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Universal Basic Income (UBI)

Universal Basic Income (UBI)

Universal Basic Income - a Modern, Simple and Fair Tax and Welfare System

Executive Summary

The Opportunities Party (TOP) is proposing a fundamental overhaul of the tax and welfare systems in New Zealand to make them modern, simple and fair. This will be achieved by introducing a:

  • $13,000 annual universal basic income (UBI);
  • $2,080 annual child universal basic income (paid to parents);
  • Flat tax of 33% on all income from all sources for all entities; and
  • Risk free return method (RFRM) tax on assets.

How we got here

In the past three to four decades since the last major reforms, there have been significant changes to society, business, and the world as a whole, yet our tax and benefit system has remained the same. The lack of a comprehensive Capital Gains Tax has seen housing and property-based businesses (e.g. farms) become tax-favoured assets. This has been a contributing factor to higher house prices, increasing wealth inequality, reduced home-ownership rates, increased housing costs for people on low incomes, and greater welfare dependency.

While high housing costs have locked a generation out of the housing market, this same generation has also been plunged into the “gig economy”. As the job market becomes more dynamic, with the rise of automation and artificial intelligence, the pressure on ordinary people will grow.

There is a need for change, and now is the time.

Why reform is needed

The New Zealand tax and welfare systems are complex, punitive, arbitrary, and increasingly unable to keep up with the demands of the modern world.

Firstly, our tax system for housing is the most distorted in the world. It has fuelled property speculation, resulting in increasingly higher house prices and higher rents. New Zealand's unaffordable housing is the leading cause of poverty. In order to remove the drivers for speculation, TOP aims to tax housing at the same level as other assets. Though our tax proposal is likely to have a calming effect on house prices, the main purpose is to spread the tax base wider and to encourage investment in productive assets that will grow the size of the NZ economy.

Secondly, our tax and welfare system is outdated and creaking under the strain of economic change. Benefits for the unemployed and underemployed currently provide a financial disincentive to work, as entitlements reduce as they start to earn. So we spend billions on administration and punitive measures to counter this. In contrast, a UBI encourages people to work because they don’t lose it when their earnings increase. It also rewards unpaid labour that keeps our society going, e.g. parents caring for children. In the face of economic upheaval, it enables people to start businesses and retrain as needed.

Additionally, differing tax rates for different entities (Individuals, trusts and companies) creates incentives for tax planning (NZ has well above OECD averages of Trusts and Companies). A common tax rate between all entities removes tax advantages from the use of different entities that do not truly reflect the character of the entity.

Finally, a UBI provides some degree of financial security for everyone. A temporary boost during medical (e.g. COVID-19) and natural disaster emergencies (e.g. Christchurch Earthquake) would ensure immediate, direct support to the entire population as well as financial stimulus for the economy after financial shocks (e.g. GFC).

How it works

A UBI would be paid to all New Zealand citizens and permanent residents over the age of 18. It replaces all benefits of a lesser value (e.g. Supported Living Payments and the Jobseeker benefit). People on higher benefits would be no worse off. A child UBI would be paid to the parent(s) of all children under the age of 18. This would replace Working For Families of lesser value, those receiving higher rates would be no worse off.

All income would be taxed at a flat rate of 33% – a significant simplification of the current tax system. Progressiveness would still be achieved because the UBI creates a net 0% tax rate at around $39,000 per annum, with negative tax rates below and positive tax rates above. Companies, trusts and Portfolio Investment Entities (PIEs) would also face the 33% tax on profits, this would be an increase from 28% for companies and PIEs.

The RFRM tax would be applied to the equity on each property owned. A long-term, risk-free rate of 3% would be used to determine the deemed income on the equity in the property, and the 33% tax rate applies to this income. This effectively works out at a tax of 1% of the value of the equity in all property.

TOP has conservatively costed these changes, which end up broadly tax neutral overall. In particular, they would significantly reduce the bureaucracy within government departments and the paperwork for many kiwis. They would also achieve savings in other government transfers that are less generous than the UBI.

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Page last updated on 4-May 2020

FAQs

No. The UBI is paid tax free, you get the full $13,000 per year in the hand.

No. Everyone will be paid the UBI, then if your current transfer was larger than the UBI (e.g. NZ Super), you will be paid the difference as that transfer. So the UBI plus the top up is the same amount as (or greater than) the original transfer.

