14 May 2017

Can we replace the French benefits system by a Universal Basic Income financed by a Negative Income Tax?

Those who are following my blog will have seen my suggestion that we could have a redistributive tax system whereby 61% of the population would actually get a net payment from the tax system, paid entirely by the other 39% of the population. This means that everyone earning less than about €2000 a month actually gets extra money from the system - effectively a negative income tax.

It's remarkably simple, because you just have to fix two numbers - the Basic Income level that every citizen should get, and the flat rate tax needed to cover the cost.

Thus, to provide a Basic Income of €600 a month would need a tax rate at just under 30%.
To provide a Basic Income of €800 a month, needs a tax rate at just under 40%.  A
Basic Income of €1000 a month, needs a tax rate at just under 50%and so forth. Around 10% tax provides an additional €200 a month of basic income for all citizens.

So, what rate should we choose?

Well, how about using the system to replace the "Minium Vieillesse" which currently provides a minimum revenue for old-age pensioners. As of the 1st April 2017, these payments are fixed at
- €803 for a single person
- €1247 for a couple

These payments are currently heavilly means tested -  you can only get it if you are over 65, and every euro of pension you receive from alternative sources is removed from the amount of the allocation. If you have a pension of €803 per month, the state will add nothing to your pension.  If your pension is €403 a month, the system will make up the difference.

Let's compare that with  what would happen if we scrapped the Minimum Vieillesse and just introduced an Basic Income at €800 a month, coupled with a 40% tax on additional income. In that case, someone with an additional pension of €800 would effectively get the €800 basic income, plus 60% of the additional pension, taxed at 40% - i.e. €480, a total of €1280. That's way better than under the current system.

Now consider what would happen to someone with pension of €1200. They would get €800 + 60% of €1200 = €1520 a month.

You have a pension of €2000? You would get €800 + €1200 (60% of €2000) = €2000, meaning that you would effectively keep it all. Only those with pensions of over €2000 a  month would pay anything, and their effective tax rates would increase only slowly as shown in this graph which shows the rates for a Basic Income at €800 and tax rate at 39.5% in Blue. Even someone getting a very generous pension of €10000 would still only be paying tax on that at 31.5%.

The graph also shows the effective tax for those getting more than €2000 with the Basic Income set at €600 and the tax rate at 29.65% (in yellow) or at €1000 and the tax rate at 49.4%. It's interesting to note that even at €10,000 a month, people are paying way below the standard rate. In fact, at €10,000 a month you would be paying tax at 80% of the headline rate. To get anywhere near the headline rate you would have have to be earning far more - at €40,000 you still only have an effective tax rate of 95% of the headline rate. 

How much would be saved by scrapping the Minimum Vieillesse and replacing it in this way by a negative tax?  Actually, I don't know. The latest figures I have seen were €1.6 billion in 2006, and €2.83 billion in 2008. It's probably substantially higher today.

So, why not scrap it, save billions a year, and also prevent people being stuck in a poverty trap that prevents them moving off the €803 baseline unless their additional pension rights are much higher.

The French system also provides another set of Benefits for people of working age. It's called the Revenue de Solidarité Active (RSA). The current value for a single person is €513.17 a month. Clearly, such a person would be immediately better off with the proposed switch to a Basic Income financed by a negative income tax, even at the lower value of €600 a month.

But, importantly, they would immediately see an improvement in their situation if they were earning additional income from a part time job. With the current RSA mechanism, any additional income is  directly substracted from the €513.17. Thus, if you earned €313.17 in a given month, your RSA is docked by the same amount. You also lose some of your RSA if you are also receiving housing support - €64.22 to be precise. You simply cannot get more than the standard amount unless you are earning over the basic amount. What incentive is there to go and work a few hours a week under such conditions? It would be better to stay at home at claim the RSA unless you can find a  full time job that pays enough to get you off the minimum level.

Emmanuel Macron wants to encourage people to take on work. The RSA system is the antithesis of what is required.

Compare that will my proposal where you could decide to give everyone an Unconditional  Basic Income of €600 coupled with a flat rate tax of under 30%. Someone who worked part time and earned say €500 would keep slightly more than 70% of the income, moving them to €950 a month. In otherwords, it always pays to take on work, even if it is only a few hours a week.

Under the current system, which takes into account all the other sources of revenue, succesfully getting the RSA requires citizens to negotiate a whole string of complex rules and fill in large amounts of paperwork. Many disadvantaged people will miss out simply because the system is too complicated for them. 

In addition to being good for incentivising people to earn additional money, switching to the proposed system would save a huge amount of money for the state.  How much would it save? According to one site, the cost is currently around €10 billion a year. As I have been arguing, a much more generous program of benefits could be provided for essentially no net cost by getting the 39% who earn the most to pay those who constitute the 61% at the bottom.

So, dumping RSA and Minimum Vieillesse and replacing both by my proposed simple system would save billions. And the administration costs would be a fraction of the cumbersome means tested system that we currently have.

Is Emmanuel Macron listening? Maybe it's time to think about some really radical reforms?

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