A Basic Income via Negative Income Tax for the UK

With the UK's general election in a few days time (9th June 2017), I thought it might be interesting to see how my proposal for introducing a Basic Income based on Negative Income Tax might work in the UK. I had already taken the percentiles of income in France to show that you could provide a monthly Basic Income of (say) €600 for all adults and pay for the whole thing with a flat rate tax on all additional income of under 30%.

What would happen in the UK?

Well, I obtained the official figures from the UK government on the income and tax paid for all percentiles in the UK, and calculated what would happen if you gave a basic income of £10000 to everyone, and then required people to pay a flat rate tax on all additional income.

I've uploaded the file to Google Sheets, so you can see the details here, but the bottom line is as follows. If you want to provide £10,000 to all tax payers in the form of a Basic Unconditional Income, it would be possible to finance the whole thing by taxing all additional income at 34.4%. Anyone earning less than £29,500 would get a net payment from the state via the tax system, scaling from £10,000 for people in the first percentile down to nothing if you are at the 66th percentile. But that means that 2/3 of the population would be net receivers from the system.

The system would be in equilibrium because the money needed to make those payments would be entirely paid for by the 34% of the population earning more than £29,500 a year. The following graph shows how it works.

The blue line shows how annual income changes with percentile of the population. The red line plots the income following the introduction of a £10000 annual Basic Income. And the yellow line shows the net transfer - positive for the bottom 66% of the population (those earning less than £29,500) and negative for those earning more.

As in the French version, the £29,500 figure is a magic cut off point. It's simply the point at which the £10000 of It is easy to vary the level of Basic Income while keeping the system neutral - you simply have to increas the flat rate tax to ensure that the top 34% of earners pay enough into the system to make the payments to the other 2/3 of the population.

Here's how the tax rate would change for different Basic Income rates:

• For a Basic Income of £8000 a year requires a flat rate income tax on additional income  of 27.5%
• For a Basic Income of £10000 a year, set the tax at 34.4%
• For a Basic Income of £12000 a year, set the tax at 41.2%
• For a Basic Income of £14000 a year, set the tax at 47.2%

In fact the rule is simple - each additional £2000 a year of Basic Income requires a hike in the flat rate tax of roughly 7%.

However,  it is important to realize that these numbers do not reflect the real rates of tax that people would pay. The following graph shows the effective tax rates paid under each of these four schemes as a function of income.

As you can see, tax rates are always 0% at around £29,500 of annual income and increase progressively as income goes up. But at £50,000 a year, even a £14,000 Basic Income would not require paying more than 22% in net tax.

It looks quite an attractive proposal. However, to be fair, I should note that with this scheme the UK government would not be raising any revenue from Income Tax. On the other hand, since people on low incomes would be getting quite substantial sums of money every month from the tax system, it would no longer be necessary to make a large number of the existing means tested welfare payments.

Those of you who are familiar with my ideas will know that I think that there are far better ways of earning revenue for the government- especially in the UK. The solution is to replace Income Tax as the main way for the government to raise revenue by a financial transaction tax. Given the incredible levels of financial transactions in the UK, a tiny tax of a fraction of 1% would easily allow Income Tax (and indeed other taxesà to be scrapped as a way to raise revenue. Instead, the system of negative income tax proposed here has only a redistributive function.

Isn't that what we need? In a world where the top 1% of the earners are taking an excessive share of the revenue, and where jobs are dissapearing so fast that those at the bottom are no longer able to hope to earn enough to live decently, we need to provide a was of redistributing the money to everyone.

Importantly, with the proposed system, even though people do get "paid for doing nothing", the system is such that it will be always interesting for people to go out an work to earn additional income. There a no poverty traps that block people in a world of hopeless means-tested welfare payments.