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

Effectively Progressive Income Tax (EPIT) aka Basic Income + Flat Tax (BIFT). Richard Parncutt, Uni Graz, 14 June 2009. Progressive income tax in Austria 2005-2009. Net income (k€/yr). Gross income (k€ /yr). Broken line: Extrapolated high rate  BI = 8.5 k€/yr = 708 €/mo.

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

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  1. Effectively Progressive Income Tax (EPIT)aka Basic Income + Flat Tax (BIFT) Richard Parncutt, Uni Graz, 14 June 2009

  2. 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

  3. 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

  4. 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

  5. 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

  6. Basic IncomePhilippe Van Parijs, 2000; Basic Income Earth Network • Features • unconditional • individual • as handout or tax deduction • Questions • citizens? • children? • pensioners? • Advantages • no means test • no welfare traps • less bureacracy • “willingness” not tested • less class stigma • open and honest • freedom • no poverty • more risk taking Disadvantages: reduces incentive, changes wage structure

  7. Flat income taxneo-cons, neo-libs… • Advantages • can be paid immediately • reduces tax evasion/avoidance • promotes economic growth • the “poor rich” don’t feel “discriminated” • Disadvantages • increases rich-poor divide • linked to neo-liberal and far-right politics

  8. 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

  9. 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%

  10. Effectively Progressive Income Tax(EPIT) with BI = 500 (€/mo) and FT = 50%

  11. 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

  12. Setting the parameters • Basic income (500…800 €/mo) • high enough to eliminate poverty • poverty line in Austria: 60% median wage ≈ €900 • low enough to maintain incentive • Tax rate (35…50%) • high enough to finance BI etc. • low enough to maintain incentive • Adjustment procedure • left versus right politics • economic models

  13. 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

  14. 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

  15. Realism and equity in taxation Amount depends on ability to pay • income tax (variable capital) • wealth tax (constant capital)

  16. 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

  17. Flat wealth taxes • What about the family farm? • What about Granny’s 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

  18. 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…

  19. Flat wealth tax: Advantages • reduces rich-poor gap • accesses large resources • reduces tax evasion • shifting wealth around doesn‘t help • easier to control • total wealth tax α total taxable wealth

  20. Taxing the poorvalue-added tax VAT (MWSt) VAT on basic commodities is regressive VAT on luxury goods is progressive

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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

  27. Global inclusive politics: Issues • poverty reduction – local and global • environment, global warming • intercultural conflict, weapons • global distribution of resources • population growth • global democracy

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