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Saturday, November 12, 2011

GMI - A Response to Treasury’s Economic Analysis

The New Zealand Treasury has produced a report on ‘A Guaranteed Minimum Income for New Zealand (A Preliminary Assessment of the Tax and Equity Implications)' at the behest of the Welfare Working Group.

Given my interest in a Shared Base Income (SBI), which is similar to a Guaranteed Minimum Income (GMI) – both are universal incomes – and the looming general election, I have decided to provide a response to Treasury's analysis, as it is seriously flawed.

I should start with the first point that no policy instrument should be introduced in isolation, especially a universal income, but this is how the GMI is treated in the Treasury’s analysis. Despite this, there is merit in responding, as their analysis reflects a general economic response grounded in the belief that people's primary motivations must be financial, when this is in fact a structural outcome of our system, and not a primary motivation when a base income is guaranteed.

The Treasury report’s analysis is divided into five main sections (I’ll ignore the overseas examples in Section 7 in order to focus on the GMT, and I’ll ignore the Executive Summary in Section 1 as that is simply a summary of the body of the report which I am already responding to.

“A GMI scheme has a number of policy implications. These will be discussed in the following sections: Section 2 discusses equity and fairness; Section 3 covers the efficiency and growth implications including the labour market effects; Section 4 discusses the fiscal cost; Section 5 the integrity and coherence of the tax system; Section 6 covers administration and compliance; …” p5, A Guaranteed Minimum Income for New Zealand (Oct 2010), The Treasury.

I shall deal with each of the substantive points the Treasury makes in the sections it has created. Generally I quote the point(s) and then respond, but I focus more on the negative analysis (as that's what I have issue with) than the positive (you can read that yourself in their report). To begin:

“2. Equity & Fairness”

“The universal, unconditional nature of GMI means it is generally an equitable policy in a redistributive sense. The broad nature of the GMI also means every person is covered and none are allowed to slip through the social safety net. The Gini coefficients conform this…” p5

All well and good as this is the purpose of a universal income: everyone receives it as of right, because everyone is entitled to an income that enables them to realise their potential, a freedom only a universal income can grant.

“In both cases the primary losers would be single-person households without children earning over (roughly) $50,000.” p7

“Losers” in the rather emotive vocabulary the Treasury uses, in the sense that they pay more tax than those earning less than $50,000 - though of course they still earn more, which really means they're 'winners' (in the fiscal sense that Treasury and economists invariably use).

“Many beneficiaries, including second and third tier assistance, receive an income in excess of $300 per week. These include carers, sole parents and the disabled. Despite the removal of abatement rates, many of these beneficiaries are unable to undertake part-time work. Thus, a GMI would distribute money away from people with the most need for government assistance, towards those who have plenty of opportunities but in some cases choose not to work. Super annuitants would also receive less…” p7-8

A guaranteed minimum income (GMI) does not entail that all targeted benefits must be eliminated. The Treasury’s isolation of its analysis to a single policy change may be practical for analytical purposes, but is not realistic.

“3. Efficiency & Growth”

“There are many opposing incentives on the labour market. The removal of the abatement regime for beneficiaries would, in isolation, reduce the disincentive to undertake part-time work thereby boosting labour market supply. On the other hand some lower income earners would choose not to work or reduce their hours at a benefit rate of $300 per week, and higher tax rates on individual earnings would cause many skilled/higher income earners to reduce their hours or migrate to countries with lower tax rates.” p8

The GMI is not a “benefit”, it is a right – the right that every human being has to a basic income. Treasury has simply not grasped that a basic income, free of government control, is an enabler of people, not a disabler.

The 'reduction in hours worked' is a desirable outcome that would result in higher productivity. A six hour a day is more productive per hour than a longer day. If a GMI reduces per capita working hours to a level that is more productive, New Zealand will see an increase in productivity per worker, which is beneficial to New Zealand and to New Zealanders.

New Zealanders who live here do not come or stay here for 'lower taxes'. Income security is of more vital importance to people than tax levels. If New Zealand provided the highest level of real income security in the world many more people would want to come and work here, and many more would want to stay.

“…benefit levels have little to no effect on higher skilled individuals. Instead, higher tax rates are much more likely to discourage effort, implying important efficiency effects for taxation.”

There are other reasons for doing things than income and the tax rate. People work to make a contribution that fulfils their potential, this is what makes work meaningful, and is the true reward. A satisfactory income is of course necessary, but once that’s in place people get to work doing what they’re best at if they possibly can.

The trouble with Treasury (and economics generally) is that they suppose that people’s only motivation for doing things is financial, when in reality people would rather have a satisfactory, secure income locked in place so that they can forget about that aspect and get on to contributing in a way that actually unlocks their potential.

“…the income effect associated with the higher out of work income associated with the GMI could discourage people from taking entry level jobs.” p8

No, the GMI enables people to take entry level jobs. Entry level jobs do not pay well. A GMI supplements that income, it enables people to take entry level jobs and, indeed, to change careers using entry level jobs.

“The GMI could give employees a degree of additional bargaining power, giving them the option of leaving a job with unsatisfactory working conditions. The higher safety net also encourages greater risk-taking and entrepreneurial activity as people will have time to set up small businesses to create employment. However, we do not consider that this would offset the negative impacts of the GMI on the labour market discussed above.” p8

The GMI would give employees a degree of additional bargaining power, as well as enable greater entrepreneurial activity. And given that I have just shown how faulty the Treasury’s analysis is on the “negative aspects” it can be clearly recognised that all these positive aspects will act in synchrony to create a much better functioning labour market, economy and society.

