Beware the ideas of IDS

Introduction

I am a proponent of Negative Income Tax (NIT). I am because it can deliver social security via a basic income, because it is simple and cheap to administer, and because it is libertarian.

In this piece, I try to set out why implementing NIT in Britain does not require any radical surgery to the existing income tax system. I also point out that the disincentive effects of NIT are comparatively low. I suggest that the sanctions regime currently in vogue would be inappropriate under a fully developed NIT. I also briefly explain why the cost of implementing NIT, at least at first, is likely to be close to zero.

What is NIT?

It’s a very simple idea. For those individuals whose incomes fall below the personal allowance, the tax authority, instead of charging income tax, makes a reverse payment to top up the individual’s income. One of its original architects, Milton Friedman, thought the payment should be universal,  unconditional and be made without moral judgement. His idea was to replace complex and judgemental social security systems. The logic of income tax automatically and progressively claws back negative income tax payments when an individual’s income exceeds their personal allowance.

How would IDS and his followers view NIT?

Despite the libertarian origins of NIT, the IDS school of thought would seek to bring NIT, were it to be implemented in Britain, within the currently fashionable sanctions regime.  IDS  has already expressed his intention to bring in-work benefits within the sanctions regime. It is hence reasonable to suppose that IDS would wish a NIT system to be conditional and to include it in his beloved sanctions regime too. It is pretty clear from the high level of  coercion embodied in Universal Credit that IDS does not share the libertarian values of NIT.

How would a negative income tax look in Britain?

Surprisingly perhaps, it would look similar to the current income tax system in Britain – most people would notice no change to their income tax charge and to their net pay. Income tax, whether through deductions at source or through end of year self-assessment would operate as now,  without change to method or amount. Only individuals with incomes below the personal allowance would notice any difference.

Only a comparatively simple tweak to HMRC’s software would be needed to implement NIT. NIT would be simple, cheap and low risk to implement. Because radical surgery to the existing system would not be needed, a government should not find practical objections to NIT implementation.

So how would NIT differ from the current income tax system?

At the moment, the first £10,600 of an individual’s annual income is tax free – individuals pay income tax only on their annual income in excess of £10,600. The starting rate of tax for incomes above the £10,600 threshold is 20%. For the purpose of this explanation it is not necessary to consider the higher income tax rates (40% and 45%) as these are unaffected by NIT. In fact, NIT will make no difference to the income tax charge for anyone whose income exceeds £10,600, whether their marginal income tax rate is 20%, 40%, or 45%. Only those whose income is below £10,600 will be affected by NIT.

Example:

Freda’s annual income is £8,000.

Her tax charge under the current system is 20% x (£8,000 – £10,600) = – £520, which, because it is negative, means HMRC will not seek to collect income tax from Freda. So Freda pays no income tax and her post-tax income is £8,000.

In contrast, under NIT the negative result of -£520 produced by her tax computation  would trigger a payment to Freda of £520 from HMRC. Her post tax income would hence be £8,520 (£8,000 + £520). In effect, Freda’s wage is being topped up by the state through the tax system.

NB. 20% x (£8,000 – £10,600) can be written as 20% x £8,000 – 20% x £10,600

So why not stick to tax credits currently operated by HMRC?

The NIT calculation is very simple and should logically be preferred to the complex strictures and administrative expense of the tax credit schemes currently operated by HMRC. A further point is that IDS’s intention is to bring in-work tax credits into the benefits sanction regime via Universal Credit.  This will add further complication to an already over-complicated system.. An NIT could ease the burden on Universal Credit, which is already creaking under the weight of its own complexity. The implementation proposed here is modest and cautious. Over time, increasing confidence would hopefully impel a government to implement NIT comprehensively, perhaps with a view of complete replacement of other social security benefits.

Would a negative income tax have disincentive effects?

IDS et al hold that low income earners are discouraged from increasing their earned incomes because they are in receipt of tax credits and other means tested benefits. Increased use of sanctions (the withdrawal of benefits) has been IDS’s chosen method of countering these putative disincentive effects.  NIT would be perceived by IDS to have disincentive effects given the evidence. IDS et al would thus argue that receipt of NIT should be conditional and subject to sanctions should a recipient be perceived as “free-riding” on the revered tax-payer. IDS is not a libertarian.

