Social Wage Tax Credits:
A paper presented to the "Beyond Poverty" Conference;
Massey University, Albany, 14-16 March 1997.
© 1997Keith Rankin
Nothing shows so clearly the character of a society and its civilisation as does the fiscal policy it adopts.
Åsa Gunnarsson, Senior Lecturer in Tax Law, University of Umeå, Sweden; quoting Joseph Schumpeter.
Introduction - Tax Benefits and the Social Wage
I have been a consistent advocate for the introduction of the 'Universal Basic Income' or 'Negative Income Tax' approach to the income support problem (Rankin 1991, 1996). The essence of the approach is, firstly, to see the tax system and the benefit system as part of an integrated whole, not as polar opposites. The second feature is that this approach provides a welfare safety net without holes, giving everyone access to a guaranteed minimum income. The third essential feature is that every individual is entitled to receive some form of benefit as an unconditional property right - a social dividend, or a citizen's income (Meade 1993 p.15, Clark 1996 p.400). That right follows from the realisation that our natural and social inheritance belongs to the public domain; it is 'owned' collectively rather than individually (Clark 1996, p.404).
One way to approach the fiscal problem is to take the view of classical economics that taxes are proportional to income, and that deviations from proportionality (concessions, rebates, credits, allowances, surcharges) constitute the "inequality of taxation" (Mill, p.802). For John Stuart Mill, a classical economist, all benefits and surcharges are inequalities, and fiscal inequalities are tax benefits or surtaxes. In this context, inequalities are not necessarily bad. Table 1 shows tax benefits in New Zealand in 1997, based on a proportional tax rate of 33 percent, the company tax rate.
As is customary with graduated tax scales, high income recipients receive higher tax benefits. An alternative policy of equal tax benefits can be called, after Atkinson (1995), "Basic Income / Flat Tax" (BI/FT). This contrasts with the familiar "Social Insurance / Graduated Tax" approach. When, as in BI/FT, basic incomes are integrated into an otherwise proportional tax scale, a neatly progressive fiscal system emerges. Raising the tax rate and the amount of the universal benefit leads to increased progressivity; ie to a less unequal income distribution.
I wish to expand the BI/FT idea, by locating universal tax benefits firmly within the broader concept of the 'social wage'. Economic theory recognises that social rates of return differ from private rates of return. The 'social wage' concept follows from this insight. The social wage, while lacking a firm definition (Saunders 1994, pp.163-164), is usually taken to mean the social expenditure of government. Given the innate social character of government, the social wage can be taken as all government spending, including universal tax benefits. The name I favour for a universal tax benefit is 'Social Wage Tax Credit' (SWTC); a benefit, as constructed in Table 2, located firmly within the whole of public expenditure; a social dividend within a social wage, complementary to key expenditure items such as education and health.
To construct a social dividend from existing tax benefits, a new inequality arises: a 'low income surtax' (LIS). The SWTC is a part of the social wage, while the LIS can be regarded as a special tax, as is, for example, the surcharge on New Zealand Superannuation. An officially recognised SWTC would be a transparent benefit, as visible to the public as are, for example, unemployment benefits. Following the elimination of low income surtaxes, the SWTC represents a path to a Universal Basic Income (UBI).
Objections to a Universal Basic Income
There are two substantial objections to the immediate introduction of a UBI as a means of replacing 'first-tier' benefits. They relate to the affordability of the concept and the incentive to work. It is true that an adequate basic income requires an income tax rate well in excess of 33 percent. Having noted that, taxation net of UBI need not be more onerous than it was in New Zealand in 1986-88, or in many other western countries which have income tax rates above 40 percent. With a tax rate of 43 percent, it is possible to pay an adult UBI of $9,000 in New Zealand in 1997, without any cuts to existing non-cash social wage expenditure (Rankin, 1996 p.13).