“The net effect is theoretically indeterminate but it appears likely that the net effect would be to weaken education and training incentives.” p9

Total nonsense. The GMI clearly enables any person of any age greater ability to access education, whether through formal or informal channels. Indeed it allows people to self-educate, to choose the most cost-effective, least restrictive educational methods. This should be complemented by physical faculties available to all and communications that alert the public to the value of education, understanding and knowledge.

“New Zealand has one of the most internationally mobile labour forces in the OECD. The effect on migration incentives is similar to those on education. Incentives on the unskilled to migrate would reduce, due to increased incomes in New Zealand, while the higher skilled would face stronger incentives to emigrate, due to the increase in the gap in take-home real incomes between NZ and comparator countries, particularly Australia.” p9

Again, Treasury in its economic myopia, cannot see that income is not the primary driver of human contribution. A secure base income and home is what is necessary to keeping unskilled and higher skilled people in New Zealand. A GMI, and good policy around housing, can provide this for all New Zealanders. Once this is in place the focus and driver of people’s contribution is not primarily ever higher incomes, it is rather the fulfilment gained from realising their potential in their contributions. To reiterate, meaningful work and a secure income matters more than ever higher incomes and ever lower taxes. People would stay and come here if we had a secure base income that enabled them to contribute to the best of their ability.

It should also be noted that in a shared base income, everyone shares in the rewards from their contributions, because it is dependent on the production of the nation to which all people contribute.

“Economic Growth”
“…the literature does provide a range of estimates and it is not clear that this relationship would hold for such a large change in fiscal policy. However, it suggests that there would likely be significant growth consequences from the introduction of a GMI.” p10

Yes, and that growth would be up. At this point the Treasury tries to (unconvincingly) introduce estimates, without evidence, that a GMI would reduce GDP growth. It is unconvincing (and wrong) and to its credit, Treasury does note that the ‘relationship’ might not ‘hold for such a large change in fiscal policy’. Unfortunately Treasury then goes on to analyse these ‘significant growth consequences’ as if they would hold, which there is no point discussing, given they would not.

“The form of taxation used to fund GMI schemes is also important for growth. OECD studies show that income taxes (including personal and corporate income taxes), are among the most damaging for economic growth.” p11

I doubt that the OECD analysis is of income taxes with a GMI, in which case their analysis is inapplicable here.

“Significantly increasing the tax levied on the personal income tax base has negative implications for savings, investment and productivity.” p11

By itself it might, but with a GMI it does not. It is disingenuous of the Treasury to take on gospel the word of previous studies on income taxes that take no account of a GMI when the issue in discussion here is a GMI.

“An increase in personal tax rates to these levels would also significantly increases tax paid by domestic investors (although non-resident investors would not be effected). This would increase the cost of domestically sourced equity finance.” p11

It is a stretch to question domestic investment in the analysis of a GMI. This aspect requires complimentary policy change to reflect the principle that finance isn't the primary incentive of humankind in a tolerant society built on equal opportunity for all people.

“4. Fiscal Cost”

The calculated fiscal cost of a GMI is roughly a 50% tax rate. This is also the proposed fair tax rate of a Shared Base Income (fair because it is half for the individual and half for all). The difference is that a Shared Base Income starts and stays at this rate – with the income itself varying according to the revenue generated and, indirectly, the level of Gross Domestic Product (GDP). The point being that everyone becomes aware of their relationship to the economy and to everyone else, provoking a greater sense of community and sharing.

It is also the case that a shared base income is a flat half share of all the income from profits and trade – so it includes corporate profit.

“5. Integrity and Coherence”

“The universal nature of the GMI payments would reduce integrity pressures on the current social assistance structure. However, the high rate of personal tax, particularly when combined with the high effective marginal tax rates for many tax payers, would create incentives for individuals to structure their affairs in such a way as to pay a lower rate (for example, the 28% company tax rate).” p12

Obviously this straw man argument is negated if we apply the flat tax across the board. It seems pretty ridiculous not to expect corporates to pay the same tax on their profits as individuals do on their incomes.

“The tax system proposed would be internally coherent as it taxes all forms of taxable income at the same rate. However, the degree of non-alignment between the personal rate and the corporate tax would cause the tax system to become less coherent.”

Again, this same obvious straw man is negated if we apply the flat tax rate across the board.

“6. Administration and Compliance”

“A GMI scheme would be administratively efficient as it lowers the administrative, management and operating costs of the current social assistance and tax systems. The scheme is also simple to understand and the cost is transparent to taxpayers.”

This part is correct.

“However, the change will have transitional administration and compliance costs and the scheme could increase the costs of enforcement; in particular in relation to integrity measures needed to protect the difference between the personal and company rates, and in relation to audit activity.”

And of course, again, we wouldn’t expect human beings to pay a fair tax rate and corporates not to. The tax rate would be flat and fair across the board.

“8. Conclusion”

So in conclusion, a GMI and even more, a Shared Base Income, decreases hours worked in formal employment but does so with the benefit of increasing the productivity of those remaining hours.

It leads to less emigration of skilled workers, indeed, it is more likely to attract them into the country and keep them.

It encourages people to take entry level jobs as people have an income to complement them, and it encourage further education and training for the same reason.

It also enables greater entrepreneurial activity and the creation of new, innovative business which provides greater employment and greater productivity.

It also helps eliminate poverty, removes the disincentives that benefits have (as well as the stigma) and gives employees more bargaining power for greater flexibility.

Most of all it alters the structural incentives to ones that reflect people’s owner inner drives to realise their potential in what they do, a drive that is naturally far stronger than the financial acquisition drive (and far more fulfilling) when a GMI or Shared Base Income is in place.

Ben Wallace
Author The Common Purpose Manifesto
LinkedIn - http://nz.linkedin.com/in/benwallace13
Twitter - http://twitter.com/BenDWallace

Treasury Report: A Guaranteed Minimum Income for New Zealand

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