Taxation & Benefits

A common cry among libertarians is that "taxation is theft", and there is validity to this claim. Capitalism is built on the ideas of voluntary exchange and having a right to the rewards of your own efforts. Taxation is the government confiscating resources in a non-voluntary way, and this "legalised theft" seems antithetical to capitalism.

Unfortunately for the purists, if you wish to prevent collapse into anarchy you need some rules, someone to enforce those rules, and some taxes to fund that enforcement. Once you accept that taxes are unavoidable, the question then becomes what the best method of raising these taxes is. The two key attributes of an ideal tax system would be simplicity of administration and minimisation of counter-productive incentives.

Desiring a simplicity of administration is a no-brainer. The goal is to maximise how much of the total cost of the tax is available for productive uses rather than being spent on compliance (by both the taxpayer and the government). Some taxes seem like a good idea because they incentivise good choices, but if a large portion of the tax being collected is spent on collecting the tax, then it is not an efficient method of funding the government.

All taxes create distortions in the market, and the higher the tax on something, the lower the incentive to produce or consume that thing. Ideally then, we should only be taxing things we want less of. Ironically, the thing we want the most of - income - is currently the very thing we tax the most.

Consumption taxes such as GST are currently the best form of tax we know of. It is comparatively simple to collect (provided it is universal), difficult to avoid, and can raise a substantial amount. It also creates many positive outcomes by discouraging excess consumption and incentivising savings and investments.

Universal Basic Income:

Given the assumption that some level of redistribution and welfare support is desirable, the question then becomes what the most efficient and fair method is. Our current welfare system is very complicated, which means it is difficult to understand and costs hundreds of millions of dollars to administer annually. Milton Freidman recommended a negative income tax system due to its simplicity and its lower distortion on the market than other benefits, and a universal basic income has the same practical effect and is even simpler to understand.

Many of the current benefits have different rates depending on relationship status, with single beneficiaries receiving more. While I understand the reasoning of someone with a partner to support them needing less help, I think it is crazy to incentivize being single, especially given the disastrous consequences of single parent households. Determining relationship statuses of beneficiaries also makes the administration of the benefit more difficult and costly. A UBI would solve this by giving everyone the same rate regardless of status.

Another disadvantage of the current benefits is that many of them have substantial abatements when the beneficiary earns income above a threshold, sometimes losing more benefit than they gain from the income, which can be a significant disincentive to looking for more work. A UBI solves this by not being income tested, and earning extra income does not reduce it.

I propose a UBI at a rate of $320 per week or $16,640 per year. This would be tax-free and paid to every NZ citizen, including children, although a child's UBI payment would be entrusted to their parents until they turn 18. Anyone who leaves New Zealand for more than 28 days in a year would have their UBI reduced in proportion to the amount of time they were away, with exemptions for diplomatic and military personal deployed overseas and their families. Immigrants would not be eligible for the UBI until they obtain citizenship.

The UBI payments could be used as a method of paying child support, with the parent's payments being reduced or increased according to private arrangements or court orders, although the total amount paid to the family would remain the same.

A frequent objection to a UBI is that it enables lazy people to earn an income with no work requirements or oversight. While undoubtably there would be some who take advantage in this way, they would have to live an extremely frugal life, and I am confident that the vast majority would be motivated to find additional income provided that the rate remains at a level that allows for little more than survival. In cases of addiction or other severe inability to manage money, the UBI could be entrusted to a family member or institution to manage on behalf of the recipient.

A UBI at the proposed rate would be extremely costly and would easily become the largest expense in the government's budget, but it enables many cost savings detailed on the rest of this and other pages, and would actually result in lower government spending overall.

Fiscal Impact: I estimate that the UBI would cost $80.1 billion

Benefit Cancellations:

With Children receiving the same UBI as everyone else, and their parents able to spend it as they see fit, this more than replaces the loss of the various working for families benefits, and these can be cancelled, saving millions in administration costs and reducing the opportunities for fraud.