Unlike a UBI, a social dividend - which has no adequacy provision - can be paid given any level of taxation. Combining even a low SWTC with an adequate second-tier benefit can ensure that the three features outlined in my opening paragraph are fulfilled. Significant and affordable improvements can be made to New Zealand's benefit system in 1997 or 1998, without requiring any funding in addition to that already allocated to the 1998 tax cuts.
The 'incentive' objection results from the fact that an unconditional income sufficient for a person to subsist on would serve as an incentive for persons to withdraw from paid work, or to significantly reduce their hours of work. This was called the "no free lunch" objection by Claus Offe at the 1996 conference of the Basic Income European Network in Vienna. The alleged problem is, of course, also one of the strengths of the UBI. A withdrawal from paid work makes possible a contribution through unpaid work. And, in a society in which many people work long hours, especially parents of dependent children, while many other people are involuntarily unemployed or underemployed, some people working less make it possible for others to work more, using market incentives rather than coercive 'workfare' measures to guide them.
The objection remains to be addressed. It was noted at the Vienna conference that the problem is particularly important with respect to school leavers, living with their parents, who may never have been in paid work, and for whom a UBI may seem quite generous. The problem with respect to young people can be addressed by paying the UBI through an organisation to which they are affiliated but not necessarily employed by (eg a tertiary education provider). The majority of the population could receive their UBI, as a tax credit, with their wages.
The more general objection can be met by noting that, where (as in North America) negative income taxes have been piloted, there was some reduction in parental overwork (Robins 1985, Baffoe-Bonnie 1995) but no mass withdrawals from the paid workforce (Burtless 1978). Economic theory is ambivalent, because there are two incentive effects involved - a 'substitution' (ie price) effect and an income effect - which in many cases work in opposing directions. Thus, persons on high incomes, facing a higher tax rate under a UBI, might need to work more in order to maintain their standards of affluence. On the other hand, the cash reward for additional work would be smaller, creating a substitution disincentive. The most important incentive effect is pro-employment; the encouragement for those not employed to seek and accept part-time work, knowing that they stand to lose, at most, only their supplementary assistance.
As with the 'affordability' objection, the 'incentive' objection can be by-passed entirely in the case of an SWTC set sufficiently below the social minimum to not qualify as a UBI. When a social dividend serves as a gradual pathway to a UBI, the incentive problem barely arises, because each increase in the dividend could be small enough to ensure against mass withdrawals from the labour force. Changes occurring 'at the margin' would be evolutionary rather than revolutionary.
In 1995, journalist Jane Clifton called the 1996 tax cuts "the long awaited social dividend". In fact, to be able to pay true social dividends, the income tax scale needs to be officially reconstructed along the lines depicted in Table 2. The only real objection to such an SWTC being raised in lieu of the 1998 tax cuts is self-interest on the part of higher income earners, who gained the biggest increases in their tax benefits in 1996, and stand to do so again in 1998. Indeed, given a wide ideological support base for the basic income approach (Clark 1996, p.401), a Social Wage Tax Credit can be regarded as an unobjectionable move in the direction of a Universal Basic Income.
Benefits in New Zealand in 1997-98
To determine who gets least benefits in New Zealand, it is necessary to closely examine the present income tax scale. Company tax (a form of income tax), set at a low 33 percent, is also the upper personal rate. Tax benefits, as shown in Table 1, arise, in particular, because the first $34,200 of annual income is taxed at a concessionary rate. As a result, a person earning less than $34,200 per annum gets a smaller tax benefit than a person grossing $34,200 or more. Figure 1 below shows tax benefits in relation to other standard benefits available to some income-deficient adults.
My treatment of the maximum tax benefit (currently $3,933) as a Social Wage Tax Credit is shown in Table 2. Any person whose total benefits comes out at less than this amount can be said to be paying a surcharge on their SWTC. It is low income recipients - those who get the smallest tax benefits and no first-tier benefits - who are paying the largest Low Income Surtaxes (LIS). Figure 1 shows the LIS as a reduction of benefit entitlement incurred by low-middle income recipients.
