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The Contribution Bonus - Slovak Welfare and Tax System Reform

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posted on Aug, 3 2011 @ 12:22 PM
I hereby present you a study about the Contribution Bonus tax and welfare system.

This proposal is based on the Contribution Bonus, which is a framework behind the Slovakian economic tax and welfare reform by center-libertarian SaS party. It is a system combining Basic Income and modified Negative Income Tax concepts into one system which does away with most of the flaws of current system. It also allows to repeal harmful minimum wage regulation without jeopardising the social situation of low-wage workers (the sole justification for minimum wage). It is a completely new paradigm in public finances and welfare.

Efficient and robust, yet simple, logical and beautiful - thats Contribution Bonus.

Shortcomings of the current systems:

1. Social system fails to motivate people to work - there is a huge barrier between working and non-working. The difference between net income in the case of non-working and net income in the case of working for a low or minimum wage is very low.

Our social system works on alimentation of non-working. The fundamental mistake is in paying social benefits only as a substitute for wage versus an addition to wage. We give alms instead of a helping hand, fish instead of a fishing rod.

However, the main reason why our current social system fails to motivate people to work for low wages is the nonexistent consonance between social benefits and low wages, bringing about de-motivating marginal taxation. As long as taxes, contributions and social payments are treated separately, such a consonance will never occur. A single system defining the financial relationship between the state and a citizen must be in place and must apply from zero to infinite income. A single continuous solution is needed, without leaps, plunges and breakpoints. As a mathematician would say, first derivative cannot be discontinued.

2. minimum wage has many negative effects, and its only positive effect (protection of the lower classes from the "choice" between working for any wage or not having basic necessities) can be accomplished by different means which do not have those negatives.

Negative effects of minimum wage law:
- As a labor market analogue of political-economic protectionism, it excludes low cost competitors from labor markets, hampers firms in reducing wage costs during trade downturns, generates various industrial-economic inefficiencies as well as unemployment, poverty, and price rises, and generally dysfunctions.[36]
- Hurts small business more than large business.[37]
- Causes price inflation as businesses try to compensate by raising the prices of the goods being sold.[40][41]
- Benefits some workers at the expense of the poorest and least productive.[42]
- Can result in the exclusion of certain groups from the labor force.[43]
- Discourages further education among the poor by enticing people to enter the job market.

Minimum wage is less effective than other methods (e.g. the Earned Income Tax Credit or NIT) at reducing poverty, and is more damaging to businesses than those other methods.[44] It merely shifts the problem of social situation of employed lower class into the problem of increased unemployment and slower economic growth. Minimum wage damages the poor the most, since it prevents the creation of new much needed jobs for unqualified workers the most.
In addition to this, minimum wage under system with welfare is simply immoral. Any law which criminalises mutualy voluntary interactions or contracts between two consenting adults is immoral. This includes criminalisation of wage contracts below the minimum wage (CB welfare ensures this contract is truly voluntary from both sides, since you never have to choose between starving or working for any wage).
With CB, minimum wage simply loses its meaning and becomes redundant, or even harmful.

3. Taxation of the same income earned by different means differently is inefficient and unethical, and deforms the markets, thus creating further economic inefficiency.

4. The system is overly complex, increasing the probability of frauds and loopholes, and bureucreatic expenses. The old paradigm of Birsmackian social system conceived in 19th century has over time become an incredible mess and amalgamation of all kinds of arbitrary ad hoc rules and exceptions. Its an old moloch crawling under its own weight.

Paradigm shift

“The space was Aristotelian for centuries, then Newtonian for another few centuries and Einsteinian all of a sudden. There was no gradual transition, no half - Newtonian , half - Einsteinian physics. The new paradigm rules utterly,”
Thomas Kuhn - The Structure of Scientific Revolutions.

Basic principles of the new paradigm:

Generally speaking, freedom of an individual should one of the highest values in our society. Also in the financial relationship between a citizen and the state. Freedom includes a freedom to make decisions and making decisions includes decisions about one’s own money. The state then should take (enforce as taxes and contributions) from its citizens only the necessary part of their money, required to prevent worse consequences such as lack of basic necessities for someone, danger to life or health, or severe hampering of the equality of opportunities (not outcomes!).

