Tax and Basic Income

This page looks at Basic Income and tax issues.

• This page discusses how an appropriate tax regime for use with a Basic Income might be created. 
• The figures given on this page are estimates only. 
• The examples given are for illustrative purposes and do not necessarily represent the policy of this organisation. 
• All references to the “present progressive tax system” or to a “progressive tax system” refer to the present New Zealand progressive tax system with existing tax rates and thresholds unless explicitly stated otherwise.  
• All references to cost are to the net expenditure by the government and not to costs incurred by individuals or firms. 
• Targeting allows a higher value Basic Income when compared to the total net cost of the scheme.
  • A scheme with better targeting delivers a higher Basic Income at less cost per person.
• A Basic Income scheme broadly targeted toward those on lower incomes, offering more support to those in need, will be cheaper and easier to introduce politically.
  • This can be achieved by paying a Basic Income with a tax regime that achieves broad targeting.
• Paying higher net value Basic Income payments to more people with less targeting is counterproductive.
  • A Basic Income scheme that gives more money to more people will cost more and require more funding.
  • Higher taxes are needed to fund a Basic Income with larger payments or less targeting, making it politically difficult to implement the scheme.
• A Basic Income with a single proportional tax rate improves targeting, but if the tax rate is lower than the higher tax rates of the progressive system it replaces, it will give tax cuts to high-income earners.
  • A two, three or more-stage, tax system with higher rates for higher incomes will avoid tax cuts.
• A Basic Income can be supported by a progressive tax scheme that targets income better than a proportional tax.
  • However, a scheme with low initial tax rates will require higher tax rates on higher incomes, potentially leading to tax avoidance and other issues.
  • Higher initial rates enable a scheme that focuses Basic Income on lower incomes, with smaller increases in rates required for higher incomes.
• An appropriate tax enhances the benefits of a Basic Income. It will:
  • ensure those with the lowest incomes benefit the most,
  • and avoid undue tax increases for those on any income.

A tax scheme that does not meet these objectives will make the Basic Income scheme less effective and increase costs.

A more expensive scheme will be more difficult to introduce. 

• A Basic Income and a tax regime should apply equally to all. 
• Ensure tax changes with a Basic Income do not unfairly benefit those who do not need extra income.
• A poorly designed tax regime will unduly add to the overall cost of a Basic Income.  
• Tax cuts and adjustments that favour the wealthy over low-income individuals are not suitable for a Basic Income scheme.
  • They counter the objectives of a Basic Income, which are to support those in greatest need and ensure a smooth transition for those with less need, with minimal administrative costs.
• There is a need to avoid the temptation to use a progressive tax and reduce the tax rates for the first tax steps in order to benefit those with the lowest incomes as this will:
  • reduce the taxes paid in absolute dollars by those on high incomes more than those on lower incomes and
  • significantly add to the total cost of a Basic Income scheme. 
• If the number of tax steps are reduced with the introduction of a Basic Income, it is important to ensure that high-income earners do not get a tax cut because this will:
  • advantage the wealthiest instead of the poorest, and
  • raise the total cost of the program.
• The best way to target value to those on low incomes is to use a Basic Income with an appropriate tax regime, as explained in more detail below.

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This page compares different outcomes when a Basic Income is paid with various possible tax systems, allowing the most appropriate tax scheme to be determined. 

• A Basic Income, coupled with a suitable tax system, will focus support toward those who need it the most, reducing the scheme’s overall cost.
•  Tax-free or Taxable.
  A Basic Income may be paid as a taxable or tax-free amount.
  • New Zealand Superannuation and New Zealand welfare benefits are paid as taxable income.
  • If a Basic Income is taxable, it is added to other income, and the annual tax is determined on the total income.
• Paid with a progressive, proportional or regressive tax.
  A Basic Income may be paid in conjunction with a progressive, proportional, or regressive income tax, or alternatively, in conjunction with a single, two, three, or more stage tax scheme.
  • With a multistage tax system, the stages may be any combination of proportional, progressive or regressive in any order.
  • The combination of a taxable or tax-free Basic Income with three possible tax options, proportional, progressive, or regressive, gives six possible options.
  • With a multistage tax regime and variations in tax thresholds and tax rates, the number of options increases.
• Basic Income and proportional tax.
  If a Basic Income is paid with a proportional tax, the net amount the government pays is the same for both a taxable and a non-taxable Basic Income.
  • This is true when the net amount is held constant and the gross value varies as the tax rate varies..
  • With a proportional income tax, if the net value is constant, there is no difference in the net cost to the government between a taxable and non-taxable Basic Income.
• Targeting the Basic Income.
  A taxable Basic Income paid with a suitable tax regime can increase targeting toward those with the lowest incomes.
  • Targeting maximises payments to those with the lowest incomes while reducing the overall cost of the scheme.
  • A broadly targeted Basic Income using taxes minimises the funding required from increased or alternative taxes.