The first step towards the creation of a UBI is to eliminate the LIS, thereby legitimating tax benefits as genuine social dividends, rather than as hand-outs to those on higher incomes. That would not in itself give more money to beneficiaries, but by giving improved support to part-time and other low paid workers, and to women in relationships, it could help beneficiaries change some aspects of their present circumstances. Furthermore, beneficiaries would be able to receive increased 'tax cuts' - ie increases to the SWTC - in the future.
Figure 1 is like a see-saw (with a fulcrum at $20,000), showing higher benefits at each end of the income spectrum. The LIS will increase with the 1998 tax cuts. If the government also moves to cut benefits - eg by making them more conditional, such as through the imposition of time limits - then the combined impact of benefit cuts and tax cuts in 1998 will be to reweight the benefit see-saw at both ends, a net transfer from those on lower incomes to those on higher incomes. On the other hand, a social dividend system, implemented as an alternative to the 1998 tax cuts, would guarantee every adult a benefit equal to at least the amount of benefit automatically available to our richest citizens. Figure 2 shows an example, based on an SWTC set at $4,000. It is this universal approach, ironically, that most efficiently achieves the target that the tax cuts were supposed to be directed towards: low income workers and parents of dependent children.
The see-saw in Figure 2, unlike that in Figure1, is clearly balanced in favour of lower income recipients. While the SWTC depicted falls well short of a Universal Basic Income, it is at least a step in that direction. It points to a consolidation of existing benefits into something like a Guaranteed Minimum Income (GMI) of say $10,000, incorporating an unconditional Social Wage Tax Credit of $4,000 and a means-tested "Participation Income" (Atkinson 1993) of $6,000. For persons of retirement age, the Participation Income would be replaced by a Guaranteed Retirement Income (GRI), and could be set at a higher level. The SWTC would serve as a genuine universal superannuation.
The political 'right' tends to favour either of two alternatives to the construction of Figure 2. The more common right-wing approach in the 1990s is to emphasise tax cuts and conditional benefits. Such advocates would like to eliminate the universal benefit shown in Figure 2, leaving only the supplementary assistance. With the help of a low flat tax, as ACT New Zealand advocate, they could create a see-saw diagram that shows only low income recipients as receiving benefits. The problem is that taxes and the social wage become much reduced under such a fiscal regime, leaving individual and company tax payers paying very little for public domain resources. If one was to reconstruct the see-saw diagram using a tax rate that accurately reflected the contribution of public domain inputs to national income, then the tax benefits depicted in Figure 1 would be shown to be understated and a redrawn see-saw would be heavily weighted in favour of high income recipients. Atkinson (1995, pp.2,154) sees 40 percent as an appropriate flat tax rate for Great Britain and the European Union. A reconstruction of Table 1 and Figure 1 based on 40% (or more) instead of 33% would reveal very high tax benefits to corporate New Zealand and its overpaid employees.
The other very different solution to the benefit problem that has had the favour of the right is the elimination of supplementary assistance, leaving only universal benefits. While this approach had support across the political spectrum (Tobin 1970), the Negative Income Tax proposals, influential in the 1970s, have been linked with conservative economists such as Milton Friedman (eg Friedman 1962, p.192) whom the 'left' distrust. Universal benefits can serve the interests of those who favour a low social wage, but only so long as the benefits are low, linked to the elimination of all other forms of income support, and funded from the social wage by reducing other items of public expenditure. Nevertheless, despite its associations with the 'right' in the 1970s, the principle of universal benefits is strongly opposed by conservatives and neoliberals in the 1990s.
Towards a Universal Basic Income
As in the case of Clifton's social dividends, Social Wage Tax Credits can be raised with economic growth without any change in the rate of income tax or the introduction of any other kind of tax. Because the most important determinants of New Zealand's standard of living are those factors which we have inherited as a society, and because the social inheritance process proceeds over time, we should receive higher social dividends in each year of economic growth.