The withdrawal rate, (the amount by which the state top-up is reduced for each additional £ of income) is  equal to the 20% starting rate of tax. This is far lower than the 65% withdrawal rate aimed for by Universal Credit. The NIT implementation proposed here thus compares favourably to IDS’s Universal Credit.. This suggests that sanctions should not be necessary to “motivate” NIT recipients to increase their incomes

How much would NIT cost?

Confining NIT (at least to start with) to recipients of market incomes and to pensioners then the answer is not much. This is because their benefits and tax credits would be reduced by the amount equal to the NIT payments received by them. NIT would be payable only where market incomes and pensions fall below £10,600, so many people would not be NIT recipients, The total social security bill and tax take would be identical as between the current arrangements and NIT.

So why implement NIT then?

A modest and cautious implementation has been recommended here so that the costs and risks of failure are low. Over time, more benefits of NIT can be captured. These benefits include

  1. reduced administration costs;
  2. better incentives;
  3. increased flexibility;
  4. a basic income;
  5. simplicity;
  6. reduced benefit costs;
  7. a more constructive role for DWP;  and
  8. less state coercion

Self-employment and negative income tax

Introduction

Previously, in “Is Universal Credit the wrong approach?”, I proposed that a thoughtfully designed negative income tax system would be more effective in delivering UC’s stated aims. I believe UC is fundamentally flawed, primarily because it does not address the UK’s low and falling wages. The feasibility of designing incentives to make work pay into UC, in an environment with low and falling wages, may be logically flawed. This doubt exists in addition to the current uncertainty about UC’s technical feasibility. In this post, I set out how negative income tax (NIT), the proposed alternative to UC, would apply to the self-employed.

Recap of the negative income tax proposal

1. Income tax would be assessed on Comprehensive Realised Income (CRI).

2. An individual’s tax-free allowance would be calculated according to the number of hours worked. The value of each hour worked would be £20 and be capped at 40 hours per week (2,080 per year).

3. A single rate of tax would be applied to comprehensive realised income, By way of example, and for philosophical reasons, the single tax rate has been set at 50%,

4. Carers, the disabled, and the infirm would be credited with 40 hours per week by HMRC. This would release  a payment of £800 per week (40 hours x £20/hour) to individuals falling in these categories. Any earnings would not disqualify recipients from this minimum income guarantee. However, earnings would be taxed at the marginal rate of 50%.

5.  Job seekers would be paid according to the hours they work part-time, voluntarily in the charitable sector, and in work placements. These hours would be notified to HMRC by the placement providers using HMRC’s Real Time Information reporting system. Payments would be accordingly triggered at HMRC. The placements would not be compulsory – job seekers would have choice as to the  number of hours and type of work they took on. The role of the DWP would be to find and arrange work placements in cases where the job seeker has been unable to do it for themselves.

6. The self-employed (sole-traders and partners), would be allowed a tax-free allowance equivalent to deemed hours of work. The imputed hours would be capped at 40 hours per week (or 2,080 per year), as for all other cases. The hours worked would be imputed by dividing the tax-adjusted earned profits by the standard value of an hour (£20) and multiplying the result by the marginal tax rate. This arrangement would be necessary since no third party could attest to the number of hours worked.

H(n) = m x Y(n)  ⁄ c

Where

H(n) are the imputed hours for the period (capped at 52 x 40 = 2,080)

Y(n)  is the tax adjusted profit in period n

m is the marginal tax rate (set to 50% in the examples)

c is the standard value of an hour worked (set to £20 in the examples)

Example 1

Stephen enters self-employment at the start of the tax year. His (tax-adjusted) profits for the year come to £10,000. He has no other sources of income.

His imputed hours for the year would be

H(n) = £10,000 x 50% / £20 = 250

Hence Stephen’s tax charge for the year would be 

T(n) = 0.5 x £10,000 – 250 x £20 = £0

Stephen’s disposable income is hence £10,000 because his tax charge is zero. He has used up 250 hours of his annual allowance of 2,080 hours. He could have used the unused allowance to do part-time work and/or voluntary work. His income would have been supplemented had he done this.

