Free enterprise without poverty Effectively Progressive Income Tax UBI-FIT = Universal Basic Income + Flat Income Tax: a rational, centrist blend of efficiency, transparency, fairness and freedom © Richard Parncutt 2006-2016; talk on 16.6.09 ppt

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Further information

• Netzwerk Grundeinkommen
• Bien
• Global Income
• Basic Income Initative (please sign!)

Summary

UBI-FIT aims to significantly reduce the gap between rich and poor within industrialized countries, and to effectively eliminate poverty. UBI-FIT stands for Universal Basic Income and Flat Income Tax. "Universal" (or unconditional) means applying to all taxpayers and all welfare recipients in the country in question - including children and pensioners. Under UBI-FIT, everyone would be treated equally with one exception: people with disabilities would get a special deal (as they do now). 

At first glance, this seems impossible. Two questions arise immediately. (1) Why give money (basic income) to people who don't need it (the rich)? (2) Progressive income tax scales aim to reduce poverty, so how can poverty be reduced by getting rid of them? Let's briefly consider each question.

(1) For low income earners and the unemployed, unconditional basic income would replace current benefits. The money would be much the same, but the labels would be different. For high income earners, unconditional basic income would be much smaller than the tax that they pay, or should pay. They would pay more tax, because tax evasion and avoidance would be reduced through a general simplification of the system and increase in transparency, as I will explain in detail below. That would compensate several times over for the basic income that they also receive.

(2) Progressive tax scales may seem to benefit low-income earners, but the gradually increasing gap between rich and poor in most countries suggests that something is seriously wrong. In fact, the total amount that low earners gain (and high earners lose) from progressive tax scales and social benefits is smaller than the total amount gained by the rich through avoiding and evading tax. And in the end, it's the total that counts! Seen another way: The government gives low earners large numbers of small payments, but at the same time high income earners avoid paying small numbers of (very) large payments. The large number of small benefits for low earners gives them the impression that the system is fair, but in fact they are being tricked. A good example is value-added tax (consumption tax): low-income earners pay a higher proportion of their income in VAT, which in typical Western democracies approximately balances out the supposed advantages of progressive income tax. For this reason, VAT should gradually be phased out except for luxury goods, but that is another story.

So before we can consider reducing the rich-poor gap by giving low-income earners real benefits through the taxation and welfare systems, we have to create a level playing field in which everyone is treated equally. It is also important that people understand how the system works, so that they can vote for those political parties that truly support their interests. In short, we need more fairness and more transparency. Both of these points are goals of UBI-FIT, and of this document.

When expressed in terms of the relationship between gross and net income, UBI-FIT is similar to the current system in modern industrial democracies. Initial values of basic income and flat tax would be determined by drawing a line of best fit through the current relationship between gross and net income (see graph below). Some individuals would initially have more money, others less, but the differences would be small and could be smoothed out during a transition period.

UBI-FIT would be superior to the current system in several important ways. 

• UBI-FIT would eliminate welfare traps and the stigma attached to receiving benefits. Currently, people on welfare may be reluctant to take paid employment because it would mean reducing or giving up the benefit. That is bad for them personally because it prevents them from improving their situation. But it is also bad for the country because it reduces productivity. A solution to this problem is urgently needed. Under UBI-FIT all people, rich and poor, would get the same "benefit" (basic income, applied as a tax deduction to higher incomes). The difference between welfare beneficiaries and others would disappear, along with the stigma. UBI-FIT would spread work incentives evenly across all income brackets. Everyone would be motivated by the reward of higher income to work harder, more efficiently or more creatively. The incentive would be the same regardless of current income. 

• UBI-FIT would considerably reduce private and government expenditure by enabling a radical simplification of both income tax and welfare. Since the tax rate would be constant, it could be paid directly every time money was earned. Yearly income statements for individuals, which currently cost significant amounts of time and money for both individuals and government, would become a thing of the past. Expenses incurred to produce income would be compensated for individually in cash. Successful applications (filled form plus receipt) would be rewarded with cash rebates equivalent to the current flat tax rate multiplied by the expense in question. That would further increase tax revenue by reducing the number of bogus tax deductions. 

• Simplification of the system would mean that more voters understand it. So the results of elections would correspond more closely to public interest. Election results would indirectly determine the system's two free parameters: the basic income rate and the flat tax rate. That in turn would determine the size of the deficit and the poverty rate. In the long term, both can and should be eliminated.

• UBI-FIT would reduce tax evasion at both the low and the high ends of the income spectrum. At the low end, people who work for cash and pay no tax (the "black market") would be offered a choice between two legal options: either (i) receive the basic income and commit yourself to the flat tax (employers would be responsible for informing the tax/welfare office of employee status) or (ii) do without the basic income, provided your income does not exceed it. Since people would be better off with (i), they would generally choose that option and become part of the system. At the other end of the spectrum, high income earners would find it more difficult to avoid or evade tax, because the system would be simpler and more transparent with fewer loopholes. All income tax would be paid immediately, when money is earned. Capital gains and wealth tax are not part of UBI-FIT, but UBI-FIT suggests that both should be flat taxes whose rates could be increased beyond current levels without affecting productivity. That would further reduce the gap between rich and poor. But new international agreements would be necessary to avoid exodus of capital.

Introduction: The basic idea

Poverty is a serious problem. Even in the socially secure and apparently generous European Union, the rate of poverty varies across countries between 10% and 23%, depending on how poverty is defined. Given the general wealth of the EU, this is an embarrassing problem that must be solved. The study Vermögensbildung und Reichtum in Österreich found that 1% of Austrians own 34% of Austria's wealth. The situation is worse in the USA: to get a feel for how ridiculously rich the rich are in the USA, visit the L-curve page. Moreover, in most countries today, the gap between rich and poor is increasing. If nothing is done the situation will get even worse. 

According to the Global Wealth Report 2010, Austria, a country of 8 million inhabitants, has 37 thousand (!) millionaires and 300 households with more than 100 million US dollars. (Please read that sentence again, there are no misprints!) The total private wealth of Austria is 656 billion US dollars. Worldwide there were 12.5 million millionaires in 2010, which was 12.2% more than in 2009. Given these figures, anyone who says we cannot afford a universal basic income is speaking pure nonsense, aka bullshit. Unfortunately, we often encounter nonsense in our daily lives, for example in advertisements (just turn on the TV), at the pharmacy (homeopathic medicines) and the church (Jesus was the son of a virgin, brought Lazarus back to life and rose himself from the dead). If we learn to recognize and reject all forms of nonsense, we might have a chance to get rid of poverty, which is a much more serious problem than misleading advertisements, placebo mediction, and perhaps even religious fantasy.

Many people believe that an unconditional basic income at a level corresponding to the poverty line (in Europe: 800-1000 Euros per month) can eliminate poverty. But what about motivating individuals to work? And what about balancing the budget? Regarding motivation, the more you give to people who are unemployed, the more they lose when they get a job - which reduces the motivation to look for a job and accept job offers. It is no use blaming people and accusing them of being lazy - the problem is in the system, not in the people. Regarding the budget, basic income must be affordable. If it leads to a net increase in social security payments, the money has to come from somewhere. This are serious problems and they cannot simply be swept under the carpet. If we really want to eliminate poverty, we have to take these problems seriously.

We also need to think about the complexity of the system and and the implications of that complexity for democracy. Politicians regularly use "tax reforms" and "welfare reforms" to attract votes from particular target groups. The broader implications of such "reforms" for society and the economy may get lip service, but are essentially ignored if politicians are assuming that voters are selfish and care only about their income. Over the decades, these special offers and exceptions mount up. The system gets too complicated. Ordinary people tend to know only about rules that apply to them. The do not and cannot  understand the entire system. Armies of accountants and bureacrats are need to administer it - and often spend their lives doing so. That is not only very inefficient - it is also undemocratic. When politicians talk about changing the system, people are not in a position to evaluate the changes. They don't know what they are voting for.