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New Zealand has a five-stage progressive tax system with five tax brackets. Higher incomes are taxed at higher rates.

New Zealand tax rates from 31 July 2024:

Example: a person earning $200,000 per annum will have the first $15,600 taxed at 10.5%, income between $15,601 and $53,500 taxed at 17.5%, income between $53,501 and $78,100 taxed at 30%, income between $78,101 and $180,000 at 33% and the remaining income taxed at 39%.

• The marginal tax rate (MTR) is the tax rate paid on the last dollar earned. The rates are 10.5%, 17.5%, 30%, 33% and 39%.

For past tax rates, see: New Zealand tax rates on the page:
How big will a Basic Income be?

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Some Basic Income supporters previously suggested funding a Basic Income with a single-rate or proportional tax.

• With a proportional tax, the tax paid is proportional to income.

Advantages of using a single-stage proportional income tax.

• Simplicity. There is only one tax rate that applies to all.
• A typical example might be a 33% proportional tax.
• The Basic Income may be paid as a taxable or tax-free amount without any additional cost to the government.

Disadvantages of a single-stage proportional income tax.

• If the tax rate chosen is less than the higher rates on the present progressive tax scale, those on higher incomes will receive a tax cut.
  • This reduces government tax revenue that might have been used to pay the Basic Income.
  • Higher tax rates elsewhere, or new taxes, may be required to compensate for the loss in tax revenue.
  • In New Zealand, the maximum tax rates on the present progressive scale are 33% and 39%. If a 33% proportional (flat) tax is introduced, those with an effective marginal tax rate in the 39% bracket will receive a tax cut.
  • In Australia, the maximum rates on the present progressive scale are 37% and 45%. If a 33% proportional (flat) tax is introduced, those with an effective marginal tax rate in the 37% or 45% bracket will receive tax cuts. Note: In Australia, a 2% Medicare levy is also paid in addition to the tax rates above.
  • To avoid giving those with higher incomes a tax cut when a Basic Income is introduced with a 33% base rate, a multistage tax scale is necessary.

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There are three types of tax: regressive, proportional, and progressive (see Taxation Basics).

Some Basic Income advocates suggest that people should be taxed in proportion to the amount they earn at a constant rate. This is variously known as a proportional tax, a uniform tax, or a flat tax.

A proportional tax is sometimes suggested for funding a Basic Income because it can lower the overall cost of a Basic Income scheme and better target the income support to low-income individuals than the current progressive tax system.

• However, further cost reduction and improved targeting can be achieved with a two or three-stage progressive tax system as described in the sections below.
• A proportional tax provides better targeting of a Basic Income to those with low incomes than can be achieved with the present progressive tax system. 
• See: “How do incomes change with a Basic Income?” below for worked examples that show how the combination of a Basic Income with a suitable tax provides improved targeting and lower overall cost.
• Present, tax-free thresholds in some countries and progressive tax systems with low initial rates are intended to give people on low incomes an effective discounted tax rate on their low incomes.
  • But while they give a discount to those on low incomes, they also give the same or larger value discounts in absolute amounts to those on higher incomes.
  • The people who need the discounts the most get the smallest discounts!
• A progressive tax with lower initial rates for low incomes reduces overall government income because high earners also benefit from the tax discounts.
  • To make up for this loss, governments must increase rates for high earners, and more so as there are fewer high-income earners.
  • However, high marginal tax rates on higher incomes can lead to tax avoidance and discourage work.
• Governments, aware that tax rate increases are unpopular, may compensate for reduced tax income arising from lower initial income tax rates by cutting essential expenditures such as education, health and public services.
• A better solution is to pay a Basic Income to all and tax all other income with a proportional tax or an improved two or three-stage progressive tax scheme.
• Note: Moving from a progressive tax to a proportional tax scheme that abolishes the lower tax rates can also decrease the effective tax rate (ETR) for those with high incomes and reduce government revenue.
  • To avoid this, it’s better to keep the higher tax rates with a multi-stage tax system than to use a flat tax.
• For other alternatives, see the two-stage and multi-stage taxes below.