A child would receive the UBI as soon as they are born, which when combined with the parents' own UBIs, would be a sufficient replacement for parental leave, and this benefit could also be cancelled. Households where one parent elects to stay home to care for children are not eligible for parental leave, but would receive the UBI, so in this respect it is fairer.

The UBI would be higher than most levels of jobseeker (unemployment) benefits, especially when including any children's UBI. The only category that would receive less from the UBI than they do from the current benefit would be those who are single, childless, and 25 or above, but they would be able to make up this difference by working as a volunteer (see below). Cancelling the jobseeker benefit would save an enormous amount of administration costs, with no need to police efforts to find work.

Students would receive the UBI, which would replace student allowances.

Children are currently eligible for 20 hours of free early child education (ECE) per week, which can only be used at registered providers. A pre-school child's UBI would more than cover the cost of paying for these ECE hours if the parent wishes to continue with this service, but it also gives parents much more flexibility to pay family or friends to look after their children or stay home themselves to look after them and keep the money.

Fiscal Impact: I estimate that cancelling these benefits would save $26.1 billion, including $760 million of administrative costs

Superannuation:

Superannuation rates could be immediately reduced by the amount of the UBI, which would have no effect on the overall amount received.

Anyone on superannuation at the time the UBI was introduced would continue receiving their pensions at the legacy rates (adjusted for inflation and including winter energy payments) for the rest of their lives.

Long-term, superannuation would be replaced by personal savings. To ensure that everyone saves enough for a comfortable retirement, KiwiSaver would be made compulsory and the minimum rate increased to 12% of income, although the first $20,000 of income would be exempt, and employer and government contributions would end. KiwiSaver schemes would be made more flexible, including the ability for any savings and the entire 12% contribution to be diverted to investment in the home you live in, but the minimum savings rate must be invested into an asset that is likely to hold its value until retirement age. A contribution pause could be applied for in exceptional circumstances. There would also be more flexibility about how the savings are made available, and they could be used at the complete discretion of the saver from the age of 60.

Those who are close to retirement age at the time the changes take place would not have time to save enough for retirement. To compensate for this, they would continue to become eligible for legacy superannuation, but the age of eligibility would rise in proportion to how much time they had to save under the new scheme, with the speed of the rise being calculated so that the vast majority of people are no worse off than under the legacy superannuation scheme. Due to compounding investment returns on savings, the rise in the age of eligibility would start slowly and rise faster each year, until after about 30 years the age of eligibility would rise a year per year, meaning no new people would become eligible for legacy rates.

Once those receiving legacy superannuation have gone from the system (this would likely take about 50 years from the changeover), everyone would have to fund their retirements from the UBI, any income they continued to earn, their own savings, and support from their family. A key advantage of this new approach would be that in the instance of an early death, the balance of their savings would be inherited by their loved ones, in contrast to superannuation being never started or stopped after only a short time despite paying taxes towards it their entire life.

With the cost of legacy superannuation ending and no unfunded liability for the government, the superfund would have no further purpose and government contributions could stop. The assets in the superfund could be gradually sold to fund the cost of the legacy superannuation during the transition period.

Fiscal Impact: I estimate that the reduction of legacy superannuation by the amount of the UBI results in an immediate saving of $8.6 billion, and the eventual savings once all legacy pensioners are out of the system would be $25.7 billion

Income Tax Rates:

I propose that Income tax be charged at a single low flat rate of 20%. The UBI builds in an element of progressive redistribution (low earners effectively have a negative income tax rate, and the more you earn the higher your effective tax rate would be), so progressive tax rates are not required. A key benefit of a single tax rate is simplicity of compliance, with PAYE and withholding taxes able to be accurately calculated, eliminating the need for most end-of-year wash ups and tax returns, saving costs for both taxpayers and the government. A single tax rate also removes the need for complex tax arrangements that share income to avoid breaching the threshold for higher marginal tax rates and supports families in which one partner doesn't work full time as they will no longer be "wasting" their low marginal tax brackets.