What have previous "tax reforms" achieved? We still have poverty, welfare traps, black markets, and time-consuming income declaration procedures that only experts properly understand. The taxation and welfare systems are regarded as fundamentally unfair by the rich, the poor, and those in between. Considerable government revenue is lost every year through welfare fraud - but much more is lost through the management of the complex tax-welfare system (just think of what all those bureacrats and accountants are earning, when you add it all up). And by far the most government revenue is lost through tax avoidance/evasion, facilitated by the system's complexity and its innumerable loopholes, of which new ones regularly emerge and are discovered by smart tax consultants. 

The aim of this document is to present a radically new and simple idea that would largely solve most of these problems. The basic ideas are as follows:

• Poverty can and should be eliminated. Modern Western democracies have been rich enough to achieve this goal for decades. Moreover,the gap between rich and poor is far too large. It can and should be sustainably reduced.
• Everyone should be motivated to work to the same extent. Any significant increase in working hours should translate into a significant increase in income. That is not the case at the moment (due to "welfare traps").
• Everyone can and should be treated equally. It is unnecessary to create a special class of "welfare recipients" who get more handouts, or a special class of "rich" who pay extra tax. This is not a political statement - it is neither left-wing or right-wing. It is a pragmatic observation based on simple mathematics, as I will explain below.

Under UBI-FIT,  everyone would receive a basic income (that is, basic income would be absolutely unconditional), and everyone would pay the same rate of tax on all other income. Both the level of basic income and the rate of income tax would be independent of income. The political debate about welfare and tax would be largely confined to one dimension, corresponding to the tradition left versus right distinction:

• whether, how and to what extent the gap between rich and poor should be reduced (left), and
• whether, how and to what extent the incentive to work should be increased (right).

My bias. To avoid possible misunderstandings, let me be open about my own political bias, which could be described as centre-left liberal green. For me, the basic income aspect is more important than the flat tax aspect. I can imagine and accept a system in which unconditional basic income is combined with progressive tax scales, as proposed for example by the Basic Income Earth Network. This text is not intended to conflict with such approaches, but to complement and extend them. I am completely opposed to any form of flat income tax that is not coupled to an unconditional basic income, because any such system would presumably increase the gap between rich and poor. And that gap is already considerably larger than necessary to motivate people to work and improve their financial position. 

UBI-FIT is mainly about eliminating poverty. In the Western world today, no-one questions the importance of democracy in the form of "one person, one vote". And not many would question that everyone should be treated equally and all kinds of discrimination should be gradually exposed and eliminated. Moreover, most agree that every person has the right to freedom from poverty. The Universal Declaration of Human Rights (1948), Article 25, provides that "Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control." But since there is still so much poverty, even in rich countries, not many support the idea that everyone has the duty to contribute fairly to national budgets  through taxes. The problem can be solved by giving everybody an unconditional basic income at a level that enables survival AND obliging everyone to pay tax in a fair way on all additional income and all wealth. By "survive" I mean no risk to life and no significant risk to health due to chronic lack of food, shelter, clothes, heating, medicine and so on. This is not a bad goal when one considers the relationship between life expectancy and income even in rich countries (link). In industrialised countries, we are close to achieving this goal, and at the same time maintaining and even promoting capitalist financial incentives. We can also eliminate welfare traps so that everyone has a good chance of raising their standard of living well above the poverty line. In that way, poverty can be sustainably eliminated. Just imagine a future version of the universal declaration of human rights that states that (i) everyone has the right to a basic income, (ii) everyone has the duty to pay tax on all earnings and all wealth, and (iii) in all these respects everyone has the right to be treated equally. That is essentially what UBI-FIT is about.

UBI-FIT embraces both socialist and capitalist principles. The goal of eliminating poverty is a classic socialist goal. On the capitalist side, UBI-FIT would motivate all members of society to work (harder or better) to the same extent. No-one would be demotivated by the possibility of moving to a higher tax bracket or being taxed more than someone else. More importantly, no-one would be demotivated by the possibility of losing a welfare benefit as a result of earning too much. Seen in this way, UBI-FIT represents and implements a new positive, constructive attitude to the relationship between socialism and capitalism. These two ideologies are no longer seen as contradictory. Instead, they are eminently compatible. They are like love and marriage, which the old-fashioned romantics among us assume to be inseparable:

Love and marriage (...)
Go together like a horse and carriage (...)
You can't have one without the other

This text is intended as a quick introduction to UBI-FIT - just enough to whet your appetite. It is written in a clear, concise, popular style. You don't need a university degree in public economics to understand it (most other literature about "basic income and flat tax" is addressed to an academic audience). The arguments apply primarily to modern industrial democracies; the question of UBI-FIT in developing countries is beyond my scope.

Examples of gross and net monthly income under UBI-FIT

To understand UBI-FIT, it is important to distinguish between real and effective rates of taxation. The real rate is the way in which the tax is levied (e.g. "give me x% of amount y"). The effective rate takes into account gross income, which in UBI-FIT includes basic income. 

The difference between real and effective tax rates is important when considering progressive taxation. In most countries today, the income tax rate increases incrementally as gross income increases - it is different in different income tax brackets. The table below shows that, with UBI-FIT, the effective tax rate would also be progressive, even though the real rate is constant. Moreover, the effective rate would increase continuously with income. 

Suppose for the purpose of argument that the basic income is 1000 Euro/month and the flax tax is 50%. The effective tax rate is defined as the difference between gross and net income, expressed as a percentage of gross income. Gross income is income before both basic income and flat tax; net income is income after both basic income and taxation. Here are some simple examples of the relationship between gross and net income, and the corresponding effective tax rate:

Adjusting the basic income and flat tax rates

What is the right or optimal rate of basic income and flat tax? The values of 1000 Euros/month basic income and 50% tax rate in the table are arbitrary round figures - chosen to simplify the calculation. In a real application of UBI-FIT, they would be adjusted to satisfy the wishes of the electorate and government policy (right or left wing) as well as basic economic constraints (balancing the budget, managing the national deficit, and the predictions of economic models). An unconditional basic income of 1000 Euros could be supplemented by various conditional benefits, but the system of supplements could be much simpler than the present welfare system. A lower flat rate of tax (perhaps as low as 35%) may be possible depending on government income (including other forms of tax, for example wealth tax) and other expenses. 

The main constraint on the exact level of basic income and tax rate is to balance the budget. Any increase in basic income will reduce the incentive to work (if you have enough money, why work?). Similarly, any increase in the tax rate will reduce the incentive to work (why work harder if I get less money for it?). So any increase in basic income or tax rate can reduce productivity, which reduces tax revenue. That in turn may necessitate a reduction in basic income, since there will be less money available to finance it (unless it partially financed from other sources such as wealth taxes). Arguments of this kind reduce the range within which basic income can vary. 

How progressive is UBI-FIT? Although it is based on a flat income tax, the above table show that UBI-FIT is no less progressive than the system currently in place in most industrial democracies. The difference is that it is consistently progressive - it is not affected by welfare traps (currently, you lose your handout, either suddenly or gradually, if you earn too much). The progressivity of UBI-FIT can be adjusted by changing the basic income and tax rate. If basic income is increased, the tax rate must be increased to finance it, and the effective tax rate becomes more progressive. If both basic income and the tax rate are reduced, the effective tax rate becomes less progressive. In this way, UBI-FIT eliminates the need for different income tax brackets. The tax-welfare system becomes simpler, directer and more transparent, and the rich can no longer avoid tax by shifting income to different (virtual) income earners or different financial years.