As a general rule, a regressive tax is not recommended as it accelerates the transfer of wealth from the poor to the wealthy.

However, it is possible to combine a Basic Income with an initial regressive tax and subsequent progressive tax in such a way that the overall result is progressive. This is explained in more detail in the sections below.

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New Zealand tax values are used in the following examples.

• If we take the highest tax rate of 39% as the standard tax rate, a progressive tax system gives an effective tax exemption or discount on the lower income brackets, below $180,000.
  • Converting to a proportional tax usually involves removing the discounted or lower tax rates so that all income is taxed at a higher marginal tax rate.
  • In New Zealand, this may be a proportional tax in the range of 33% to 39%.  
• Changing to a proportional tax of either 33% or 39% without some form of compensation for lower-income earners will significantly hurt those on low incomes.
  • With a 33% proportional tax, those with low incomes will have a 22.5% tax rate increase, from 10.5% to 33%. 
  • With a 39% proportional tax, those with low incomes will have a 28.5% tax rate increase, from 10.5% to 39%.
  • This increased tax must be offset with a Basic Income to avoid a significant loss of income by low-income earners.  
• Reducing the proportional tax rate further, to a value less than 33%, to say 30% in an attempt to benefit those on low incomes will, however, give those with incomes over $78,100 but less than $180,000 a 3% cut in marginal tax, and those with incomes over $180,000 a 9% cut in marginal tax while still significantly increasing the tax on those with the lowest incomes.
  • With a 30% proportional tax, those on an income of $180,000 or greater at present will receive a 9% cut in their marginal tax rate.
  • Changing to a proportional tax without a Basic Income hurts those on low incomes and benefits those on high incomes.
• Changing to a proportional tax of 33% may result in a person on the minimum income paying an additional 18% in tax, a person earning more than $78,100 paying an additional 13% and a person earning more than $180,000 paying an additional 5%.
• As a percentage, the tax increase declines as income increases so the greatest negative impact is on those with the lowest incomes. Those on the lowest incomes are hit the hardest. 
• A change to a proportional tax gives the greatest percentage increase in tax to those on the lowest incomes and a tax cut to those on the highest incomes, while making very little difference in total taxation as a percentage to those on very high incomes.
  • Without a Basic Income, a change to a proportional tax favours the wealthy while driving those on low incomes into poverty.
  • Without a Basic Income, this is a regressive change as it hits those on lower incomes harder than those on higher incomes. 
• As a change to a proportional tax has a major impact on the net incomes of low-income earners and little impact on high-income earners, it should not be considered without a Basic Income.
• However, with a Basic Income, a desirable outcome is achieved. This will be demonstrated in more detail below.

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A Basic Income might be paid as a taxable amount or as a tax-free amount, and taxation might be either regressive, proportional or progressive. This gives six possible combinations.

With a progressive tax, the tax may be the existing tax scheme or one that is better suited to providing Broad Targeting with a Basic Income. This increases the number of possibilities.

We examine the possibilities below to determine the best combination.

• To provide a fair comparison of the different possibilities, the net or after-tax value of the Basic Income when there is no other income, which is the actual cost to the government, must be the same in all cases. 
• Two of the combinations, a taxable Basic income or a tax-free Basic Income, paid in combination with a proportional tax (flat tax) on other income, produce exactly the same results.
  • This occurs because, with a proportional tax, the tax rate on a taxable Basic Income is the same as on other income and is constant and does not vary with income.
  • This reduces the number of combinations to compare.