A future centre-left government - say a Labour-Alliance coalition - is likely to raise income taxes, total revenue, and social wage expenditure. In effect, that would constitute a revaluation of the public domain, our collective inheritance. While there are many other items of social wage expenditure that need attending to in addition to the provision of universal benefits, it would not be unreasonable to expect from such a government at least some increase in any SWTC that it might inherit from a centre-right administration.
A rise in the SWTC that is not accompanied by a proportionate rise in supplementary benefits can be taken as a move in the direction of a Universal Basic Income. In addition to raising income tax - or indeed as an alternative - such a government might raise or introduce other taxes such as a financial transactions tax. All taxes contribute to the social wage fund, from which tax benefits and other public expenditure are drawn. Nevertheless, income tax is particularly important, because, unlike consumption taxes, it is paid by foreign users of New Zealand's resources.
If the present Government were to reform the tax-benefit system as per Figure 2, I could imagine that a centre-left coalition, if it came to power in 1999, would raise enough revenue in 2000 to, among other things, set the SWTC at $5,000 and the GMI at $10,500. If the SWTC were then to rise by $1,000 every 5 years, and the GMI by $500 every 5 years, a UBI of $16,000 would be achieved in the year 2055. The means-tested Participation Income would be eliminated. Additional support would still exist for people with children or special needs, such as Family Support tax credits for low-income parents.
One scenario for the twenty-first century - the 'green' scenario - involves productivity growth but not any significant growth of per capita GDP (gross domestic product). Instead the composition of GDP might be changing, from the 'bads' Marilyn Waring (1988) has emphasised, to the goods and services that we really want. It also implies more leisure - shortened working days, working weeks, working years, or working lives - and an expansion of the unpaid work that contributes immensely to the social inheritance of future generations. This vision of productivity growth is one in which the market economy releases people from routine tasks that can be performed with minimal human labour, and from the many professional tasks which involve redressing bads, and allowing them to move into caring and creative tasks for which there is rarely much monetary reward. Some artists may end up being well paid, but most artists will not, and no artists can know whether they will be well paid when they commence their careers as artists.
The difficulty is that, under this latter scenario, there will be no mechanism such as economic growth to drive up the social wage. Therefore productivity growth in the market economy should be taken as a signal to politicians to push for higher income taxes and higher social dividends. After all, the principle sources of such productivity growth will have been factors not divisible into individual contributions. Given a lack of market mechanisms to justly distribute publicly-sourced wealth, then, in the absence of an increasing social dividend, the proceeds of our future social inheritance would continue to be concentrated into the hands of rentier capitalists and salaried insiders.
The future of 'civilised' societies will be determined by the obligation of those able to appropriate high rents from the market economy to share their gains with those less able or less willing to seek such rewards. Low private incomes arise on account of different private inheritances, different prices attributed to different skills, unemployment, entrepreneurial failure (which is essential in an innovating economy) and other misfortune, and differing perceptions of the importance of private income as measures of contribution and personal worth. High gross incomes arise from the combination of public and private resources. In a really free and efficient economic society, public domain resources earn social dividends. Such is the blueprint for the future of the welfare state; a cooperative rather than a charity; a world, beyond poverty, in which both paid and unpaid work are rewarded; a world in which we are free to contribute to the public domain as well as able to draw from it.
Fiscal policy - taxation and the social wage - can make or break societies. As Hillel Steiner (1992, p.81) suggests, a "just tax ... is one that takes from persons what they have no right to possess". A Social Wage Tax Credit, funded from a just income tax, is a human right in a truly developed society; a society that values its social capital; a society built on the concerted endeavours of all, living and dead. Such a social dividend, as a central component of the social wage, can lead us beyond poverty to a Universal Basic Income. New Zealand should follow the UBI way, not the USA way. New Zealand should lead the way.
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This paper is published in the Beyond Poverty Conference Proceedings,
ed. Mike O'Brien and Celia Briar, available for NZ$15 from: