Universal Welfare? An alternative taxation strategy

I'm in favour of universal welfare or any steps towards it. I believe that such a change in taxation/welfare reform can be independent of political persuasion. Universal welfare is simpler to manage. Political parties could argue over the numbers involved, but agree on the process.

If there was one relatively high tax rate for all income, but a huge tax free income bracket, then the effective tax rates would not be far removed from where they are now. A more universal approach to welfare could be an alternative option to the tax free bracket, meaning that essentially every $ earned pays a flat tax, but every adult and child also gets a set amount each year/month. This approach would also solve the income splitted equation where families only have 1 income.

For example (numbers indicative only):

  • Flat tax, 38%
  • Either
    • $21000 tax free bracket for single person
    • or $7000 benefit/rebate per adult and $3000 per child/

Lets take a 2 adult, 2 child family with household income of $100000. Potentially $38000 tax to pay, but with $20000 in family tax credits, that means only $18000 tax paid, or an effective tax rate of only 18% on $100000. Not really a reason to head for Australia is it?

For those on low incomes, they would potentially be getting family assistance top ups in addition to their income. For those on very high incomes, they would basically have a flat tax, probably always higher than they want it, but the reality would be that their effective tax rate would always be lower due to the tax free threshold. 

This approach to taxation and welfare would achieve huge benefits for individuals and the country as a whole. It would remove much of the administration of welfare and taxation. eg The tax office would not need to care how many nights a solo parent slept with a new partner. Companies and the tax office would not need to know how many jobs you had. You would merely pay the full tax rate on all income, unless the tax office had confirmed to your employer that this was your main job.

Let's consider some more examples.

  • A poor 2 parent family, struggling on a single average wage income, discovers they are much better off financially under universal welfare, where as the current system there is encouragement to divorce and for 1 partner to seek a domestic purposes benefit.
  • An unemployed person who gets the option of 1 day a week work, will take it, knowing that they will not loose their benefit, nor face extra administrative paperwork. They make a start back into the work force paying the same rate of tax as everyone else. Under the current system, many unemployed stay on the benefit until a full time job becomes available.
  • 2 professional parents determine that their net family income is the same if only 1 person works full time, or both work parttime, under universal welfare. Where as before there was a major difference, and this made co parenting difficult.
  • A parent needs to stay home to help look after a disabled child. They will receive some income assistance under universal welfare, but in the old scheme they received nothing.

What about working for families?

That scheme is well minded, in that it probably achieves close to the same result as universal welfare, however it adds just one more level of complication to an already complicated tax scheme.  Refer to the example below to see how much better a universal welfare scheme could replace working for families.

Example of Universal Welfare

In the chart below, we compare the "effective tax rates" in current tax system with teired tax rates of 12.5%, 21%, 33% and 38%, versus the Universal Welfare tax of 38% and a tax credit of $7000 per adult, and $3000 per child. The effective tax rate is the percentage of total tax paid from the total income earned, accounting for the fact that deductions to low teired tax rates do benefit all income earners, high and low. The working for families scheme is not taken into account here, because this chart aims to demonstrate how this system could replace working for families with universal welfare, and thus decrease significant administration cost. Under universal welfare, the result for families is quite different as the result for an individual, high earning individuals pay slightly more tax under universal welfare, and families pay much less. But in either case we achieve an progresive tax scale, that is easy to administer, and we remove the need to have a separate working for families scheme.


Current System

Universal Welfare



Tax Earner

Single Person
Family 2+2
Income Tax Paid Amount Effective Rate
Tax Paid Amount Effective rate Tax Paid Amount Effective Rate
$10000 1250 12.50%
-3200 -32.00% -16200 -162.00%
$20000 3010 15.05%
600 3.00% -12400 -62.00%
$30000 5110 17.03%
4400 14.67% -8600 -28.67%
$40000 7210 18.03%
8200 20.50% -4800 -12.00%
$50000 9550 19.10%
12000 24.00% -1000 -2.00%
$60000 12850 21.42%
15800 26.33% 2800 4.67%
$70000 16150 23.07%
19600 28.00% 6600 9.43%
$80000 20050 25.06%
23400 29.25% 10400 13.00%
$90000 23950 26.61%
27200 30.22% 14200 15.78%
$100000 27850 27.85%
31000 31.00% 18000 18.00%
$150000 47350 31.57%
50000 33.33% 37000 24.67%
$200000 66850 33.43%
69000 34.50% 56000 28.00%
$250000 86350 34.54%
88000 35.20% 75000 30.00%








 

Posted: Wednesday 24 February 2010

Comments

  • I believe you're on the right track, but it could be even simpler using Gareth Morgan's Big Kahuna. http://www.mywitsend.co.nz/wp/the-big-kahuna/
    Posted: 2010-10-11 12:34 by Alan Vallis    

This website is sponsored by Website World. Click here to find out more.