The principal possibilities:

1. A Basic Income, either taxable or tax-free, paid with a proportional tax:
   • is the simplest option to implement,
   • provides a Basic Income that is targeted to those with the lowest incomes, and
   • gives a scheme that provides value at a lower overall cost than a Basic Income paid with the present progressive tax.
   • However, if the tax rate chosen for the proportional tax is less than the maximum marginal rate under the present progressive tax system, a tax cut for those on the highest marginal rates will occur.
     • To prevent tax cuts for high-income earners, a two or more-stage tax as necessary is recommended, with the higher marginal tax rates maintained. 
2. A taxable Basic Income with an improved progressive tax provides better broad targeting and lower cost than either a taxable or tax-free Basic Income paid with the present progressive tax or with a proportional tax, and:
   • provides the best Broad Targeting
   • is the lowest cost option.
   • but is a little more complicated than the first option above.
3. A taxable Basic Income with the present progressive tax:
   • provides poor targeting and
   • is an expensive option
4. A tax-free Basic Income with the present progressive tax.
   A tax-free Basic Income scheme that combines a Basic Income with the present progressive tax is the least targeted toward those on the lowest incomes,
   • is the most expensive option and
   • should not be contemplated for any Basic Income scheme.   

• Basic Income advocates usually recommend option 2, a taxable Basic Income with the total income received taxed with a suitable progressive tax.
  • For discussion on targeting a Basic Income using tax, see our Targeting and Taxation page.
  • Another alternative is when a two or more-stage tax is used for a scheme such as the Transfer Limit of Ulm Model discussed below.

In summary, a taxable Basic Income paid with a suitable tax system can provide the best Broad Targeting of a Basic Income toward those with the lowest income while minimising the cost of the scheme.

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The examples below show how net incomes vary with different Basic Income values and tax schemes.

The examples below use New Zealand payment and tax rates applicable for the year beginning 1 April 2025.

Example 1. A net Basic Income of $194 per week, $10,122.50 p.a.

A Basic income of this size is less than the recommended minimum for a useful Basic Income, but might be used during the introduction of a Basic Income.

Some Basic Income advocates suggest a net Basic Income of $194 p.w., $10,122.50 p.a., be paid with a two-stage tax, 33% for incomes less than $180,000 p.a., with a 39% marginal tax on incomes above $180,000.

A net Basic Income of $194.00 p.w. is just enough to offset the $10,122.50 p.a. extra tax paid by those with incomes greater than $78,100 if the present progressive tax is replaced with the two-stage tax described above, 33% on incomes below $180,000 p.a. and 39% on earnings above $180,000 p.a. A slightly larger Basic Income of $214 p.w., $11,166 p.a. would ensure that no one is worse off with a change to this two-stage tax.

For comparison purposes, the income levels used in the examples below will be:

1. No income
2. minimum income of $23,50 per hour, $940 p.w., or $49,046.85 p.a., and
3. $78,101 p.a. to $180,000 p.a.
4. $180,000 p.a. or greater if different from $78,100 or greater.

All increases in income shown below are net or after-tax values.

Considering three tax options.

1. A taxable Basic Income of $216.76 p.w. ($11,310 p.a.) gross, which gives a net Basic Income of $194.00 p.w. ($10,122.50 p.a.) when paid with a 33%-39% 2-stage tax with a threshold at $180,000 per annum.
   • A person with no income will receive the full $194.00 p.w., ($10,122.50 p.a.) net.  
   • A person on the minimum income of $23.50 per hour (p.h.) ($940 p.w. or $49,047 p.a.) will receive $27.37 p.w. ($1,428.31 p.a.)
   • A person on $78,100 p.a. or greater will receive no extra income.
   • A person on $180,000 p.a. or greater will pay an extra $17.37 pw., ($906.55 p.a.)
     
     These figures indicate targeting of the Basic Income toward those on the lowest incomes.
      
2. A taxable Basic Income which gives a net value of $194.00 p.w. when paid with no other income, with the present tax rates.
   • A person with no income receives the full $194.00 p.w., ($10,122.50 p.a.).
   • A person on a minimum income of $23.50 p.h. ($940 p.w. or $49,047 p.a.) receives an extra $162.40 p.w., ($8,473.74 p.a.).
   • A person with an income of $78,100 p.a. or more but less than $180,000 receives an extra $145.23 p.w. ($7,577.69 p.a.),
   • A person earning above $180,000 will receive an extra $132.22 p.w. ($6,899.09).
     
     Shows reduced targeting toward those on lower incomes when compared to option 1. above.
      
3. A tax-free Basic Income with the present tax.
   • A person with no income receives the full $194.00 p.w., ($10,122.50 p.a.).
   • A person on the minimum income receives the full $194.00 p.w., ($10,122.50 p.a.). 
   • A person earning $78,000 or more receives the full $194.00 p.w. ($10,122.50 p.a.).
     
     Indicates no targeting of the Basic Income.

Example 2. A net Basic Income of $361.32 per week ($18,852.77 per annum) (from 1 April 2025).

• This Basic Income payment rate is the same as the adult jobseeker rate from 1 Apr 2025.
• The nominal gross value of this Basic Income payment rate is $412.51 per week ($21,523.74 per annum).
• The gross minimum income is $23.50 p.h., $940 p.w., or $49,047 p.a.
• With the current progressive tax, the after-tax or net income for a person on the minimum income is $796.22 per week or $41,554.95 per annum.
• With a 2-stage tax of 33%-39% with a threshold of $180,000, the after-tax or net income for a person on the minimum income is $629.80 per week or $32,861.39 per annum. 

Considering the three tax options.

1. A taxable Basic Income of $412.51.76 p.w. ($21,524 p.a.) gross, which gives a net Basic Income of $361.32 p.w. ($18,852.77 p.a.) when paid with a 33%-39% 2-stage tax with a threshold at $180,000 per annum.
   • A person with no income will receive the full $361.32 p.w., ($18,852.77 p.a.) net.  
   • A person on the minimum income of $23.50 per hour (p.h.) ($940 p.w. or $49,047 p.a.) will receive $194.69 p.w. ($10.158.51 p.a.) additional income.
   • A person on $78,100 p.a. and less than $180,000 will receive $167.32 p.w. ($8,730.27 p.a.) additional income.
   • A person on $180,000 p.a. or greater will pay an extra $134.97 pw., ($7,041.97 p.a.).
     
     Shows targeting of the Basic Income toward those on the lowest incomes..
      
2. A taxable Basic Income which gives a net value of $361.32 p.w. when paid with no other income, with the present tax rates.
   • A person with no income receives the full net payment of $361.32 p.w., ($18,852.77 p.a.).
   • A person on a minimum income of $23.50 p.h. ($940 p.w. or $49,047 p.a.) receives an extra $299.49 p.w., ($15,626.39 p.a.). (2025)
   • A person with an income of $78,100 p.a. or more receives an extra $276.44 p.w. ($14,423.90 p.a.), reducing to an extra $251.68 p.w. ($13,132.21 p.a.) for incomes above $180,000 p.a.
     
     Shows reduced targeting toward those on lower incomes when compared to option 1 above.
      
3. A tax-free Basic Income with the present tax.
   • A person with no income receives the full $361.32 p.w. ($18,852.77 p.a.).
   • A person on the minimum income receives the full $361.32 p.w. ($18,852.77 p.a.).
   • A person earning $78,000 or more receives the full $361.32 p.w. ($18,852.77 p.a.).
     
     Indicates no targeting of the Basic Income.

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An examination of these figures shows:

• When a person has no other income, all three tax options deliver the same net Basic Income
• the first option of a Basic Income paid in conjunction with a two-stage tax on all other income is the best means of targeting the Basic Income to those on low incomes, keeping the overall cost of a Basic Income scheme down.
• of the three options, option 3, a tax-free Basic Income with a progressive tax on other income, pays the greatest net amount to those on higher incomes
• Option 3, a tax-free Basic Income with the present progressive tax, is the least targeted and the most expensive option, increasing the incomes of those who do not need additional income more than any other option. 

The best-targeted and lowest-cost Basic Income scheme is achieved when a taxable Basic Income is combined with an appropriate progressive tax.

• All New Zealand welfare payments, such as Jobseeker Support, are, as a general rule, considered taxable income.
• With welfare payments, the government deducts tax from the gross amount and pays the net amount to the recipient.
  • The cost to the government of deducting tax at source is negligible.
• Similarly, when a taxable Basic Income is paid, the government will deduct tax at source and pay the net or after-tax amount.
• Making a Basic Income taxable improves the Broad Targeting of the Basic Income, reducing the required increase in tax rates.
• Taxing total income, other gross income plus the gross Basic Income, with a suitable progressive tax, provides the best targeting of the Basic Income to low-income earners.

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No.

Only those receiving a Basic Income will be taxed with the new scheme.