Another way to make the system more progressive is to increase taxes on wealth and increases in wealth (capital gains), or conversely on sources of income such as speculation and inheritence. I am personally in favor of higher taxes for the wealthy, but the question is beyond the present scope. UBI-FIT would be essentially the same as the present system at high income levels

Benefits of UBI-FIT

Most socio-economic groups would benefit from UBI-FIT:

• The unemployed would be freed from stigmatisation, bureacratic harassment, welfare traps and the threat of poverty. There would be no limit to additional earnings beyond the basic income, so welfare traps would be eliminated and economic mobility facilitated.
• If the values of basic income and tax rate were chosen appropriately, the net income of the middle classes would change  little; the main benefit for them would be that they waste less time preparing tax returns - and money paying tax consultants.
• The rich would experience UBI-FIT both positively and negatively. On the positive side, they would  no longer feel that they are financing the welfare system, since they, too, would receive basic income - as a tax deduction or "negative tax". Nor would they feel that they are being penalized by progressive tax scales. They would presumably like the idea of everyone paying the same rate of income tax and in that sense being equally motivated to work - a kind of capitalist ideology. But under UBI-FIT the rich would find it harder to evade or avoid income tax, because the system would have fewer loopholes and income tax would be calculated and paid immediately rather than at the end of the financial year. It would no longer be possible to avoid the highest income tax bracket by shifting income from one financial year to another, and other tricks such as distributing income among different people would be harder to pull off. A significant reduction in evaded and avoided tax would mean a considerable increase in government revenue available for redistribution - even if the official tax rate for high incomes remained the same.

Short-term disadvantages of UBI-FIT

At first glance, UBI-FIT sounds just too easy - too good to be true. If UBI-FIT is so easy and so good, why didn't we convert to UBI-FIT long ago? I guess there are two main answers to that question. 

• First, UBI-FIT is hard to understand for those entrenched in the current way of thinking. We are talking about a radical change in economic culture. Those who oppose UBI-FIT have often not understood the underlying mathematics - in spite of (or perhaps because of) its simplicity. They cannot believe that the solution to so many problems could be so simple. They are not prepared to fundamentally question and revise prevalent preconceptions about basic income (which the right wing thinks encourages laziness) and flat tax (which the left wing associates with the worst excesses of laissez-faire capitalism). They do not realise that, ultimately, the most important thing is the mathematical relationship between gross and net income. The specific levels of welfare and tax, and the way these are calculated, are means to an end - not ends in themselves.

• Second, UBI-FIT would prevent a lot of tax evasion or avoidance. Those who benefit from that tend to be both socially and politically influential, not to mention (selfishly) creative and (discretely) dishonest. They are in a good position to invent misleading arguments against UBI-FIT and other trends toward (simplification and transparency of taxation) that sound convincing to the general public.

• Since all income including low-level wages for part-time work would be taxed, gross wages at this level would rise and net wages would fall, reducing the difference between low and high wages. Wages would more realistically represent the real value of work on the free market, because the system would treat all wage earners equally. Part-time work would become more expensive for employers, because they would indirectly be paying more tax (the tax that their part-time employees pay); that would need to be compensated for in other areas to maintain business incentives.

• Taxation offices would need new personnel to check that all income is being taxed, from part-time jobs ("cash economy") at the low end to profits of all kinds (e.g. through investment and speculation) at the high end. At the same time, taxation offices would need fewer staff to check annual tax statements, since many people would pay all tax at the time of transaction and not qualify for a return at the end of the financial year. Much of the processing of on-the-spot income tax would be performed automatically by computer. If these two changes involved about the same amount of work, the number of employees in taxation offices would remain about the same, but some retraining would be necessary.

Central issues and misconceptions about UBI-FIT

The idea of UBI-FIT can only catch on if people understand it. That is not easy, because UBI-FIT turns the familiar system of progressive tax scales and diverse, mean-tested social benefits on its head. It's one thing to understand the basic idea and another to revolutionize one's thinking about tax and welfare. That is the challenge of UBI-FIT.

• The political left think that UBI-FIT is a right-wing concept, because it includes a flat tax (even if tax is effectively progressive). The political right think that UBI-FIT is left-wing, because it includes basic income (even if everyone receives that income, including the rich). In fact, UBI-FIT is neither left nor right, but politically neutral. UBI-FIT can be adjusted to suit either left-wing or right-wing tastes, depending on the level of basic income and the tax rate. Both of these levels would be determined democratically, and they would also depend on each other: the higher the basic income, the more tax is needed to finance it. Right-wing parties would try to reduce existing rates of basic income and taxation, while left-wing parties would try to increase both rates. The most important constraint in both cases would be to balance the budget. Because UBI-FIT is much easier to understand than the present tax-welfare system, voters would have a clearer idea of the issues for which they are voting and of the possible consequences of their voting behavior. In that sense, UBI-FIT would be more democratic that the present system. It would establish a level playing field for all political persuasions.

• Economists often misunderstand UBI-FIT. They know so much about the current system of means-tested benefits and progressive tax that they find it hard to imagine what it would be like to abandon both. At first glance, the change would appear to make much of their hard-won knowledge and expertise obsolete. In fact, their knowledge and expertise would be more important and valued than ever, since any transition to UBI-FIT would be impossible without their professional and intellectual support. The transition would presumably need to be gradual, and it would be important to monitor and predict every step of the way by means of economic models.

The following central features UBI-FIT should be understood before getting into detail. Even if you are sceptical about UBI-FIT, please take the time to read and think about them, remembering that the most important aim of UBI-FIT is to eliminate poverty. (If you don't think that is a good aim, please keep surfing.)

• The flat tax in UBI-FIT is not the flat tax that extreme right-wing political parties talk about. They typically want a low rate of flat tax, say 25%, and a low rate of social services. Such a tax is also effectivelyflat - a recipe for disaster. UBI-FIT is quite different. It involves a relatively high rate of flat income tax (say, 35% to 50%) and a relatively high rate of social services (say, 800 to 1000 Euros unconditional basic income for most people). The combination of these two means that the effective rate of taxation is (very) progressive, as shown in the table above.

• UBI-FIT is quite unlike those extreme right-wing flat-tax proposals that would cut tax for the rich and reduce benefits for the needy. That approach would theoretically be possible under UBI-FIT - but so would exactly the opposite, namely a very high basic income (say €2000) and a very high flat rate of tax (say 75%). In democratic practice, extremes of this kind would be impossible, because a majority of voters would never support them. Instead, the usual democratic processes would ensure that the flat tax rate stayed in the vicinity of the highest tax rates in current progressive tax scales, and basic income remained in the vicinity of the poverty line. 

• A flat rate of income tax is easier to pay - there is no need to wait until the end of the financial year. So it is impossible to evade a flat tax by transferring income among financial years, income brackets, marital and business partners, and so on.

• By itself, a basic income is (i) difficult to finance, and (ii) can be demotivating if associated with welfare traps, as in the current system. These disadvantages disappear when basic income (i) is accompanied by a relatively high, flat rate of income tax and (ii) is universal and unconditional.

• UBI-FIT is efficient. It would greatly reduce the administrative cost of implementing the current tax-welfare system, both for the state and for individuals - which could lift the entire economy.

