pockets without having a separate tax and welfare system.

In a nutshell, we would have shifted from a system where Income tax provides around €170 billion a year that effectively gets used to finance the benefits system, to one where the Income tax system provides no actual revenue for the state, but where the requirements of the welfare system are covered by the negative tax mechanism.

The ultimate question thus becomes whether voters would actually want to keep the current extremely complex tax system with multiple tax bands with hundreds of tax loops,  and an equally complex benefits system that many people in need can't use because it is too complicated for them, or switch to a very simple streamlined reformed tax system where everything, including benefits, are all done with a single system that everyone can understand.

There are, in fact, a whole host of reasons why a Universal Basic Income would be a great idea. My analysis of how it could be implemented in France suggests that there is essentially no reason for not going for it. And the sooner the better.

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