The fairness principle does not address whether enforcement of taxes or contributions is fair and just, but rather deals with how to make the enforcement as fair as possible, or how to most evenly distribute the unfairness and burden of collecting taxes. Both taxes and contributions must be fair on horizontal as well as vertical axis. Horizontal fairness means that people in the same social situation must be equally burdened or subsidized. Vertical fairness means that people in better social situation must be burdened more (or subsidized less) than people in a difficult social situation. If we want to observe the fairness principle, we have to adopt equality of opportunities versus equality of results approach. Until 1989 the communists were attempting to achieve equality of results. They wanted the same for everyone: the skilled to receive the same as the unhandy, the smart the same as the silly, the diligent the same as the lazy. We know the results very well. Motivation none, competition gone and the quote of the day was “If you don’t steal, you are robbing your own family.” Equal opportunities are fair, equal results are not. The state cannot be made responsible for every single bruise.

As Charles Murray put it: “Billions for equal chances, not a penny for equal results."

Rules defining the financial relationship between a citizen and the state must be simple and unambiguous. The system may contain only an inevitable number of norms, easily understandable and with one possible interpretation only. The more complicated laws and regulations are, the higher are demands and costs for maintenance of the system and calculation and collection of taxes and contributions. Anoter good reason for simplicity is that the financial relationship between a citizen and the state concerns first and foremost all citizens, not just some system setters and tax or social experts.

In order to satisfy the principle of simplicity, we have to dramatically reduce the number of different unnecessary taxes and contributions, the number of social payments and benefits, and the number of free parameters themselves.

The system may not allow legal opportunities for tax and contributions avoidance and it may not make tax evasions easier or even encourage taxpayers to such a behavior. Furthermore, it may not criminalize taxpayers by inappropriate interventions and illogical measures, i.e. indirectly force them to tax evasions. The more exceptions a law allows, the more evasion opportunities can be identified.


Basic Income

Negative Income Tax (NIT) is sometimes related to the concept of Basic Income (BI), which is mistaken. BI represents a guaranteed fixed amount for any individual citizen regardless of whether he/she works or not. It can be claimed by the richest as well as the poorest, while other income is an addition to this guaranteed income. However, negative income tax is different in that it is decreased as the income is growing and thus supports only the poorest ones.
The idea of a minimum income historically stems from three roots. It first occurred towards the end of the 16th century and independent one-time guaranteed allowances appeared in the 18th century. These two ideas were formally connected to form an absolute minimum income in the middle of the 19th century.

Negative Income Tax

In economics, a negative income tax (abbreviated NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented. It was developed by British politician Juliet Rhys-Williams in the 1940s[citation needed] and later United States economist Milton Friedman combined NIT with his flat tax proposals.[1]

In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level.

A negative income tax is intended to create a single system that would not only pay for government, but would also fulfill the social goal of making sure that there was a minimum level of income for all. It is theorized that, with an NIT, the need for minimum wage, food stamps, welfare, social security programs and other government assistance programs could be eliminated, thus reducing the administrative effort and cost to a fraction of what it is under the current system, as well as eliminating the perverse incentives created by these overlapping aid programs, e.g. when a minimum wage worker who earns a little more nets out with less income because he is newly ineligible for aid. The worker is stuck in a welfare trap and has no incentive to seek higher wages.

A NIT does not disrupt low-wage markets, whereas a minimum wage makes certain very low end jobs impossible (as anyone whose labour is valued at less than the minimum wage must be unemployed). A NIT would therefore increase the availability of cheap labour, which would enable businesses to do domestically some of the work which they would otherwise have to outsource to other countries.

A NIT would reduce administrative overhead, since the large bureaucracies responsible for administering taxation and welfare systems, with the multitude of rules, thresholds and different applications required, could be eliminated. The resources saved by eliminating these bureaucracies could then be spent on more productive government activities, or returned to the people via tax cuts.

Negative income tax represents a mirror image of a regular tax system, where income taxes form a part of the state revenue and their amount grows as the citizens’ income is improving. On the other hand, in applying the negative income tax, taxpayers are refunded some money depending on their particular income. Negative income tax thus does not deal with high income; on the contrary, it deals with the lowest. NIT aims to provide a direct tool that would ensure a minimum income to any family while avoiding costly welfare bureaucracy. This results into retaining a significant personal responsibility and motivation to work, earn and pay taxes instead of living from welfare. The economy can benefit from more economically active citizens.