• UBI-FIT could effectively eliminate poverty, which would be an enormously positive achievement. In spite of the generally high standards of living achieved by modern post-industrial societies, they have so far failed to eliminate poverty - or at least reduce poverty to a level that is somehow tolerable or defensible. There are still people in our midst who do not have enough money to put a roof over their head or to buy a decent meal. That is not only embarrassing - it is a scandalous. It suggests that the many good intentions built into current system are hiding an underlying moral bankruptcy. UBI-FIT offers a realistic solution to the whole problem of poverty. It does not treat a part of the problem and forget the rest. It does not merely treat the symptoms - it addresses the causes. UBI-FIT assumes (and demonstrates) that it is not the fault of the poor that they are poor - as many conservatives believe - but the fault of the system in which they find themselves. UBI-FIT would not alleviate poverty temporarily or partially, but completely and permanently. It would not do this by applying socialist principles alone, but by harnessing the power of capitalism in the service of socialism. 

The underlying philosophy of UBI-FIT

In modern democracies, the relationship between an individual's gross income and his or her net income is complex. It depends on two interacting factors:

• Progressive income tax. The more you earn, the higher is the percentage of your income that you pay in tax. (For example, the taxation rates applied to different income brackets in Austria, home of the author of this article, are here.) But your taxable income can be reduced in innumerable ways, called tax deductions. The rich often pay surprisingly little tax, because they are most skilled at reducing their taxable income, or have access to the best advice on how that can be done. For example, they may shift income from one year to another or from one person to another, to avoid the high tax rates of high income brackets.

• Means-tested benefits. If you are unemployed or the parent or guardian of a child, you are entitled to social welfare benefits. If you are unemployed and get a job, or if your child earns money or moves out, you may lose that benefit at some point. Just exactly where that point lies depends on the current legal situation, and it is determined by a public servant. Depending on the system, you may lose the benefit gradually or suddenly as your situation changes. If you can afford a good accountant, you may be able to keep the benefit as your income increases, simply by rearranging your finances.

Enormous amounts of time and energy are devoted to the management of these two factors:

• Progressive income tax. The average employee presumably spends at least one working day per year preparing tax returns and/or employing accountants to do this task for them. This applies even if they employ consultants to help them. Governments  employ thousands of bureacrats to check these calculations and initiate legal proceedings against tax dodgers. A lot of this time and effort could be saved if tax was paid as soon as the money was earned and yearly declarations were avoided.

• Means-tested benefits. Countless bureaucrats spend enormous amounts of time and public money deciding who should receive welfare benefits and who should not. In so doing they infringe the privacy of the recipients and damage their self respect, which reinforces class differences. Not only that - their decisions often seem arbitrary and unfair. And the system encourages people to lie about their income, which encourages and maintains a culture in which lying, deception and secrecy are considered acceptable behaviors, especially when applied to money and wealth. Chronic poverty is an integral part of such a culture.

Much of this effort is pseudowork. It does not directly generate wealth or quality of life. Much of it could be prevented if the system were radically simplified. But would a simpler system be as fair? I argue that a radically simplified system would be even fairer than the present system, if it did the following two main things:

• The socialist goal. The reform should significantly reduce or eliminate poverty. The gap between rich and poor appears to have been steadily growing in recent decades. The means to effectively eliminate poverty are clearly available. It would cost the rich relatively little, and the benefit for the poor would be enormous. What is lacking is the political will - and a suitable and effective procedure.

• The capitalist goal. The reform should provide incentives for all members of society to improve their productivity, which in turn improves general quality of life. Capitalism should not generate poverty, as it often seems to do. Instead, it should generate the means to eliminate it.

These two aims should not be regarded as contradictory. The key to a radical simplification of the tax/welfare system is the recognition that socialism and capitalism are not mutually exclusive, but complementary. History has shown time and again the one cannot exist without the other. Thus, an effective tax/welfare system should not pit these principles against one another, but instead integrate them seamlessly.

What are the main features of ideal socialist and capitalist societies? Opinions differ, but here is a possible interpretation:

• In a purely socialist society, everyone is regarded as valuable, regardless of much or how effectively they work. So the state gives everyone the same income, which covers their basic needs.

• In a purely capitalist society, a person's value depends only on her or his productivity as determined by a free (unregulated) market place. Individual incomes reflect this underlying assumption. Everyone, regardless of income, is strongly motivated to work harder and increase their income. Their very survival may depend on their productivity.

History has shown that neither of these "pure" systems is stable. The purely socialist society is unable to sustain itself, because it does not motivate its citizens to work. The purely capitalist society destroys itself as extreme social injustice leads to violence. Clearly, a compromise is necessary. Modern tax/welfare systems incorporate both the socialist and the capitalist principle, but they combine them in a complex way. There are innumerable ifs and buts. The loopholes accumulate as politicians try to win elections by wooing specific groups of voters with financial rewards and moral proclamations. The tax dodgers and welfare abusers then find and take advantage of the loopholes. Imagine what would happen if such populist political tactics were no longer possible, and all those ifs and buts were removed. Too good to be true?

The main financial details of UBI-FIT

Transparency and democracy. Democracy only works when the voters understand the issues upon which they are voting. A truly democratic tax and welfare system must therefore be as simple and transparent as possible. Since the relationship between gross and net income is inevitably a mathematical relationship, we may ask the following questions: (i) What is the simplest, most transparent mathematical formulation of the complementarity of socialism and capitalism? (ii) What is the simplest, most transparent relationship between gross and net income? The following graph answers both questions:

The expression "gross income" on the horizontal axis refers to all monthly income before UBI-FIT, i.e. not including the basic income. The expression "net income" means on the vertical axis means monthly income after UBI-FIT, that is after basic income has been added and tax taken away. Under UBI-FIT, basic income and tax are always considered together.

The graph presents a fictitious relationship between gross and net income that is surprisingly close to the relationship as it already exists in modern democracies. Those with no gross income at all generally qualify for some kind of welfare benefit. Those on higher incomes pay tax at a rate that effectively increases as their income increases (progressive tax scales) and approaches some 40-50% in the highest income brackets.

The relationship between gross and net income in modern western democracies is complex, because benefits are means-tested: you lose your benefit - either suddenly or gradually - when you earn too much money. Here, I have replaced this complex relationship by a straight line of best fit. This line eliminates the welfare trap associated with means-tested benefits.

• The line crosses the vertical axis at a point called basic income or guaranteed minimum income. For the purpose of argument, basic income is set here at a €1000 per month, just above typical European estimates of the poverty line. The exact value of basic income would depend on how much society can afford, that is, how much tax the middle and upper classes are able or willing to pay. Basic income is defined to be universal and unconditional: all people receive it, regardless of their other income (or lack thereof). The only condition is the honest declaration of all income and payment of income tax.

• The tax is flat in the sense that the line is straight, but progressive in the sense that it does not go through the origin (where the axes cross). For the purpose of argument, the flat rate is set in the graph to a relatively high rate of 50%; I could equally well have chosen 45% or 40%. The effective rate of tax for individuals is always lower than the flat rate. What the flat rate means is that when your gross income increases by €1, your net income always increases by the same amount (in the graph, by 50 cents) - regardless of how much you are already earning. It applies not to your overall income, but to changes in your overall income, and hence to the incentive to work. The gradient of the line in the graph is inversely related to the tax rate: if the gradient is steep, the tax rate is low, and if it is shallow, the tax rate is high.

• The point at which gross and net income are the same is called the break-even point. In the above graph, it is €2000 per month. In general, it may be calculated simply by dividing basic income by the tax rate: for example, €1000 divided by 50% (one half) equals €2000. The break-even point rises with increasing basic income and with decreasing tax rate (or a steeper line).

The diagonal line on the graph is the "bottom line". The important thing about the above graph is not the specific values of the two parameters "basic income" and "flat tax", which can be misleading when taken out of context, but the specific relationship between gross and net income (the line on the graph), which in the end is all that matters. For example, if your gross income (not including basic income) is €3000, according to the graph above you would take home a net income of €2500. At the end of the day, it doesn't matter whether you (i) pay €500 in tax in the current system or (ii) pay €1500 in tax and receive €1000 in basic income under UBI-FIT.