Had Stephen also sold his house at a capital gain of £40,000, his income tax computation would be:

 T(n) = 0.5 x £50,000 – 250 x £20 = £20,000

Hence his post-tax comprehensive realised income would be £30,000. He is charged no tax on earned income but is charged 50% on his capital gain (an unearned component of comprehensive realised income)

 

Example 2

Anita enters self-employment at the start of the tax year. Her (tax-adjusted) profit for the year comes to £100,000. She has no other sources of income. Her imputed hours of work in year n are calculated as thus.

 H(n) = £100,000 x 50% / £20 = 2,500

The hours must be capped to 52 weeks x 40 hours per week = 2,080.

Her tax for year n would be:

T(n) = 0.5 x £100,000 – 2,080 x £20 = £8,400

Anita’s disposable income (take home pay) is hence £91,600. Her tax rate is 8.4% on her earned income. 

Had Anita also received rental income (i.e., unearned income) of £10,000 in the same year then her income tax computation would be:

T(n) = 0.5 x £110,000 – 2,080 x £20 = £13,400

Note that the unearned components of comprehensive realised income have again been taxed at a straight 50%. This feature, whereby an individual’s tax-free allowance is calculated on hours worked, assists in aligning the tax system with the “making work pay” agenda that underpins the government’s welfare reforms and UC.

NB. The parameters used in these examples, i.e., a working week capped at 40 hours, a marginal tax rate of 50%. and a standard hour set to £20, produces a tax-free allowance of £83,600 on earned income. This produces low average tax rates on middle earnings and is very generous by current standards. It is intended to incentivise. Of course, the average rate will approach the marginal rate of 50% as incomes rise.

Is Universal Credit the wrong approach?

“Work doesn’t pay” is the oft cited justification for Universal Credit (UC). It’s not clear that rolling up six separate benefits into one single payment will address this  problem, aka the unemployment trap. Wages in the UK are at best static and may have been falling in real terms over the last decade. Coupled with declining real wages has been the almost complete elimination of affordable council housing. Wages nowadays are insufficient to meet private housing rental costs which have soared due to shortages. So yes, it may pay claimants to remain on benefits, particularly Housing Benefit.

An alternative to UC is to integrate the tax system with benefits. Low earners, instead of paying income tax, would instead receive a generous negative tax payment. The incomes of low earners would be enhanced to the extent that they would no longer need benefits just to survive; in short, integrating tax and benefits could give low earners independence. But how can this be achieved? One framework to achieve this is a system of cumulative hourly averaging combined with comprehensive realised income (CRI) subject to a single rate of tax

Cumulative Hourly Averaging – the advantages

  • It rewards work – those who work will pay less tax on their comprehensive realised incomes

  • It can integrate benefits with tax – a generous negative income tax is facilitated

  • It supports flexible labour markets – the incomes of zero hours contract workers will be enhanced and less variable. There should be no need of a minimum wage.

  • It restores or strengthens the contributory principle.

Comprehensive Realised Income – the advantages

  • It addresses inequalities in wealth distribution – wealth transfers and other windfall gains are taxed at the same rate as earned income

  • It overcomes equitable objections to Inheritance Tax – legacies would be taxed according to the recipient’s circumstances and at the same rate as earned income

  • It reduces incentives to avoid tax – a single rate of tax can be applied to all sources of income

Cumulative Hourly Averaging – the Generalised Model

 The tax charge in period n would be calculated with the following formula:

T(n) = m∑Y(n) – c∑H(n) – ∑T(n-1)

where

T(n) = tax charge in period n

∑Y(n) = Cumulative comprehensive realised income received by the end of period n

∑H(n) =Cumulative hours worked by the end of period n

∑T(n-1) = Cumulative tax paid at the start of period n, and so ∑T(n) = T(n) + ∑T(n-1)

m = the marginal tax rate. I have used a single marginal rate of 50% applied to all components of CRI  without preference

c = the value of an hour of work. I have set this to £20 so as to produce a generous negative tax component which encourages work

 The Mechanics

Before illustrating how the tax calculation works, I have set out some parameters which I have used in the examples below. These are:

  • The standard working week has been set to 40 hours per week

  • The standard wage rate (or the value of an hour of work) is £20. Note this is an administrative value and has nothing to do with a minimum wage.