The exact method needs to be determined, but it will be paid fortnightly or weekly directly into your bank account. (Ideally this will be a unique bank account for each taxpayer to ensure the individual has access to their money, in any circumstances, by stopping any direct transfers to shared accounts).

The UBI will have to be applied for initially, so it will not be paid if not applied for. The RFRM Tax and flat 33% income tax will still apply to any individual regardless of their UBI status.

The RFRM will be invoiced monthly or quarterly similar to  rates. Like rates, there will be options for regular smaller payments or larger quarterly or annual payments.

There is the potential for this to happen however, given the current low inflation environment it is unlikely that general overall inflation will increase markedly and certainly not outside the Reserve Banks 1% to 3% preferred range. With an extra $16B in circulation (before the RFRM Tax is paid) in an economy of $310B GDP the maximum additional inflation would be 5% if there was no ability to increase supply or reduce consumption of goods and services. Given the complexity of interactions that result in inflation the number expected would be lower than this.

The RFRM is based on the council valuation of the property and the banks’ reporting to the Reserve Bank of average money owing for the previous 12 months. This gives the owner’s equity in the property.

Example 1

Dean and Emma have recently bought a $600,000 house together. They have a $450,000 mortgage giving them $150,000 equity in the house. Dean earns $50,000 per year while Emma earns $60,000. Under current tax rules this gives them a combined after-tax income of $90,960. Under the proposed regime their after-tax income increases by $7,255 to $98,215. This is after they pay the RFRM tax on their equity in the property of $1,485.

Example 2

Tim and Jan own their home freehold valued at $2,500,000. They also own a $500,000 holiday home giving them $3,000,000 equity in property. Tim earns $300,000 a year, and Jan is a stay-at-home mum and volunteer. Currently their combined after-tax income is $210,080.

With the UBI, tax changes and RFRM on the equity in their properties ($29,700) their after-tax income drops by $12,780 or 6% compared to current.

Example 3

Courtney and Dylan are renting as they try to save a deposit for a house. Courtney earns $50,000 and Dylan $40,000 per year. They currently have a combined after-tax income of $75,960 per year.

With the UBI and tax changes this increases to a combined after-tax income of $86,300 giving them an additional $10,340 per year in the hand.

Example 4

Mike and Sally have two young children with Mike in a minimum wage job earning $40,000 a year, and Sally staying at home with the children. In addition to Mike’s income they also receive $277 per week from Working for Families. This gives them a combined after-tax income of $48,384.

With both Mike and Sally receiving the UBI and the tax changes they would have a combined after-tax income of $52,800 without any Working for Families. Working for Families will be reviewed as part of the Benefit/Transfer review so there may still be some additional support, however Mike and Sally are still 9% better off without any additional support. Additionally, there is no reduction in the UBI with additional income from Mike working overtime or if he gets a pay rise unlike Working for Families.

Example 5

Anthony is on the Jobseeker main benefit. He has variable hours at a part time job in addition to this benefit and is hoping to move into full time work. His hours vary between 4 and 15 in any week and he is paid $20 per hour before tax. He is required to report hours worked to his WINZ staffer every week and his payments are adjusted accordingly.. Anthony sometimes works weekends but is required to report hours and earnings on Friday so his weekend figures are estimates. Any mistakes result in additional work by a WINZ staffer and further fluctuations in payments. Anthony currently receives $287 per week in a 4 hour week and $341 in a 15 hour week, an increase of $54 for earning an additional $220 from his employer.

With the UBI Anthony receives $303 in a 4 hour week, which is an increase of 6%, and in the 15 hour week he receives $451, which is an increase of 32% compared to the Jobseeker benefit. There is also no need for reporting of earnings to WINZ as the UBI is unconditional and the tax system takes out the required tax as PAYE, so there are savings for WINZ in time and effort.

No. The effect of interest costs are accounted for by only using the equity in the property rather than the total value of the property.

Yes, in some form. The RFRM is not a capital gains tax and the bright line sets a standard of behaviour for IRD that overrules stated “intention” for when the property is traded for capital gain.

No. The worst situation is for someone earning over $70,000 per year, for them the UBI and the 33% tax still leaves them $3,920 better off before the application of the RFRM tax if they own property.

No. While the RFRM tax will be an additional cost after purchasing the house, the UBI and tax changes will make accumulating the deposit for the house easier and faster. The RFRM tax should slow house price appreciation, meaning house prices do not grow by more than the deposit saved every year. Initially with low equity in the house (around 20%) the RFRM will also be low.