What exactly is basic income? "A basic income is an income paid by a political community to all its members on an individual basis, without means test or work requirement" (Van Parijs, 2000, p. 3).

Under UBI-FIT, everyone would receive a basic income, regardless of their current income - even the rich. For high income earners, basic income would be deducted from their total tax bill, and would therefore be a kind of negative income tax. For low income earners, basic income would correspond roughly to the existing concepts "poverty line", "long-term unemployment benefit", and "welfare benefit" and would make some of these concepts obsolete (or change their meaning). If everyone had access to an income corresponding to the poverty line, poverty would be effectively eliminated.

Can poverty be eliminated? It depends what you mean by poverty, which in turn depends on the definition of the poverty line or (poverty threshold). The monetary value of the poverty line (in currency units per unit time) depends on the general standard of living in a given country: in poor countries, the poverty line is lower than in rich countries. The poverty line is determined not only by the cost of essential goods and services in a given country, but also by perceptions of what is "essential" for an adequate standard of living in a given country. In the end, the poverty line is determined by consensus among experts, some of whom perceive it as higher and some as lower. The value usually quoted may thus be regarded as an equilibrium between competing perceptions. Poverty is relative in other ways as well. A person who has enough money to live on but lacks basic financial management skills or rejects interesting opportunities to supplement her/his income may appear to be poor. Everyone has (or should have) the freedom to self-define as "poor" or to deliberately avoid meeting their basic needs and therefore to appear to be "poor". If the poor (or under UBI-FIT, everyone) received a basic income, perceptions of basic needs would change, increasing the monetary value of the poverty line and perhaps making it impossible to completely eliminate poverty. Given these uncertainties, it might be more accurate to claim that UBI-FIT would come as close to eliminating genuine poverty as is reasonably possible.

Parents would receive basic income both for themselves and their children. Thus, basic income would also replace current child benefits. At a certain age (probably 18), children would be required to open their own bank accounts and receive the basic income directly.

The exact amount of basic income for the average person would be determined by the usual democratic processes. Left-wing political parties would try to increase basic income (and increase the tax rate to cover it), right-wing parties to decrease basic income (and reduce the tax rate accordingly). It might also be a good idea to legally define the outside limits of these parameters: e.g. basic income should never fall below 80% of the poverty line (given a well-defined procedure for determining the poverty line) and the flat rate of tax should never exceed 50%.

Basic income would depend on the ability to work: pensioners and the disabled would receive more. Exactly how this would work is beyond the present scope (but see the paragraph on pensions below). Basic income would not depend on willingness to work. "Willingness to work" is an unsuitable criterion for a social benefit for the following reasons:

• "Willingness to work" is difficult to determine. On the one hand, nobody wants to do boring or unrewarding work. For this reason, everyone can be expected to lie about their willingness to work, the rich included. A system in which people are expected to declare their willingness to work is a system that cultivates a culture of lying. On the other hand, everyone wants to have more money and in that sense everyone is willing to work. Rather than trying to measure the unmeasurable at the level of individuals, the state should be trying to increase everyone's willingness to work.

• "Willingness to work" is expensive to monitor. It costs a lot of money to keep track of the job-seeking activities of thousands of unemployed people. Which applicants attended which job interviews? Did they really attend them or merely claim to have done so? Should their unemployment benefits be discontinued? If so, what benefit will replace them? What are the consequences of the poverty created by the discontinuation of unemployment benefits and what measures are needed to deal with it? These are difficult questions, and it costs money to answer them.

• "Willingness to work" is none of the state's business. Why should the state pry into the private lives of individuals? This practice contradicts the basic principles of individual freedom, privacy and mutual respect upon which modern democracies are built. Moreover, since some people are subject to this prying and others are not, it may be regarded as a form of discrimination. Nor is a person's living situation - with whom one is living, how many people live in the same house or flat, whether parents are married, whether a relationship is heterosexual or homosexual, and so on - any business of the state. Besides, one might argue that those who choose to live together, which is financially more efficient, should be rewarded for their initiative and not punished.

• "Willingness to work" ignores people who voluntarily do unpaid work such as childcare, domestic duties, and study. The current system treats these people as if they were "unwilling to work": they are not eligible for unemployment benefit. But if not for these people, society would crumble. In fact, there would be no society. They deserve at least a basic income. Consider the following examples:
  • If the birthrate is too low, it is because potential parents and particularly potential mothers are unhappy with what society is giving them in return for the effort and expense that goes into raising children - not to mention the effect that it can have on the parent's career. It is therefore in the interests of the whole society that both parents and their children receive an unconditional basic income. Not only that - all governments should follow Sweden's lead and guarantee good, inexpensive child care for every child. One could even argue that free child care should be available to all, at least for five half days per week, which would cost some €300 per month per child and be financed by a combination of income, capital gains and wealth taxes. That would end the discussion about the difficulty of combining family and career and the effect on the birthrate. Children and their parents are surely important enough for their basic needs to be met. We are not talking about luxury!
  • The efficiency and creativity of the workforce depends on the number of people with tertiary qualifications. To get a tertiary qualification, you need to study at university, and to do that, you need enough money to cover your basic living costs while you are studying. It is therefore in the common interest that students receive an unconditional basic income. Following this argument, they should not have to pay tuition fees, either. The running costs of universities can be met by combination of government and private sources. Students are surely important enough for their basic needs to be met. We are not talking about luxury!

Basic income may also depend on age. Some argue that children generally spend less money (or cause less money to be spent), so basic income should be lower. Perhaps the real reason behind this assumption is that children have less political power. But one can equally argue that basic income should be higher for children than for adults:

• I have argued that basic income may depend on ability to work, but not on willingness to work. Since children are unable to work (child labor is illegal), they should receive more basic income than adults.

• Single parents and in particular single mothers belong to those most at risk of poverty. They need their children's basic income to survive.

• Although children usually eat less than adults and their clothes may be cheaper, adolescents may eat more than adults, and growing children need new clothes more often.

• In many industrial countries, the population is decreasing. A high basic income for children could help to increase the birth rate.

• If parents were to earn only 1 Euro per hour (!) for looking after their children - for about 16 hours per day and 30 days per month - we are already looking at about 500 Euros per month, without considering food, clothes, rent, school, toys and so on.

Balancing and comparing the various arguments, it may be both fair and realistic to make basic income independent of age, at least for children (The question of basic income for pensioners is considered below). A system with fewer variables is more transparent and easier (cheaper) to manage. Remember that each variable would be periodically adjusted in a time-consuming political process. If the basic income for children is the same as for adults, the system contains one less variable.

Finally, basic income may depend on gender. The average women still earns considerably less than the average man for the same work, in spite of decades of attempts to solve this problem. So perhaps women should receive more basic income (or pay less tax - see below) in an attempt to redress this imbalance.

These details would have to be decided in a democratic process. I am concerned here only with the general principle of UBI-FIT, which involves a radical change in current thinking. There is little point discussing the details until the basic concept is understood, which is a big step.

Balancing the budget. When basic income is set at €1000 and flat tax at 50%, the numbers are round and calculations are easy. Of course these figures would have to be adjusted in a political process and would be different from one country to the next. For Germany, Strengmann-Kuhn (2006) calculated that a basic income of €500 per month could be financed by a flat tax of 35% (a typical right-wing setting of the two parameters), and a tax rate of 50% could support a basic income of €800 (a typical left-wing setting). For this calculation he assumed that children receive half the basic income of adults.