  • There is no minimum wage

  • A flat rate income tax of 50% applies to all components of comprehensive realised income without preferment. This is a limiting rate, meaning no one in work will pay tax at this rate however high their income.

  • Tax free personal allowances depend on cumulative hours worked and are valued at £20 per hour worked.

  • Tax free personal allowances are carried over to succeeding years, unlike the current “use or lose” system

  • No individual’s personal allowance can exceed 48 hours in a week

  • HMRC operates RTI (Real Time Information) so that incomes and changes in circumstances are reported as and when they occur.

 

Example 1

Freda starts work for 30 hours per week at £7 per hour (£210 per week). She has no other sources of income.

T(1) = = 0.5 x £210 – £20 x 30 = – £495

Freda will pay no income tax and instead will receive £495 under the negative tax mechanism. Her disposable income will thus be £210 + £495 = £705.  Not bad for a week’s work !

In the second week, Freda’s tax calculation is as follows:

T(2) = 0.5 x £420 – £20 x 60 – (-£495) = -£495

So again, Freda’s disposable income (take home pay) will be £210 +£495 = £705. Enjoy yourself, Freda. you deserve it! And so it will continue until Freda’s circumstances change.

Example 2

George starts work as a director of a large company. His monthly remuneration package comes to £60,000. His monthly hours of work are restricted to 208. He has no other sources of income

T(1) = 0.5 x £60,000 – £20 x 208 = £25,840

So George’s disposable income will be £60,000 – £25,840 = £34,160.

T(2) = 0.5 x £120,000 – £20 x 416 – £25,840 = £25,840

So long as George’s circumstances don’t change his monthly disposable income will remain at £34,160.

 

Example 3

Mark Anthony is a notorious playboy who has never done a day’s work in his life. His very rich father bequeaths Mark Anthony £500,000 in his  will. Mark’s tax liability will be:

T(1) = 0.5 x £500,000 – £20 x 0 = £250,000

In the second  period, Mark Anthony decides to do some voluntary work. He registers 30 hours with HMRC.

T(2) = 0.5 x £500,000 – £20 x 30 – £250,000 = – £600

Mark Anthony is rewarded for his voluntary work to the tune of £600 via the negative income tax mechanism. Work pays! Even unpaid work.

 

Example 4

Lois has a severe disability that limits the amount of work she can do in a week to 10 hours. She is paid £3 per hour (there is no minimum wage). HMRC credits Lois with 30 additional hours per week to compensate her for the hours she is unable to work through no fault of her own. She has no other sources of income. In week 1 her tax will be calculated thus:

T(1) = 0.5 x £30 – £20 x 40 = – 785

So Lois’s disposable income in week 1 will be £30 + £785 = £815. This is an example of how institutions can be used to compensate disadvantage.

In week 2, Lois receives a pay rise of £2 per hour to £5 per hour. Her tax calculation in week 2 will be

T(2) = 0.5 x £80 – £20 x 80 – (-785) = -£775

Lois’s disposable income in week 2 has risen to £50 + £775 = £825.  A pay rise of £20 per week has resulted in Lois’s disposable income increasing by £10 and the state subsidy falling by an equivalent amount.

Example 5

Tony is a homeless alcoholic, without work or income. He is offered 40 hourly work credits per week which will trigger weekly payments of £800 via the negative income tax mechanism provided he undergoes treatment for his alcoholism at a residential clinic. In Tony’s case, the  weekly payments are paid directly to the clinic instead of to Tony, Tony will need to price himself into employment when his treatment is completed, a task made easier absent a minimum wage.

Information requirements

HMRC will need to keep an up-to-date record of every taxpayer/claimant and changes in their circumstances. This is not as onerous or as intrusive as might at first appear; RTI, which requires employers to submit details of employee  hours and pay in “real time”,  has already been introduced. The road has already been dug.

