Friday, 1 May 2020

Killer Arguments Against Citizen's Income, Not (28)

I'm sure I've covered this before, but it has raised its ugly head again (@CentreThinkTank on Twitter, who are otherwise pretty sound on all sorts of issues).

For some reason, they (like a lot of centre-right people) think Negative Income Tax is better than Citizen's Income because it can be 'targeted' at lower earners and so it is cheaper than paying it to everybody, including people 'who don't need it'.

As Sam Bowman at the Adam Smith Institute explains, The Negative Income Tax and Basic Income are pretty much the same thing.

His article is logically and mathematically correct, but I find it helpful to look at a real-life example...

A real life example

Ireland used to have* a hybrid system as follows, which I think is the best combination of the two:

1. Unemployment benefit was €300 a month.

2. There was, officially, no income-tax free personal allowance.

3. People in work received a 'tax credit' of €300 per month against their PAYE liabilities.

4. PAYE was calculated as follows:

step 1: multiply gross pay by 30% on all earnings (up to the higher rate tax threshold) = PAYE due.

step 2: reduce each person's PAYE by €300 each month (but not below zero)

5. If an unemployed person took on some some part-time work, he continued to receive the unemployment benefit but didn't get the tax credit as well. He had PAYE deducted at the flat 30% on all his earnings.

Worked examples:

The unemployed person gets net income €300 a month.

An unemployed person takes on some part-time work, €500 gross a month. Net of 30% tax he earns €350 and keeps his €300 unemployment benefit. Net income €650.

A low earner on exactly €1,000 a month looks at his payslip and sees PAYE deducted zero (the 30% x €1,000 and the tax credit exactly cancel out), net pay €1,000.

A medium earner on €2,500 a month looks at his payslip and sees PAYE deducted €450 (30% x €2,500 = €750, less €300 tax credit).


The final outcome (in terms of net income) is exactly the same whether you call the €300 'unemployment benefit' or 'tax credit' or 'negative income tax', or 'citizen's income'.

The 30% is the same whether you call it 'means-testing' or 'claw-back of unemployment benefit' or 'income tax'.

The majority earning more than €1,000 a month couldn't care less if you call it a €300 'tax credit' or a €1,000 'tax-free personal allowance'.

The part-timer on €500 a month should be indifferent whether he gets net pay €350 and €300 unemployment benefit; or whether he gets €500 gross pay and €150 negative income tax (being 30% x the excess of the notional tax-free personal allowance over his gross pay).

The difference here is psychological. We want the unemployed to take on low-paid or part-time work. If we say "You can keep your €300 unemployment benefit and keep 70% of your gross earnings", they won't miss the 30% tax deducted because they never had it. That is more of an incentive than saying "You can keep all the €500 you earn, but we will make you fill in some forms and will reduce your unemployment benefit by half".

It is impossible to say whether the Irish system was more like Citizen's Income or more like Negative Income Tax. Because in terms of the final outcome, they are identical and indistinguishable!!

It's just a question of administrative simplicity and minimising fraud and error. With NIT, you need a separate system for calculating NIT and clawing it back; with CI, the claimant just gets a BR tax code, so pays tax on all his earnings - the clawing back is done via the normal PAYE system. So the CI system makes life easier for the minority at the margins of employment, and those are the people we should be concerned with. For the long term-unemployed and the majority earning more than €1,000 a month, NIT and CI are the same.

With the Irish system, there would have been some people in work who continued to receive the unemployment benefit and get the tax credit. Boo. And there would have been some people who didn't get unemployment benefit and earned less than €1,000 a month, who didn't get the full value of the tax credit. Also boo.

Well, sure, but there will always be fraud and error in a welfare system and there will always be tax evasion if you try to tax output and earnings. And payroll departments and the tax office will always make a few mistakes.
* I've simplified this a bit and am doing this from memory. It's now more complicated, but you can recognise the basic model.