Pseudowork. Following the introduction of UBI-FIT, those many bureacrats who currently decide whether people get welfare benefits, and who check tax returns for accuracy and fraud, would need to be retrained to do something more interesting and productive, such as monitoring the introduction of the new system and its many social and economic effects. Tax advisors would similarly find themselves moving into new domains.

Resistance and misunderstanding. It's not easy to understand UBI-FIT when you are used to the current system. Both capitalists and socialists tend to object, sometimes vehemently.

• Capitalists may object to a basic income. Would it be wise to give everyone a handout, themselves included? Surely that will reduce the incentive to work - across the board?
• But the incentive to work depends primarily on the gradient of the line in the graph and not on the point at which it crosses the vertical axis. The big advantage of UBI-FIT from a capitalist viewpoint is the constant incentive, regardless of income. Everyone is equally motivated to work and no-one feels the system is unfair.
• Besides, the security of basic income makes it easier for people with lower incomes to take risks and develop the entrepreneurial spirit that is needed to create successful new businesses.

• Socialists may object to a flat tax because it is associated with laissez-faire capitalism in which the rich get richer and the poor get poorer.
  • But the above graph shows that when you make the relationship between gross and net income linear (i.e. a straight line whose gradient depends on the tax rate) and shift it away from the origin (the bottom left of the graph, where both axes are zero) by an amount corresponding to the basic income, the result is mathematically equivalent to a progressive tax scale.
• Besides, progressive tax systems have not been very successful in reducing the gap between rich and poor. That is presumably because the rich can more easily afford good accountants, who work out sophisticated ways of evading tax. This problem can be addressed by making the system simpler and more transparent, which gives the majority more power to reduce the gap between rich and poor by ordinary democratic processes.
• Finally, UBI-FIT treats everyone equally even though some are rich and some and poor. UBI-FIT spans the entire spectrum from the ideal communist concept of constant income throughout society to the ideal capitalist concept of zero social benefits and low flat tax. In every case, it treats everyone equally. But it also gives people the power to determine the right position between these extremes by democratic means. If this procedure is truly democratic - that is, if all people can have an equal influence on the decision, regardless of income - the result is bound to lie in the interest of lower income earners, since they represent the majority.

Once the concept of UBI-FIT is understood and the above misunderstandings overcome, resistance to it is expected to come mainly from the rich. In spite of the inclusion of the capitalist concept of flat tax, the UBI-FIT concept is primarily a socialist one:

• UBI-FIT has the potential to eliminate poverty (depending on how poverty is defined), which is an issue of central concern to the political left.

• UBI-FIT would simplify the tax-welfare system, with the result that more people could understand it. That would reduce the current advantage enjoyed by those with better education (to understand the intricacies of the current system) or financial resources (to employ accountants to manage their finances).

The right wing should nevertheless be pleased about the following central features of UBI-FIT:

• Small government: a significant reduction in the amount of pseudowork (bureaucracy), and hence in the size of the public service

• Personal freedom: a significant decrease in governmental interference in private lives of individuals

• Incentive: The current system motivates welfare recipients not to work - for if they work, they risk losing their benefit, or their benefit may be reduced. For them, the line on the above graph is horizontal or even downhill. UBI-FIT would ensure that everyone is financially rewarded for extra paid work, and to the same degree.

Eliminating welfare traps. A welfare trap (aka poverty trap or unemployment trap) is a situation that discourages people from accepting offers of employment because their total income after accepting the offer would not increase enough to make the change worthwhile. In deciding whether to accept a job offer, they must take into account their total income from all sources - including the means-tested welfare support, their new income, any income they would lose due to the reduction in their free time, and any new costs such as the cost of child care for parents (especially single parents).

Anyone who has ever received welfare benefits knows what a welfare trap feels like. As every good capitalist knows, or should know, welfare traps are bad for business, because people who could be working are encouraged to stay on welfare instead. Not only that - a system that motivates people to do whatever they can to maintain their welfare benefits promotes a culture of dependency and deception.

The rational solution is not to reduce the amount of welfare, but to straighten out the line on the graph of net income against gross income so that no matter what your gross income is, you will always increase your net income significantly by increasing your gross income. That way, everyone is motivated to work, which will eventually increase the gross national product and hence the standard of living of everyone.

UBI-FIT abolishes all welfare traps. Given the central importance of this point, objections to the system are unlikely to be well unfounded. What could possibly be wrong with taking the current relationship between gross and net income in a given country and drawing a straight line of best fit through it? Any objection to that would be an argument in favor of bending that line, which goes against fundamental economic and democratic principles. The economic or capitalist principle is that every bend creates a welfare trap or other disincentive, for a given socio-economic group (defined purely according to their income). The democratic or socialist principle is that there can be no good reason for negatively targetting any socio-economic group.

Both socialists and capitalists will agree that a tax-welfare system should allow and even encourage socioeconomic mobility. There should be no barriers to those striving to change their "class". UBI-FIT promotes socioeconomic mobility by removing all correlates of socio-economic class from the tax-welfare system. Both means-tested benefits and progressive tax scales are completely avoided.

Pensions. Under UBI-FIT, pensioners would receive the basic income just like everyone else. But their basic income would be higher due to their reduced ability to work. Let's assume for the purpose of argument that it is €1500 per month. Beyond that, they would receive pensions from state and private funds as in the current system. Under UBI-FIT, this could be done in a number of different ways.

• The system could be left largely as it is, with the exception that pensioners with little or no pension fund receive the basic income as an absolute minimum.

• A radical - and presumably politically impossible - solution would be to treat existing pensions as gross income and input them to the above graph. If the basic income for pensioners was €1500 (again, for sake of argument), the break-even point on the above graph - the point where gross and nett income are the same - would shift upwards. This would reduce the currently large gap between rich and poor among pensioners. Of course this idea would be welcomed by poorer pensioners and strongly resisted by the rich.

• An intermediate solution might involve leaving basic income the same (at say €1000) and reducing the tax rate (to say 25%). This would again have the effect of increasing smaller pensions and reducing larger ones, but to a smaller extent - similar to the "solidarity contribution" that better-off pensioners are sometimes asked to make to the incomes of worse-off pensioners.

Tackling poverty. One of the biggest problems facing the modern world is the large and expanding gap between rich and poor, both within and between countries. There is no easy solution to this problem, because the rich generally have the power to determine how wealth is distributed. In other words, democracy is not working very well. (It especially does not work between countries, where the distribution of wealth is primarily determined by multinational corporations. So far, international democratic controls are weak or non-existent. But that is another issue.)

UBI-FIT would contribute to a solution of these problems by making the financial relationship between individuals and national states more transparent. This makes it easier for voters to bring about changes that are in the interest of the majority.

But that would not be UBI-FIT's main achievement. UBI-FIT could eliminate poverty altogether if basic income corresponded to the poverty line - which of course depends on the definition of poverty. At one extreme, the OECD and EU define the poverty line as 50% of median income. At the other extreme, the world bank regards people whose purchasing power is equivalent to less than one US dollar per day as poor. Depending on definition, the poverty line in central (western) Europe currently lies between €800 and €1000 per month. To eliminate poverty, a basic income should lie in this range. Even if it were set slightly below the poverty line, an unconditional universal basic income would go a long way toward eliminating poverty (recall that parents would receive more than one basic income).

Foreigners and the underground economy. Some consider UBI-FIT to be unworkable, because all work would have to be legal and controlled. The benefits of the underground economy (illegal cash economy, shadow economy) would disappear. But this may not be such a bad thing:

• The underground economy is fundamentally dishonest and therefore corrupt. It encourages the proliferation of other forms of corruption and reduces social and political transparency. If we are to make progress along the path towards an honest, open society, it is necessary to gradually reduce all forms of corruption.