 Here is a logical record of the information and processing that HMRC would need to collect and process for an employee. The particular employee shown in the record has had a particularly turbulent time, starting as a highly paid director, becoming unemployed, suffering disability, inheriting a sizeable estate, etc, all in six weeks!. The record is not intended to be of a typical employee but is illustrative of how income tax would work under cumulative hourly averaging with CRI .

Table of events

Conclusion

One thing writing this post has taught me is how difficult it is to design a safety net which both protects and incentivises.  A safety net  which is too generous removes incentives to return to, or to get into, work. A safety net built around stick and no carrot is cruel and damaging to individuals. I fear that Universal Credit, with its vicious sanctions regime and its heartless treatment of the sick and disabled, falls into this latter category. I venture to suggest that the negative income system outlined above, albeit with its fault lines, would be more effective than the proposed UC project should the latter ever go live. The system outlined above is certainly kinder than UC. Having said this, it may be that the proponents of Unconditional Basic Income win the day – UBI sidesteps the tension between incentive and protection. Perhaps this is the way to go.

Acknowledgement

It would be remiss of me not to acknowledge the brilliant work of Douglas Bamford in the field of taxation and philosophy. Douglas very kindly gave me sight of his then forthcoming book in advance of its publication. His ideas on cumulative hourly averaging have very obviously informed this piece, as has his idea of using comprehensive income as a tax base. His book is entitled Rethinking Taxation – An Introduction to Hourly Averaging. ISBN 9781907720918.

Any errors or sub-standard work contained in this piece are mine, and mine alone.

Addendum 2 September 2014

1. Quite rightly, it has been pointed out to me that the negative tax proposal outlined above does not say much about unemployment support. To answer this, I suggest work placements should be available for all jobless people, which they can choose to take up. There should be no compulsion as to participation or as to the type of placement. If a jobless person can arrange a placement of their choice, say in a museum, then so be it. The only requirement would be the readiness and agreement  for the placement provider to submit the hours worked to the HMRC as registered hours. The registration of hours worked each week under RTI reporting would then trigger a payment via the negative income tax mechanism to the worker in the same way as for other employees.

2. People who have caring responsibilities, either for children or for aged parents, should receive hourly credits equal to the standard working week  (40 hours according to the parameters used in my examples).

3. Profits on the sale of houses, even if a house in question is a Principal Private Residence (PPR), should be brought into the Taxable Comprehensive Realised Income calculation. Currently, the gain on sale of a PPR is exempt from taxation.

Should the poor be afraid of a “Flat-rate” tax?

I believe it depends on three things:

  1. How income is defined;
  2. The tax-free personal allowance; and
  3. The tax rate

Realised comprehensive income

In the UK there are three taxes that could be consolidated into a single income tax. These three taxes are Inheritance Tax, Capital Gains Tax, and the current income tax. All three levy tax on assets that flow from one party to another. Each of the three taxes has a separate and different  tax free allowance associated with it and are taxed at different rates.

A realised comprehensive income tax would make no distinction between these asset flows – all flows would be taxed as income. The annual inflows of assets received by an individual from the three sources would be aggregated and taxed as realised comprehensive income after deducting the individual’s annual tax-free personal allowance.

The advantages of a realised comprehensive income tax are:

  1. Simplification. Inheritance tax and capital gains tax would be brought under a single regime;
  2. Less incentive would exist to engage in tax avoidance;
  3. Legacies would be taxed according to the recipient’s circumstances, not the donor’s. This is more just as the recipient’s entitlement to the assets has not been derived through labour or through an identified contribution to society. Many donor’s feel resentment when it is their circumstances that determine the tax due on bequests, as is the case currently.

The annual tax-free personal allowance

Rolling up all three types of income into one obviates the need to have separate tax-free personal allowances for each of the three sources. Setting a single annual tax-free personal allowance of, say, £50,000 would provide generous relief to those whose comprehensive incomes are low or in the middle. It also supports simplification of the tax system.

The tax rate

In the presence of an annual tax-free personal allowance a flat-rate tax would by definition be a marginal rate (not an average rate).

Many ‘small-staters’ and their ilk hold that the state’s share of someone’s income should never exceed 50%. Setting the marginal rate of income tax to 50% respects this limit because of the annual tax-free personal allowance. In fact, many individuals with taxable income will have average tax rates that are far below the marginal tax rate of 50%.

