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Taxpayers Union Critique of the UBI just bonkers – again

Gareth MorganUncategorizedLeave a Comment

Today the Taxpayers Union – a lobby group that advocates minimal tax and State-provided education, health and social services – has released a report suggesting that the Unconditional Basic Income (UBI) will result in sky high tax rates and leave the most vulnerable worse off. The report is lightweight, and little more than zero tax advocacy dressed up as research. The TU has taken the same approach to this topic as it did to sugar taxes a few weeks ago and with which we pointed out the flaws.

Specifically, the following are some of the arguments in their contribution to the discussion on the UBI and why they are flawed.

1.  superannuitants would be worse off

No-one is suggesting the UBI would be introduced immediately, it would be transitioned in over a long period just as NZ Super itself was (the universal NZ Super payment began by paying a very small amount in the late 1930s, each year it was gradually increased and it wasn’t until the 1960s that the payment was substantial enough for it to be the only income transfer available to retired people).

Only people who are today under the age of 50 could be expected to retire under the UBI policy, the policy would not apply to existing superannuitants. The key question is whether someone aged, say 40 today, would be better or worse off in retirement under the policy. And the answer is if they earn the average wage now, have an average house, they will tend to be neither better nor worse off. For the 25 years prior to retirement they will receive the UBI on top of their wages. If they save a good portion of it they will have nest egg at retirement which they can use in retirement to supplement the UBI (which is more modest than today’s NZ Super).

2. taxing capital would see innovative industries move offshore

The Taxpayers Union, in accord with their disdain for all taxes let alone the redistribution those taxes fund through State-provided education, health and income transfers, does not acknowledge the tax loophole represented by imputed rent – in contrast to the 2001 McLeod Report, the 2010 Tax Working Group, and us in our 2011 book “The Big Kahuna”. Consequently it regards the closing of that tax loophole as we advocate as

“a massive new tax on investment and capital”

Therein lies the Taxpayers Union philosophical starting point. It disagrees with tax and government-intermediated services and transfers – except of course for law and order that it sees as necessary to protect the assets of property owners from the rest.

The Taxpayers Union actually supports zero company tax. Many companies pay full tax in New Zealand and they are handicapped by being honest contributors. If all capital is included in the tax net, the implicit handout to tax-avoiding users of capital will end – and yes they may disappear from the landscape but there will be other businesses willing to expand here – think of your local bookshop vs Amazon.

The race to the bottom mentality on corporate tax is just that – a race to the bottom. If your economy is based on flightly capital only interested in short-term gains you don’t have a strong basis for growth going forward. There won’t be the commitment to building skills within the firm, no long term investment in employees, markets or R and D. We’ve already seen the harm short term investors can do – the short term opportunistic buyers of NZ’s former state assets are a case in point – fly-by-night private equity firms owning your productive base does not a strong economy make.

Far better to offer investors a politically stable basis for business; a healthy, motivated and productive workforce; and a culture of innovation and cooperation – all by-products of the UBI policy.

The zero corporate tax mentality that underpins the Taxpayers Union position would see us all declare ourselves as corporates of course in order to avoid our income tax – precisely the end point this lobby group favours.

3. sole parents would be worse off:

There UBI policy is more flexible in the context of sole parents than the critics give it credit for. Each child has two parents, the UBI is paid to both whether they live together or not. It is totally feasible that the UBI of both parents could be required to be directed to support the children in the event of separation. In the Kahuna the amount paid per family would be $22,000 after tax – more than is paid to a sole parent family now.

As well, existing child support rules would need revamping in the event the UBI was introduced– currently the child support payments paid by the absent parent are held onto by IRD if the caregiver is supported by WiNZ. Under a UBI policy these would be passed onto the caregiver – boosting the income supporting the children yet again.

Moreover, there are potentially many market solutions to the financial stresses of sole parenthood. These are currently under-developed in New Zealand – an example would be life insurance. Life insurance provides capital and/or income for the remaining parent. Currently beneficiaries of life insurance policies could be penalised when they receive income from the policy (their WiNZ benefit would be reduced by the private income they receive). Under a UBI policy surviving parents would receive the full UBI payment irrespective of how large the life insurance payout was. It is easy to imagine other financial products being devised once the penalty implicit in the current system is removed.

4. Treasury costings of the UBI policy can be relied upon.

The 2010 Treasury report assumed all of the current administrative expenditure tied up in allocating Working for Families payments and WiNZ benefits would continue as it does now. Such an assumption was simply wrong, that’s one of the main points of the reform. What these costs would deliver in the event a UBI was introduced is hard to fathom – there is no gate to keep.

The costs of administering the current welfare system are high – over $1bn per annum if you just look at what IRD and MSD spend administering the system and over $2bn per annum if you add in the amounts written down from transfer-related loans such as student loans (these would be far less necessary under a UBI policy).

Secondly of course the Treasury costings of the UBI did not include any costing of the main funding mechanism that was covered in “The Big Kahuna” which was closing income tax loopholes such as we advocated with the Comprehensive Capital Income Tax (CCIT). Taking account of those two factors plus the reality that aligning NZ Superannuation with the UBI alleviates the enormous fiscal pressure from the Baby Boomers – is what makes the Big Kahuna package fiscally neutral. And the single tax rate in that work was either 30% or 34.5%, depending on what rate of CCIT was chosen.

An independent costing of the Big Kahuna policy by the NZ Institute of Economic Research, updated using 2013 figures, showed the policy was fiscally sustainable over the long term. As in the original Kahuna work the cost of transitioning to the policy was not estimated, but the end goal is totally fiscally responsible. The Kahuna is a clever solution to the problem of an aging population.

It would be helpful – although we shouldn’t be hopeful – if the Taxpayer’s Union got it’s own figuring similarly audited.

Taxpayers Union Critique of the UBI just bonkers – again was last modified: March 29th, 2016 by Gareth Morgan
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Gareth Morgan

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.