• A feature of a Basic Income scheme paid in conjunction with a proportional tax is that only those receiving a Basic Income will need to have their income taxed at the new tax rates.
  • This enables a Basic Income to be introduced voluntarily and progressively. 
• The combination of a Basic Income with a new tax regime enables trials to be set up if thought desirable, and for these trials to be localised or for those on the trial to be dispersed throughout the country.

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• A Basic Income is usually limited to citizens or permanent residents. It’s important to consider how to treat those on temporary work permits fairly. Here are some options:
  • First, provide no Basic Income and tax temporary residents with the current progressive tax system.
  • Second, pay full-time workers a Basic Income and tax them with the appropriate tax.
  • Third, allow full-time workers to choose between receiving a Basic Income with the appropriate tax or receiving no Basic Income and being taxed with the present progressive tax.
• The situation is more complicated for temporary residents in part-time employment.
  • A full Basic Income payment for such people would not be appropriate, so they are likely to receive no Basic Income and be taxed with the present progressive tax system. 

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Yes.

• Yes. Existing computer systems are designed to handle several different tax systems with different rates simultaneously. 
• At present, people undertaking work must indicate if their employment is their main or secondary employment and they are taxed at different rates depending on their response
  • Those doing contract work are taxed at another rate.
  • Those on a Basic Income scheme will be taxed at the tax rates for someone receiving a Basic Income. 
• Inland Revenue computers handle various tax rates now. Incorporating a suitable tax scheme for those on Basic Income will not be difficult.
• Government computer systems already handle New Zealand Superannuation and various welfare payments, such as Jobseeker Support.
  • It will not be difficult to include Basic Income payments. 

Why use a two-stage tax?

• Some Basic Income proposals use a two or three-stage tax system.
  • With such tax systems, the tax rate may either increase or decrease above pre-set income thresholds. 
• Using a two or three-stage tax gives the designers of a Basic Income more flexibility.
  • Tax rates for net recipients and net payers can be adjusted independently to ensure that payments to recipients are balanced by the extra tax raised, or to maximise the benefits achieved with a Basic Income. 

Basic Income and a one-stage uniform (proportional or flat) tax

• When a uniform (proportional or flat) tax is combined with a Basic Income, the Effective Tax Rate (ETR) is progressive.
  • That is, the ETR progressively increases as gross income from other sources increases.
  • This is because the Basic Income may be considered to be a negative tax payment, and when the constant negative Basic Income payment and the positive uniform tax are added together, the net result is negative for those on low incomes, so the ETR is negative.
  • As gross income from other sources increases, taxation on other income increases proportionally.
  • As other income increases, the tax paid eventually exceeds the Basic Income received, so the ETR progressively becomes less negative and eventually becomes positive.
  • While the marginal tax rate on other income has not changed, the ETR on all income progressively increases from negative to positive. 

Basic Income with a two-stage tax

• Changing the tax rate on income above a threshold changes the rate at which the ETR increases, but the increase in ETR with other income remains progressive, except for some very unusual cases.  
• Some Basic Income proposals use a two or three-stage tax system.
  • Using a two or three-stage tax gives the designers of a Basic Income more flexibility.
  • Tax rates for net recipients and net payers can be adjusted independently to ensure that payments to recipients are balanced by the extra tax raised, or to maximise the benefits achieved with a Basic Income. 
• With a two-stage tax system, the tax rate may either increase or decrease above pre-set income thresholds. 
  • In the first case, a lower initial tax rate that increases above a threshold gives lower marginal tax rates on income earned by those with low-income or part-time work, reducing the disincentive to work.
    • However, this reduces the overall government tax income with a Basic Income scheme, so higher tax rates are necessary above the threshold to maitain government tax income.
  • In the second case, a higher initial tax rate and a lower rate above the threshold will increase the government tax revenue with a Basic Income scheme and limit those who benefit from it, but will have the disadvantage of higher marginal tax rates for those on lower incomes and those with part-time work.
    • A tax rate that decreases above a threshold is a regressive tax system.
    • A special case of a tax rate that decreases beyond a threshold is the Transfer Limit or Ulm Model. 
  • With the Transfer Limit or Ulm Model, the initial marginal tax rate is higher than the second tax rate, giving a regressive tax with the threshold occurring at the Transfer Limit.
  • However, with a Basic Income included, the overall tax rate or effective tax rate (ETR) is likely to remain highly progressive as other income increases.