Example 

Suppose the annual tax-free personal allowance has been set to £50,000 and the single rate of tax is 50%. An individual with a realised comprehensive income (earned + unearned + capital gains + bequests) of £100,000 would be liable for tax of

 0.5 x (£100,000 – £50,000) = £25,000

which is 25% of realised comprehensive income received in the year.

Here is a graph which shows average tax rates against realised comprehensive income in a flat-rate tax system with the parameters described above.

Image

The average tax rate will get ever closer to the 50% marginal rate as comprehensive income gets larger and larger.

Conclusions and Summary

What I have shown is that flat-rate taxes, so often proposed by ‘small-staters’ et al, should not axiomatically be feared. This is because the fairness of such schemes can depend on their parameters and the definition of income. Flat-rate taxes need not mean low-taxes, as hoped for by their proponents. The battleground is really about the parameters of such a scheme, not about whether a flat-rate tax system is desirable in itself. A judicious selection of parameters can ensure equity, whilst simultaneously meeting the objections of ‘small staters’ to wealth taxes and high average tax rates on conventional income.

I suggest, in the wake of Piketty, that taxing flows of assets as income is a more feasible way of addressing runaway inequality than imposing taxes on stocks of assets (wealth taxes). The exception to this rule would be a land value tax, which can be perceived as a rental charge on privately sequestered natural assets. It is difficult to sustain a moral objection to taxing  a stock in the case of land.

I have not attempted to cost out this flat-rate tax proposal, either with the proposed or alternative parameters. It may be that a flat-rate tax system would raise less than the current sum of capital gains tax, inheritance tax and conventional income tax. If so, then perhaps a Land Value Tax would be needed to plug the gap. The challenge, as I see it, is to find ways of financing generous public services whilst simultaneously defeating the (sometimes spurious) moral objections that Libertarians et al advance.

Towards a truly progressive tax system

Is the UK’s tax system out of date and no longer fit for purpose?

Many people, including myself, would say it is.

Politicians, though, seem unable or unwilling to address the creaking tax and social security systems.

Here are some, perhaps radical, ideas that could transform the lives of ordinary people. The proposals are unlikely to meet with approval from the very wealthy, from those who receive very high incomes, or from those who otherwise have a stake in the status quo. Nevertheless, here goes:

1. Realised comprehensive income

By adding together an individual’s earned income, their dividend income, their savings income, their property income, their capital gains, and their receipts from legacies, one arrives at an individual’s realised comprehensive income.

Taxing comprehensive income simplifies the tax system and makes it harder to avoid tax because all types of income would be taxed at the same rate. The current system taxes the individual components of comprehensive income at different rates. The current system hence provides incentives for taxpayers to manipulate their affairs so as to take advantage of differential tax rates. For example, under the current system, it is usually advantageous for an individual to take the benefit of a transaction as a capital gain rather than as income. This is because capital gains are generally taxed at a lower rate for individual tax payers.

2.  Increase annual tax free allowance to £100,000

The first £100,000 worth of comprehensive income received in a year would be tax free. Such a move, were it to be implemented, would take most, perhaps as many as 98% of tax payers, out of income tax altogether. Only those with comprehensive incomes above £100,000 would be liable for income tax. Incomes above £100,000 are more likely to be unearned, they deriving from rent extraction activities, holding gains, and luck.  It is unlikely that extremely high incomes result from a commensurate contribution towards the common good. Genuinely earned income, that is income derived from an individual’s contribution to society, is likely to be lower than £100k per year and should therefore escape income tax altogether.

3.  Simplification of income tax

Every income tax payer would have the same marginal rate of tax. This would ensure the average income tax rate rises with comprehensive income.

A formula can be used to determine an individual’s tax rate taking account of their annual comprehensive income. The formula would only be applied to comprehensive incomes above £100,000 p.a.

An example of such a formula is a follows:

0.9 x (Y –  £100k)

where Y = annual comprehensive income, the £100k shown in brackets is the annual tax free allowance and the 0.9 (90%) is the marginal tax rate and the limiting tax rate (i.e., the tax rate will never exceed 90% however large an individual’s comprehensive income may be)

Here is a graph which plots comprehensive income against the applicable average tax rate using the formula shown in blue.