• Immigrants who depend on the underground economy would either benefit from the new system or be unaffected by it. They would have the choice of receiving the basic income on the condition that they declare their income, or remaining "underground". Employers might be legally required to find out whether their employees are receiving the basic income and if so to declare the wages that they pay them, or to deduct tax before any payment to employees who receive basic income.

Public discussions about foreigners tend to be dominated by xenophobia - the irrational fear of cultural groups who are in some way different. It is important to remember the following two points:

• All signatories to the Geneva convention are obliged to accept genuine refugees. And international agreements of this kind are important - in fact, the survival of humanity may depend on them.

• Modern industrial economies depend on immigrant labor, because immigrants tend to do work that locals avoid.

The first step would be to abolish work permits. Why should someone be prevented from working? The work permit system is irrational for the following reasons:

• It is another case of pseudowork. The system costs a lot of money to run, but there is no productive output. Quite the contrary.

• Worse still: the system promotes crime. People who have no money (no food, no shelter) and are not allowed to work are of course likely to resort to crime to solve the problem.

• UBI-FIT introduces a new incentive to drop the work permit system. If everyone pays tax, every worker increases state revenue. Of course this may be difficult to control, but the principle is at least an interesting one.

How could the cash economy be brought under control so that workers who are receiving a basic income also pay their income tax? Currently, the responsibility for ensuring that income taxes are payed is shared between employees and employers. Under UBI-FIT, the responsibility could lie entirely with employers (which of course includes the self-employed). They would deduct the flat rate of income tax from every pay packet and forward it electronically to the state. Employees would never see this money.

How much basic income would asylum seekers and citizens of other countries receive? In richer countries, the amount would have to be reduced to prevent a flood of asylum and immigration applications from poorer countries. Perhaps asylum seekers should receive 1/3 of the basic income, and "resident aliens" (those granted asylum and citizens of other countries with residence permits) should receive 2/3 of the basic income. But these numbers are little more than preliminary guesses; appropriate values should take into account current equivalent benefits and the social and economic impact of abandoning the work permit system. Different countries with UBI-FIT schemes might agree that the citizens of each other's countries should receive the entire basic income. These details would have to be worked out. In any case, everyone would be allowed to work, and all employers would be legally required to pay the income tax of their employees.

Effect on the minimum wage. UBI-FIT would not only reduce the gap between rich and poor - it would also reduce the gap between low and high wages. Recipients of unconditional basic income, would be less likely to accept poorly paid jobs, forcing up wages for such jobs. Companies who rely on cheap labor would of course argue that that is bad for business. The advantage of the change in the long term would be that wages would more accurately reflect the market value of the corresponding work.

Exposing illusions. The importance of transparency becomes evident when one considers the illusions inherent in the current system. These would be exposed and rectified by UBI-FIT.

Two aspects of the current system of seem, on the surface, to favor the poor:

• Welfare benefits, which are means tested

• Progressive tax scales, according to which the poor pay less or no tax

This apparent benefit is an illusion:

• Progressive tax scales exacerbate the difference between high and low wages. On the one extreme, the poor are willing (or can be forced) to work for relatively low wages because they pay no income tax. At the other extreme, head-hunters trying to convince high-earning professionals to switch jobs must offer them relatively large increases in income, since the increases will be taxed at the highest rate. Under UBI-FIT, the difference between high and low incomes would decrease to a more realistic level; wages would better reflect their market value.

• In most industrial countries where the system of means-tested benefits and progressive income tax exists, the gap between rich and poor has increased rather than decreased during recent decades. The reason is presumably because the above advantages of the system are counterbalanced by the following two hidden disadvantages:
  • Welfare traps: Poorer citizens have less incentive than rich citizens to work longer and harder - not only because they earn less, but because they risk losing their benefits.
  • Complexity or lack of transparency: Only the rich can afford the professional help, or can develop the expertise, that one needs to exploit the taxation system's complexity and loopholes.

UBI-FIT is an improvement on the present combination of means-tested benefits and progressive income tax in the sense that:

• UBI-FIT is easy to understand. It avoids a lot of meaningless calculation and control by armies of tax consultants and public servants.

• UBI-FIT treats everyone openly and equally. As such, it eliminates entrenched barriers to socio-economic mobility. It places no barrier in the way of people who wish to increase their income, no matter what their current income happens to be.

The transition to UBI-FIT

The main problems to be addressed during the transition from the current system to UBI-FIT would be:

• UBI-FIT would cause gross incomes to increase for lower income earners, but should affect their net incomes relatively little. It would be necessary to adjust existing pay scales such that net incomes change as little as possible during the transition. This is essentially a mathematical and statistical problem. It can best be solved by experts with access to comprehensive information about gross and net incomes across professions and social classes.

• It would be necessary to explain why some groups find themselves with less net income after the transition, and others with more - which happens anyway every time the tax or welfare system is reformed. If the above graph is a line of best fit to the current relationship between gross and net incomes, the differences will be small. If the difference turns out to be considerable for specific groups, it may help to smooth some aspects of the transition over a number of years.

• After the transition to UBI-FIT, many tax accountants and welfare bureacrats would need to be reemployed or find new employment, for example in the ongoing monitoring of the new system, or in information technology. It would be necessary to plan a gradual transition and to develop re-training and re-employment schemes.

The bottom line

Most people have a problem with UBI-FIT, but find it hard to explain what the problem is, exactly. To criticize UBI-FIT, it is necessary to explain what is wrong with the above graph. If the graphical relationship between gross and net income should not be a straight line that is shifted away from the origin, what should it be, ideally? Should the line include bumps (welfare traps)? If so, what is their function? Should the line sometimes be flat, i.e. should some people be expected to work for nothing? Should some people be able to keep more of their additional income when they work harder? If so, who and why?

From this point of view, there is no alternative to UBI-FIT, and it is obvious that UBI-FIT would work. The question is not whether UBI-FIT would work. The question is what values of its two free parameters - the basic income and the flat tax rate - would work.

The transition to UBI-FIT would not be easy. But after we got used to the new system and learned to enjoy its simplicity and transparency, we would wonder how we had survived for so long without it. In this sense, the conversion to UBI-FIT may be compared with the conversions to the metric system of weights and measures and to decimal currency that took place in several countries in the late 20th Century.

That UBI-FIT would work is conclusive proof that there is something very wrong with the present system of means-tested welfare benefits and progressive tax scales. Both of these systems aim to alleviate poverty, but they are obviously not achieving that aim. By contrast, UBI-FIT would eliminate poverty by treating everyone equally. There would no longer be any need to allocate people to different social classes. Just imagine: no more stigma, no more condescension. Moreover it would finally become clear why the poor are poor. If UBI-FIT works by treating everyone equally, then the current system must be perpetuating poverty. The fault lies not with individuals, but with the system.

Do the upper and middle classes want to eliminate poverty? If so, we should be thinking openly about alternatives to the current welfare and tax systems. The fact that we are not doing that (or not doing it enough) suggests that we feel good about having more money than the poor. That is why we are clinging to the present system and its complex web of arrogant work-ethic morality, illusion and deception. UBI-FIT will have achieved its purpose if it does no more than expose these problems and stimulate progress toward a realistic solution.

Acknowledgements. I am grateful to John Parncutt, Russell Parncutt and Rosanna Scutella for helpful suggestions.

Literature sources

This account of UBI-FIT is intended to be popular in nature. It aims to interest people with little or no academic background in the idea of UBI-FIT. The following sources are more academic and research-oriented.

Atkinson, A. B. (1995). Public economics in action: The Basic Income/Flat Tax proposal (Lindahl Lectures). Oxford, England: Oxford University Press.

