Effectively Progressive Income Tax (EPIT) aka Basic Income Flat Tax (BIFT)

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Effectively Progressive Income Tax (EPIT)aka
Basic Income Flat Tax (BIFT)

• Richard Parncutt, Uni Graz, 14 June 2009

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Progressive income tax in Austria2005-2009
Net income (k/yr)
Gross income (k /yr)
Broken line Extrapolated high rate ? BI 8.5
k/yr 708 /mo
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Progressive income tax in Australia1 1.7
45
Net income (k/yr)
40
30
23
15
0
Gross income (k/yr)
Broken line Extrapolated high rate ? BI
23k/yr 13.1 k/yr 1090 /mo
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Progressive income tax in Canadafederal not
provincial 1 1.6
Net income (k/yr)
11.4
Gross income (k/yr)
Parameter marginal tax rates Broken line
Extrapolated high rate ? 11.4k/yr 7.28 k/yr
607 /mo
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Welfare trapsSozialhilfefalle Zuverdienstgrenze

• Limited extra income of welfare recipients
• welfare is cut suddenly or gradually
• rising gross income ? constant/falling net income
• local implicit tax rate of 100 or more
• Suppresses incentive
• Reinforces rigid class identity
• Generates resentment and class conflict

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Basic IncomePhilippe Van Parijs, 2000 Basic
Income Earth Network

• Advantages
• no means test
• no welfare traps
• less bureacracy
• willingness not tested
• less class stigma
• open and honest
• freedom
• no poverty
• more risk taking

• Features
• unconditional
• individual
• as handout or tax deduction
• Questions
• citizens?
• children?
• pensioners?

Disadvantages reduces incentive, changes wage
structure
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Flat income taxneo-cons, neo-libs

• Advantages
• can be paid immediately
• reduces tax evasion/avoidance
• promotes economic growth
• the poor rich dont feel discriminated
• Disadvantages
• increases rich-poor divide
• linked to neo-liberal and far-right politics

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My hidden agenda

• Centre-left liberal-green
• Eliminate poverty
• Resolve left-right conflict
• Transparency, democracy
• Political realism
• Co-supervision of PhD?
• Topic detailed economic consequences

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Basic Income Flat Tax BIFTaka negative income
tax plus flat taxcf. Friedman Rose (1980)
Atkinson (1995) Strengmann-Kuhn (2005)
break-even point
basic income
Arbitrary parameters BI 500 /mo., FT
50 Could be BI 700 /mo, FT 40
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Effectively Progressive Income Tax(EPIT) with BI
500 (/mo) and FT 50
Gross income (K/mo) Net income (K/mo) Effective tax rate
0 0.5 - 8
1 1 0
2 1.5 25
3 2 33
4 2.5 37.5
5 3 40
10 5.5 45
100 50.5 49.5
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Just one kind of progressivity

• BI plus progressive tax?
• ? two simultaneous sources of progressivity!
• Just one progressive system allows for any
• level of progressivity
• progress toward income equity
• Combining two progressive systems creates
• unnecessary complexity, reduced transparency
• opportunities for clever tax advisers

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Setting the parameters

• Basic income (500800 /mo)
• high enough to eliminate poverty
• poverty line in Austria 60 median wage 900
• low enough to maintain incentive
• Tax rate (3550)
• high enough to finance BI etc.
• low enough to maintain incentive
• Adjustment procedure
• left versus right politics
• economic models

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Basic income for childrenreplaces other
comparable benefits

• Less than for adults?
• lower expectations less political power
• More than for adults? Childcare wage
• 10 hours x 30 days x 10 3000/month!
• high rate of poverty among single parents
• Same BI for adults and children?
• less arbitrary democratic ideology (equality)
• Problem
• low work incentive for large unemployed families

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Special casestypical low income earners

• Single parents
• BI for parent and each child
• free creche, kindergarten, school, university
• Pensioners
• same BI as everyone else
• other pension schemes in addition (taxed)
• Disabled
• higher rates of BI
• BI depends on ability, not willingness to work

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Realism and equity in taxation

• Amount depends on ability to pay
• income tax (variable capital)
• wealth tax (constant capital)

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Flat wealth taxes

• ...are effectively progressive because only the
  rich have significant wealth
• (middle classes have relatively high income but
  low capital)
• Example 0.2 / year

Capital () Tax (/yr)
1 0.002
1 000 2
1 000 000 2 000
1 000 000 000 2 000 000
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Flat wealth taxes

• What about the family farm?
• What about Grannys house?
• Anyone with wealth
• can convert it to other forms of wealth
• is better off than those with less wealth
• should compete equally in a free market
• ? Treat everyone equally

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Flat taxesthat reduce the rich-poor gap

• Capital gains tax (incl. income tax)
• only progressive with basic income
• one flat tax for all people and all income
• wages, gifts, inheritance, interest, speculation
• Wealth tax
• one flat rate for all all people and all wealth
• bank, home, farm, company, yacht

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Flat wealth tax Advantages

• reduces rich-poor gap
• accesses large resources
• reduces tax evasion
• shifting wealth around doesnt help
• easier to control
• total wealth tax a total taxable wealth

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Taxing the poorvalue-added tax VAT (MWSt)

• VAT on basic commodities is regressive
• VAT on luxury goods is progressive

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Problems that BIFT addresses

• Poverty
• scandalous!
• Welfare traps
• suppress incentive and class mobility
• Inequity, injustice
• black markets
• tax avoidance, welfare fraud
• Inefficiency
• complexity ? dependence on advice
• armies of accountants and bureaucrats
• uninformed democracy

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BIFT Priorities (1)

• More important
• gross-net relationship
• Less important
• terminology for BI and FT
• history of terms ideology
• specific levels of BI and FT

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BIFT Priorities (2)

• More important
• reducing rich-poor gap (left politics)
• motivating productivity (right politics)
• Less important
• needs or desires of specific groups
• Rules of thumb
• no such thing as a free lunch
• advantage for me disadvantage for you

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BIFT Priorities (3)

• Standard of living
• no poverty
• Freedom
• choice, privacy, mobility
• Democracy
• rights, transparency, people power
• Socialism
• fair distribution of resources
• Capitalism
• incentive, production, wealth
• Efficiency
• waste reduction

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Socialists and capitalistscf. humanities
sciences, Palestine Israel

• Like any other major conflict
• strong identities based on difference
• ignorance of Other group ? prejudice
• assumed moral superiority
• Conflict resolution
• mutual recognition
• fairness, transparency
• reduction of distance

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Global inclusive politics Approach

• Global
• focus on biggest global problems
• rational, co-operative, global solutions
• think globally, act locally
• Moral
• universal religious and secular morality
• altruism, honesty, human rights

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Global inclusive politics Issues

• poverty reduction local and global
• environment, global warming
• intercultural conflict, weapons
• global distribution of resources
• population growth
• global democracy