It depends what you mean by hard working. If the definition of hard working includes owning a house that appreciates in value while you do little to nothing then yes. If the definition of hard working covers people working long hours at minimum wage jobs then absolutely not. The working poor (low paid, fully or partially employed) benefit most from these changes.

Maybe. There will likely be some people for whom this is an attractive idea. However, people who are able and willing are more likely to pick up seasonal, or short term work in the absence of the incumbent stand down periods and reductions in eligibility of the current transfer / benefit system. In other words, it is designed to incentivise more work, not less.

No. NZ Super recipients get special treatment due to that group being asset rich and cash poor (in general compared to the rest of the population). They are given the option to roll over the RFRM tax until the property is sold so that there isn’t any effect on their available cashflow for living.

Additionally, the tax-free payment of NZ Super top up over the UBI will be higher than their current level, to ensure that those with a small amount of additional income to supplement NZ Super are not negatively impacted by the change in tax rates from 17.5% to 33%. 50% of NZ Super recipients will either be better off or no worse off with these changes.

The worst situation possible is for someone receiving the NZ Super couple rate and a total taxable income (including NZ Super) of $70,000 per year. They will be $85 a week worse off. This affects less than 10% of current NZ Super recipients and will usually apply to those only recently eligible for superannuation. Even so, they will still see an increase over their take home pay prior to turning 65.

Example 1

Michelle lives alone in her freehold home valued at $850,000. She receives Single Alone NZ Super giving her an after-tax income of $21,380. With the small increase in NZ Super and the RFRM tax ($8,415) Michelle is significantly worse off. However if she defers the RFRM until the house is sold her disposable income increases by $806 or 3.8% per annum.

Example 2

John and Sue are both over the age of eligibility and receive the couples rate of NZ Super. They own their $900,000 home freehold and also have a rental property valued at $300,000. The rental property returns $300 per week and expenses cost $100 per week so it returns $10,400 per year which is over the RFRM income ($9,000) so standard income tax on the $10,400 is due. Currently they have a combined after tax income of $41,472. If they defer the RFRM then their after tax income is unchanged, and with the RFRMtheir after tax combined income drops by $9,070 to $32,402.

Your UBI is unaffected by your partners income. Unlike current transfers, the UBI is an individual based payment (not a household payment), so everyone gets $13,000 per year.

This depends on whether the farm is operating as a business or is effectively a large lifestyle block. This will have to be justified to IRD to their satisfaction that the property is returning regular profit from land-based activities that exceeds the RFRM income. A property that does not return regular profit in excess of the RFRM income (3%) will need to pay the RFRM tax annually.

For a farm that regularly exceeds the RFRM rate of income, but will also have some years where returns are low (low milk pay-out, poor yields in dry/flood years), the tax due can be rolled forward as long as the average tax payment over any 5 year period exceeds the RFRM tax.

Example 1

A 1 hectare $300,000 freehold farm has a roadside stall that sells free range eggs and fruit when in season. After costs for chicken food, fertiliser and sprays the stall makes $5,000 per year. This is less than the $9,000 RFRM income so tax is due at 33% on the $5,000 profit from the stall ($1,650) with a further tax payment of $1,320 required to meet the minimum RFRM tax due of  $2,970 (33% x $9,000). If the stall generated $10,000 profit per year then tax of 33% at $3,300 would be due which exceeds the RFRM tax so no further tax for RFRM would be due.

Example 2

A dairy farm valued at $8,000,000 with debt of $3,000,000 generates an average profit of $200,000 per year over five years with a bad year returning only $100,000. With $5,000,000 equity the RFRM income is $150,000, and with a business tax rate of 33% a minimum RFRM tax of $49,500 is due per year. In a bad year the $100,000 profit only generates a tax bill of $33,000 so a further $16,500 should be paid to meet the minimum RFRM bill. However, this $16,500 liability can be carried forward to subsequent tax years, if the next year is an average $200,000 profit year the tax bill of $66,000 is $16,500 over the minimum RFRM rate of $49,500 so the $16,500 liability has been paid off. The total tax paid over the bad year and the average year is $99,000 which is equal to two years at the minimum RFRM tax rate of $49,500 per year.

Lifestyle blocks are treated like residential housing. There is no separation of land area into house or family home land and other as was proposed under the capital gains tax proposed by the tax working group. Whatever equity the owner holds in the lifestyle block will be subject to the RFRM tax as would a residential property of the same value.