Top tax rates graph

Comments

The graph shows how an individual’s average tax rate is determined by their comprehensive income.  For example, an individual with an annual comprehensive income of £0.4 m would have an average tax rate of just under 70% of that income, (the exact percentage is 67.5%).

An individual with a comprehensive income of £0.1m or less would not pay tax on their comprehensive income at all.

As an individual’s comprehensive income increases the closer their average tax rate approaches the 90% limit. However, no individual, however high their comprehensive income, will have an average tax rate of 90%; but very high comprehensive incomes will come close to the 90% limit.

Taxing comprehensive income this way is consistent with free market principles. Company directors and others who can, and do, effectively set their own pay will continue to be free to do so. Using the proposed formula to assess tax on comprehensive income supports freedom but also enables society to benefit. A high marginal rate may also discourage “superstar” remuneration, and thus may help to address runaway inequality which is becoming increasingly prevalent.

4.   Universal Basic Income

The introduction of a universal basic income would guarantee every adult citizen of the UK an unconditional basic income. This would guarantee every citizen social security. This would obviously need to be funded and a Land Value Tax may provide such a fund. A quick estimate suggests that £208 bn per year would be need to be raised to pay a basic income of £100 per week to 40m adults. This is clearly a lot of money.

The universal basic income would have many benefits. For example, the minimum wage could be abolished. The bargaining power of workers would be be enhanced in wage negotiations with employers. Self-employment, because of the risk reduction impact of a basic income, should mean more workers eschewing employment in favour of self-employment. This would contribute to economic dynamism and creativity. A basic income may permit younger people to stay on at college to acquire skills from which they, employers and society benefit. The benefits of a universal basic income are manifold and, encouragingly, the concept is increasingly finding support from both the left and right ends of the political spectrum.

5.   Land Value Tax

A tax on the value of land is thought by many to be a rich potential stream of taxation income.  It has been suggested that, very approximately, one-third of the value of a house is due to the value of the land the house sits upon.

A land value tax would be an annual charge on land owners. It would be charged as a percentage of the value of land owned. Whether a Land Value Tax would provide sufficient funds to finance a meaningful Universal Basic Income is at the time of writing unknown to this author.

A powerful argument in favour of a Land Value Tax as a means of funding a Universal Basic Income is that it supports justice in distribution. Land is a God-given resource which should be available to everyone to profit from. But the land is owned by private individuals who capture the benefits of land ownership despite having acquired the land by means of dubious morality in the first instance. So it makes sense that landowners should fund a Universal Basic Income to compensate those who are forcibly displaced from the means of subsisting from the land.

Appendix

Tax rates for comprehensive income of up to £8m p.a.

top tax table

Is taxation theft?

Libertarians claim taxation to be theft. How true is this statement?

My dictionary defines theft as:

the dishonest taking of property belonging to another person with the intention of depriving the owner permanently of its possession,(Collins English Dictionary)

So for taxation to be theft the taking of property must be dishonest.

My dictionary defines dishonest as

not honest or fair; deceiving or fraudulent  (Collins English Dictionary)

and honest as:

not given to lying, cheating, stealing etc

and stealing as:

to take something from someone etc without permission or unlawfully, especially in a secret manner

So to equate taxation with theft it is necessary to show that taxation requires

  1. Lying or cheating, or
  2. Stealing.

It is easy to see that taxation does not depend on lying or cheating. Each year Parliament passes legislation that specifies which taxes HMRC must collect and from whom. This is a transparent procedure and so, by definition, is not deceptive or fraudulent.

The second strand of dishonesty, stealing, describes the taking of someone’s property  without permission or unlawfully, as in a street robbery. As described above, Parliament gives permission to HMRC every year. This permission is granted lawfully.

So a basic tenet of Libertarian philosophy, that taxation is theft, is not accurate. So taxation is not theft.

Hardly a sound basis for a political philosophy, is it? Yet Libertarianism appears to be gaining popularity despite the inaccurate premise upon which it is built.