Strengmann-Kuhn, W. (2007): Finanzierung eines Grundeinkommens durch eine Basic Income Flat Tax. In G. Werner (Hrsg.): Symposium Grundeinkommen: bedingungslos. Universitätsverlag Karlsruhe.

Van Parijs, P. (2000). Basic income: A simple and powerful idea for the 21st Century. Background paper, 8th International Congress, Basic Income European Network (BIEN), Berlin.

Questions of income tax and social welfare are part of the discipline of public economics. A standard text:

Atkinson, A. B., & Stiglitz, J. E. (1980). Lectures in public economics. London: McGraw-Hill.

About the author

When I first dreamed of UBI-FIT , I was on unemployment benefit in Australia in the mid 1980s. Luckily, that only lasted a few months, during which I managed to convert my PhD thesis into a book manuscript. If the unemployment office had known that, they would presumably have cut the benefit! After all, I was supposed to be doing nothing and feeling depressed.

Every week I went to a little office (hoping that no-one would see me), filled in a form on which I was supposed to declare any other income, and worried about whether to declare the cash I earned playing the piano in a restaurant, which would reduce the amount of the benefit (then about 100 Australian dollars per week). I guess the woman across the counter was constantly confronted with people lying about their income and I wondered hoiw she dealt with it. I now live in Austria and earn about €4000 gross per month, which in both the current system and on the above graph translates to about €2500 net.

I first published these ideas in a rather long letter to Neucleus, the student newspaper of the University of New England, Australia, in the mid 1980s. Little did I know that the Basic Income European Network (BIEN) had established itself at the same time and held its first conference in Louvain-la-Neuve in September 1986. My original concept was different in that it involved the combination of basic income and flat tax, which I regarded as an equal balance of socialist and capitalist principles. I was never especially interested in either basic income or flat tax by itself, and I still regard the two as inseparable.

Appendix: Flat wealth tax

The ability of UBI-FIT to close the gap between rich and poor is limited, because it considers only income. The gap between rich and poor also depends on wealth, or capital. Thus, additional elements may be needed to generate the finances necessary for a universal basic income. These elements are capital gains tax and wealth tax (also called capital tax, equity tax, net worth tax, net wealth tax, solidarity tax, or property tax).

Capital gains taxes are already common in many countries. Wealth taxes are less common, perhaps due to the difficulty of estimating a person's wealth, which is strictly only possible to do when a buyer agrees to buy that person's estate. The amount that a buyer is prepared to offer depends on many factors.

Many think that a wealth tax applies, or should apply, only to the wealthy - say, those with a total capital of more than one million Euro. According to this concept, the rich should regularly part with a small percentage of that wealth. Politically, this option is difficult to achieve, although it has operated successfully in some countries. The reason is that wealthy have too much influence to allow the state to introduce a reform that they perceive as targeting them directly.

It is more realistic to propose that everyone, regardless of wealth, pays an annual wealth tax corresponding to the same proportion, say 1%, of their total estimated capital worth. To make this work, everyone with any capital would have to declare that capital each year, just as they currently declare their income. The advantage of this approach is that the rich could not complain that they are being treated unequally. The tax would nevertheless have the effect of reducing the gap between rich and poor.

This is another form of flat tax that is neither capitalist in nature nor associated with extreme right-wing politics. On the contrary, a flat wealth tax has a socialist flavour. But is not communist. In communism, everyone is supposed to have the same capital, or no capital at all. By comparison to the communist ideal, a flat wealth tax at the proposed rate would have relatively little effect on the gap between rich and poor. But it would have some effect, and the poor would feel the positive effect much more strongly than the rich would feel the negative effect.

Those who object to wealth tax may support their argument by reference to specific cases such as the following:

• What about a farmer whose land is worth about 10 million Euros? Should s/he pay the same rate of wealth tax as others? In response to this point, one might argue that a farmer with so much land should be able to generate enough income from it to cover the wealth tax. If not, s/he has the option of selling a small part of it, which would finance the tax for decades.

• What about a widow who owns the flat in which she lives and has otherwise very little income? Like the farmer, she has the option of using her capital to generate the income necessary to cover the wealth tax, for example by letting out a room. She also has the option of moving to a cheaper flat; the difference in the price of the two flats might easily cover the wealth tax for decades. In any case she is much better off than someone in a similar situation without capital.

In other words, a person with capital should be using it to generate more capital, which should enable her or him to pay wealth tax without losing capital. If they are unable to do this, it is their own problem and not that of the state.

Ever since taxation began, people who have more money have paid more tax - or have been supposed to pay more tax - whether that money was in the form of income or capital. That is ultimately where national states get their income from. Because the rich have often managed through influence or cunning to evade taxes, it has often been the middle classes that have paid most of them. For example a wealth tax that is only payable above a capital of say one million euros can be evaded by distributing capital between husband and wife, among other family members or among companies. A flat wealth tax reduces the chance that the rich will get away with such strategies.

Like flat income tax, flat wealth tax can be considered part of a strategy to eliminate poverty. Those fellow left-wingers who think it unfair that everyone should pay the same rate of wealth tax are asked to consider the following analogy. According to Newton's law of gravitation, the gravitational force between two objects is proportional to the mass of each object: the rate of gravitation is a flat rate. That means that there is a gravitational force between any two objects, for example between a person and a nearby mountain. But since the earth is so much more massive than a mountain, the force of gravity exerted by mountains on humans has no noticeable effect (although physicists have been known to measure such things). Similarly, a flat wealth tax at a low rate of around 1% is a small and perhaps negligible burden for people with little capital. Nor is it much burden on the wealthy (although they perceive it that way). But government revenue from wealth taxes can be considerable, and comes mainly from the rich. Consider the extreme case of Bill Gates, whose net worth is estimated at 50 billion dollars. If he paid a wealth tax of 1%, that would be 500 million, which is $2 for every person in the USA. With that kind of money the US government could do something about inner city poverty - if wasn't wasting it on military foolishness such as the 2003 invasion of Iraq. But that is another story.

A disadvantage of wealth tax is that it forces individuals to spend a lot of time calculating their net wealth, and periodically revising their calculations. One of the reasons why UBI-FIT is so interesting is that it reduces the amount of pseudowork. Readers may wonder why am I promoting the introduction of a new kind of pseudowork, having just gone to considerable lengths to get rid of another kind. If, however, these calculations become public knowledge (as suggested below), society becomes more transparent. It becomes easier to understand the gap between rich and poor and to develop appropriate strategies to reduce it.

Transparency and public access

In Sweden, all income tax declarations are published in the internet. The advantage of this procedure is that it forces people to be honest. If they are not, others (journalists, ordinary citizens...) can complain, which can lead to investigations. The legal provision that makes this possible is the principle of public access.

The proposal of combining universal basic income with flat income tax, capital gains tax and wealth tax would be easiest to achieve in conjunction with the principle of public access. The wealthy have a responsibility to share a part of their wealth with the general public, because if they do not, there can be no modern social democracy. Society is where their wealth comes from and what gives their wealth meaning, so society has a right to some of it, too. A first step toward this goal is for the rich to make their wealth known. And if the wealthy are forced to do that, then it is only fair that everyone should do it. Thus, the declared income and capital of all citizens in previous taxation years should be public knowledge. This in no way affects the right of any individual to amass wealth; free enterprise is surely ok, provided it is fair and transparent.

Transparency can also solve the problem of estimating a person's net worth in the absence of a buyer-seller relationship. If everyone is required to declare their net wealth and is taxed on the declared amount, of course they will tend to underestimate that wealth. But if the declaration is public and can be legally challenged, the degree to which wealth declarations can be underestimated will be limited.