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• The Ulm Model (Deutsch: Ulmer Modell) was developed at the University of Ulm in Germany. It is a special case of a Basic Income combined with a two-stage tax system where the tax rate reduces above a threshold. 
• With the Ulm Model, the threshold is set at the Transfer Limit, where the net Basic Income equals the tax paid on other income. At this point, net income equals gross income.
• When other income is less than the Transfer Limit, the Basic Income will be greater than the taxes paid. When other income is greater than the Transfer Limit, the taxes paid will be greater than the Basic Income received. 
• The advantage of the Ulm Model with a higher initial tax rate is that it reduces the overall cost of a Basic Income scheme by more effectively targeting the net Basic Income payments toward those with the lowest incomes.
  • The higher initial tax rate abates the Basic Income as other income rises until the transfer limit is reached, after which taxation occurs at a lower rate.
• A disadvantage is slightly higher marginal tax rates for those on lower incomes. 

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• With the Ulm Model, the initial or higher tax rate continues until the transfer limit occurs.
  • This is the gross income level where the net Basic Income received is equal to the tax paid on gross income.
  • Beyond this point, the tax paid will exceed the net Basic Income received. 
• With the modified Ulm Model, the higher initial marginal tax rate paid continues until the point is reached where the net income received with a Basic Income and other income at the higher initial tax rate is equal to the net income received with the present progressive tax and no Basic Income.
  • This will improve the targeting of the Basic Income to those on lower incomes,
  • increase the savings achieved and
  • further lower the overall cost of the Basic Income scheme.

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Is there a case for a three-stage tax or a greater number of tax stages?

• Some Basic Income advocates argue that there is a case for using a three-or-more-stage tax when implementing an Ulm Model or Modified Ulm Model taxation system.  
• This is because the present tax system’s progressive tax scheme may have higher marginal rates of taxation for those on higher incomes.  Choosing a second-stage tax rate lower than the highest rates will result in tax cuts for those earning income in the higher tax bands. 
• New Zealand’s highest tax rate of 39% for those earning over $180,000. If a 33% tax were introduced as the second tax rate for all those earning above the threshold between the first and second tax rates, those earning above $180,000 would receive a tax cut.
  • This can be countered by introducing a third tax rate for those earning above $180,000.  
• Similarly, extra tax thresholds and tax rates could be introduced if necessary or when existing tax regimes have a greater number of higher tax bands, but more than three tax bands are usually not considered necessary in New Zealand.

 Once fully implemented, a modest Basic Income becomes largely self-sustaining with little or no tax increases required.

• Without increasing tax rates or new or additional taxes, taxes received by the government will rise as extra money circulates.

However, some additional taxation may be necessary due to leakage, money being held in bank accounts rather than circulating or being spent in other countries, slowing the velocity of money. 

• With a Basic Income, savings are made by eliminating welfare payments of the same or less value and partially replacing welfare payments of greater value. 
• Additional tax revenue is raised by paying the Basic Income as a taxable amount.
  • For those receiving a Basic Income, adding the gross value of the Basic Income to other income received and taxing the total income with an appropriate tax, such as a two or three-stage progressive tax as discussed above, will increase tax revenue.
  • Alternatively, this can be seen as “Broad Targeting”. targeting the Basic Income toward those with the lowest incomes, or seen as a way of lowering the real cost of a Basic Income. 
• The extra money circulating in the economy will increase expenditure and economic activity, increasing GST revenue, increasing employment, and increasing income tax, profit tax, and tax on interest and dividends.
  • Modelling shows that after an introductory period, 99% of the money paid out as a Basic Income will return as taxes.
  • The additional money required from other sources to fund a Basic Income is, therefore, less than 1% of the total money required to pay a Basic Income.  
• Trials have shown that paying a Basic Income causes a multiplier effect, boosting the economy and government tax revenues.
• Basic Income trials in various countries show improvements in physical and mental health, particularly for low-income recipients, and reductions in crime.
  • Improvements to mental health and reduced crime will result in reductions in government expenditure, freeing money which may be used to fund the Basic Income. 
• If there’s a tax revenue shortfall, advocates have proposed various ways to increase tax revenue.
  • BINZ advises considering all alternatives but does not endorse any specific tax increase.
  • Distributing tax increases among different taxes helps avoid economic distortions.
  • While several suggestions follow, other options are available.