The variance between individual, company, and trust tax rates has long been the impetus behind many complex tax avoidance arrangements. To simplify and reduce compliance costs, I propose that company and trust tax rates are fixed at the same rate as individual income tax. This would make dividends and distributions effectively tax free, reducing the incentive to lock away wealth in companies, and freeing it up for investment in other ventures. Lower business tax rates will also be at least partially passed on to consumers as lower prices and coupled with deregulation will encourage investment into New Zealand (both domestic and international), creating jobs and spreading the benefits beyond business owners.

Lower tax rates do not necessarily mean less tax revenue for the government. Low tax rates are likely to motivate taxpayers to put effort into income generating opportunities that would otherwise have been ignored due to the high percentage of any reward that would be owed as tax. Low tax rates are also a magnet for foreign high earners and are likely to attract many to immigrate to New Zealand (especially since NZ has many other attractive qualities), boosting the total tax take and stimulating the economy through spending. Current residents with more disposable income due to low tax rates and the UBI, coupled with additional high spending immigrants, will boost consumption and the government's revenue from GST.

Fiscal Impact: I estimate that lower taxes will result in the government receiving $11.5 billion less revenue from income taxes, partially offset by a $1.8 billion increase in GST revenue.

Volunteering:

To ensure that there was always work available for those that desire extra income, I propose that the government pay wages for anyone willing to do volunteer work. This work would be managed by government departments (primarily DOC), councils, and approved charities, and would only include work that has a public benefit and does not compete with regular employment. Examples of possible volunteering roles would be pest & weed control, native planting, rubbish cleanups, track construction & maintenance, and storm damage cleanups. Equipment, training, and supervision would be provided by the organisation managing the work.

Wage rates would be set at 50% of the median wage (about $15/hour). Only those earning below the tax breakeven threshold (UBI divided by the tax rate, or about $73k) would be eligible for these wages, but those earning more would be welcome to volunteer for free is they wished. If not enough volunteers are available in a particular area or for a particular job, the organisation managing the work could offer a top up wage at their own cost to attract more volunteers. Volunteers would be rated on the work performance by the supervisors, and poorly performing workers could have the wages docked. A good rating could be used by volunteers as a reference when applying for employment.

This scheme would replace various government initiatives aiming to help people find employment, as the volunteering opportunities would be an excellent way for inexperienced workers to prove themselves and gain training and experience. Another major benefit of this scheme would be the tens of thousands of hours of labour being spent of projects with public benefit.

Fiscal Impact: I estimate that the volunteering subsidies would cost $2 billion but would replace $720 million of other employment assistance programs for a net cost of $1.3 billion.

Other Benefits:

There are a number of other benefits including disability, sickness, sole parent, financial hardship, and youth support that would only be partially replaced by the UBI. These benefits generally give support to those who face difficulties that are not entirely their own fault, and it seems right to make sure they have support. In an ideal world, these unfortunate individuals would be cared for by family, friends, and/or charities, but it seems reasonable for government to ensure that no one falls through the cracks of these support structures, the question is how is this best accomplished.

A common phrase is that charity begins at home, which suggests that we should focus on taking care of those closest to us, and that if we need support, we should look to those closest to us. A national bureaucracy does not seem like it fits this ideal; the circumstances of each case of need are unique, and trying to fit them into the pigeonholes of a rules-based benefit system that is necessary at the scale of a national program is unlikely to lead to the most effective outcomes. Having local offices only partially removes the distance between the recipients and those that set the rules. I propose that it would be more effective to give the responsibility of any welfare needs over and above those met by the UBI to local government. For details on how this could work see the local government section.

Fiscal Impact: The government currently spends $8.1 billion on a plethora of welfare programs (not including those directly replaced by the UBI discussed above). The UBI will reduce the amount of support these beneficiaries would require, but I estimate that cost of additional support still required would be $6 billion shared equally between local and national government. This results in overall savings of $2.1 billion, but savings of $5.1 billion for the national government.