Exploring new mechanisms for taxation in an economy that provides a basic income – do you still need a minimum wage?
If everyone received a basic income,
is there any need for a minimum wage?
It was something I hadn’t considered but have been mulling over ever since. At first blush, I’d say no. If everyone is receiving a basic income, then any wage earned leads to an increase in income, no matter how small. All income gets taxed, so the fewer barriers to earning wages, the better…
However, there is a potential downside to that perspective. With no minimum wage, hourly rates for most work could drop to the lowest level someone is willing to accept. This creates two problems: First, everyone gets a liveable income but it becomes increasingly difficult to move beyond ‘just about managing’ if the majority of jobs earn peanuts. Second, taxable income will decline meaning there is less money to fund public services including the basic income. Which means it gets cut and we’re back where we started…
But forcing a minimum wage could kill innovation. One of the great potential benefits of providing a basic income is giving all people the freedom to experiment with work they love that may have little or no financial pay-off initially, but could turn in to a profitable business over time. The solution is to find a way to encourage profitable businesses to pay good wages.
First, an assumption. In this scenario, ‘company’ could just as likely be sole traders employing themselves (e.g a ‘Vlogger’ earning a living on an online video channel) as a multinational corporation. The free-lancing/gig economy is here to stay. The ‘company’ generates money from selling a product or service and pays corporation tax on the profits. Employee(s) of the company pay income tax on wages received. (Yes, there are all sorts of other taxes and deductibles but lets keep it simple for the sake of argument)
My latest Friday thought is to link income taxes with corporation taxes. And then apply Amazon’s Kindle pricing model to encourage companies to pay better salaries. On the basis they are going to cough up some of their profits one way or another…
Amazon Kindle has an interesting pricing strategy. If you price your book low, Amazon keeps more than if you price your book high, but then flips back when you price your book really high. This seems counterintuitive as it goes in the opposite direction of normal tax models, which is to apply a lower tax rate to lower earnings, and increase it for higher earnings. And bears no relation to actual costs incurred by Amazon, given we’re talking about digital books.
At the time of writing, using the US market as an example, here’s how the Amazon Kindle model works:
|Book price||Royalties paid||Example|
|$0.99 to $2.99||35%||5 books sold at $0.99 earns $4.95.
Amazon keeps: $3.22 and pays author: $1.73
|$2.99 to $9.99||70%||5 books sold at $2.99 earns $14.95.
Amazon keeps: $4.48 and pays author: $10.47
|$9.99 to $200||35%||5 books sold at $9.99 earns $49.95.
Amazon keeps: $32.47 and pays author: $17.48
So here’s the idea. Link corporation tax to the number of employees at different salary levels. The more and better-paid employees a company has, the lower their corporation tax rate. In essence, the company pays less corporation tax when more income tax will be paid by the employee instead. If the company wants to minimise wages, they pay more to the government instead. If they pay more in wages, they pay less to the government. The government will still get their share, via income tax and employees have more disposable income to spend in the economy. Creating a virtuous circle instead of the vicious low-prices/low-wages circle we currently have.
How to implement this model? Well there’s the rub, and why this post is short. I haven’t found a percentage breakdown yet that works out well. All simulations lead to lower wages and lower tax receipts Will hopefully be revisiting this one with a happier outcome after a bit more work… In the meantime, suggestions are most welcome.
But before you dismiss this is an idealistic venture, there’s another term for this type of taxation model – an automaton/robot tax. In essence, I’m saying that companies should be taxed when they generate profits in ways that do not require human labour, which means they have shifted to technology-based operating costs. Given most companies seem to be striving to do away with human labour (and, in high-risk endeavours, I’d say that is a good strategy), or paying as little as they can get away with (not so keen on that strategy), governments either except diminishing tax returns, and the fun of civic instability it creates, or start looking at tax alternatives.
View my Basic Income page for related articles.
For a great read on the productivity paradox being created by technology, I recommend taking a look at ‘Our Paradoxical Economy Courtesy of Technology and the Lack of Basic Income‘ by Scott Santens. Saved me covering it in more detail here.
- Amazon Kindle Direct Publishing
- Average Salary UK 2016/2017
- UK income tax rates and personal allowances
- UK corporation tax rates
Featured image: author’s own photo. Bluebells in Winchester, Spring 2017