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A Basic Income introduced with an appropriate income tax is broadly targeted to those with the lowest incomes.

• Such a Basic Income becomes largely self-funding over time as tax income rises to match increased government expenditure.
• Increases in tax to make up for any shortfall is ideally spread over a number of taxes to avoid undue distortions of the economy.

Several possible taxes that might be used to fund a Basic Income follow. There are other possibilites.

• BINZ suggests that all alternatives be considered carefully, but does not support any particular additional tax.
• Spreading tax increases over several different possible taxes is a way of minimising distortions to the economy and unintended consequences.

A Land tax or special property tax has been suggested as another alternative, perhaps as an additional levy on rates.

• New Zealanders already pay GST on rates so this would be an additional charge.
• While some see no need for exemptions, others consider that this tax will also impact those on lower incomes and penalise savings so suggest that either the family home or perhaps the first $750,000 to $2,000,000 of property should be exempted from this new tax.
• A property tax rather than a comprehensive wealth tax is suggested as it will encourage people to invest in productive industries rather than parking their wealth in land but it will not be as effective as a comprehensive wealth tax at countering a very large accumulation of wealth by a small number of individuals. 

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A transaction tax on bank and other transactions, either within New Zealand or on foreign transactions, has been suggested.

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A consumption tax may be applied in various ways including sales taxes and VAT or GST. Increasing GST is one way of increasing tax revenue. The following points should be noted.

• GST increases will increase the cost of goods and services requiring those on low incomes to spend more for essential goods and services. Consequently, the value of the Basic Income must be increased further to compensate for the increased cost of living.
• Unduly high GST rates may result in more goods being purchased online from foreign countries so this loophole must be closed and kept closed.
• Some people may travel to foreign countries with lower GST rates to purchase goods or services or to spend their money on various activities. 
• High GST rates tend to target those on lower incomes more as people on lower incomes spend a greater proportion of their incomes on goods and services. This adds to the flow of wealth from the poor to the wealthy.
• While those with higher incomes will spend more on goods and services and consequently more in total GST they generally spend a smaller proportion of their total income on goods and services than those on lower incomes. This allows the wealthy to continue to increase their absolute wealth at a faster rate than those with low wealth and low incomes.  
• GST paid by firms on the purchase of big-ticket items such as aircraft, busses, and so on will result in higher costs to the firms that will be passed on to consumers and impact those with lower incomes more than those with higher incomes.
• High living costs due to GST increases may be a disincentive to inbound tourism while encouraging outbound tourism resulting in reduced government tax revenues and reduced private revenue from tourists.
• van Parijs and Vanderborght, 2017, note that increases in GST are unlikely to produce sufficient increased revenue to allow the abolition of income taxes. They say, that like a linear expenditure tax, a GST will tend to tax the incomes of high earners at a lower rate, owing to their saving a higher proportion of their income. They conclude, that “there is no fundamental reason for rejecting GST or another form of sales tax as a way of funding a Basic Income, but no fundamental reason for adopting it either”.

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A comprehensive wealth tax has also been suggested.

• This will tax all accumulated wealth, including property, bank accounts, and investments.
• Again, an exemption of say $750,000 to $2,000,000 might be introduced to avoid penalising the least wealthy or to avoid discouraging savings.

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• Taxing capital gains tax on properties is sometimes seen as taxing another form of income but there are issues.
• Capital gains or part of capital gains may be due to inflation and therefore not a real gain in value or real income. Capital gains must therefore be corrected for inflation. 
• Capital gains are not realised until a property is sold. This means that accurate records must be kept of the purchase price of properties. Private homeowners may find they do not have sufficient funds to purchase a home of the same value after their property is sold and the capital gains tax is deducted. 
• An exemption of say $750,000 to $2,000,000 on properties or exempting a family home might be introduced to avoid penalising the least wealthy homeowners or to avoid discouraging private home purchases. Many countries exempt the family home from capital gains for this reason.
• Capital gains taxes do not directly tax accumulated wealth which may be a greater problem than capital gains.
• Some consider that a wealth or property tax is preferable to a capital gains tax.

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Environmental taxes such as carbon taxes have been suggested.

• Such taxes are not directly related to the central issues of income and wealth that a Basic Income seeks to address, but
• Spending such taxes on a Basic Income could be justified as a fair way of distributing additional government income gained from a new tax.