The new paradigm: CONTRIBUTION BONUS

Two theories are described in the previous chapter: BI (basic income) and NIT (negative income tax). The primary disadvantage of the BI is that it provides the same relief to the wealthy and the poor – which is not necessarily in contradiction with vertical fairness but with common sense indeed. It does not make sense to support the wealthy; moreover, it is too expensive. This issue is well addressed by NIT, where the state relief is reduced with increasing income. On the other hand, the main drawback of the negative income tax is that to qualify for state relief on the subsistence level, either the negative tax rate or the non-taxable minimum must be high. High negative tax rate would mean high marginal taxation and high non-taxable minimum would mean fewer people paying taxes. The problem of both lays in the fact that positive taxation occurs only after zero state alimentation. BI however does not recognize such a problem. Taxation is independent of a (decreasing) amount of state support.
My proposal of Contribution Bonus attempts to bring together benefits of both systems, i.e. taxation independent of the state support in the case of BI and decreased state relief with improving income in the case of NIT.

“The contribution bonus is not a mere welfare benefit or low income subsidy. It goes well beyond that. It is an expression of an elementary solidarity that a civil society shares with its individuals. The contribution bonus guarantees a substinence minimum to everyone, using a single formula to serve as a continuous transition from zero income to (theoreticaly) infinite income.”

The Contribution Bonus system comprises just three simple steps:
1. an amount of maximum possible state relief (sum of state benefits: Universal - basic income (substinence minimum), Optional - child welfare (limited to first 2 children to discourage procreation for money), disability welfare...) is determined with respect to an individual citizen living conditions.
2. calculation of a specific state relief (Contribution Bonus) with respect to an individual’s own earned income (regardless of the ways it was earned - wage, profit, interest, rent..) - thats the actual sum payed as a benefit. Its determined as a sum calculated in the first step minus x % of individuals own earned income.
3. total individual income is calculated (his own income + contribution bonus), and flat tax rate is payed from it.

Everyone healthy who does not have any own source of income and is fully dependent only on basic income provided by CB for longer periods of time is required to work for at most 4 hours a day for their local community, doing community work, if such work is required. Everyone in such situation has an option to opt out of the basic income, and would not have to work if called (so its no slavery), but wont receive anything of course.

Thats all.

Now we have 3 free parameters to adjust the system:
1. basic income value in currency units (and other optional or extraordinary benefits value if wanted)
2. the percentage rate of NIT decrease
3. the percentage rate of the flat tax

If you want to separate basic social security and health insurance from the flat tax, or include sales (value added) tax you will have some additional parameters (like its done here in Slovakia), but I think it should be kept as simple as possible. Ideally there should be just one tax used to fund all state services.

So lets show a practical example. The three boot parameters of the system for our fictional economy are:
1. 180 e
2. 20%
3. 30% (it may seem high compared to current income taxes, but keep in mind its all there is to taxation - there is no sales tax, consumption tax or property taxes - once you add that all up, current taxation level is well over 30% of your income)

The formula for contribution bonus value is:

BI - 1/5 * (own income)

The formula for all money received from employer and welfare therefore is:

own income + [BI - 1/5 * (own income) ]

If you are unemployed you would get CB of 180 e a month. If you find a part time job and start making, lets say 100e a month, your total income would be:

100 + [ 180 - 20 ] = 260e a month. (Wage: 100e, CB: 160e)

As we can see, there is no decrease in total income, even for absolutely minimal wages. You always have higher total income if you work than if you dont work. There is no incentive to work less. Also notice that wages even far below minimum wage present no problem for the system or worker social situation. The smaller the wage, the higher the CB. Its a self-correcting system. There is simply no reason to include some arbitrary minimum wage regulation into it.

If you get a raise to 300 a month, your welfare diminishes, but your whole income raises even more.

300 + [ 180 - 60 ] = 420e (Wage: 300e, CB: 120e)

Basically, you always have 80% of the incentive to work than without any welfare.

The whole system is continuous, and the point where you cease to get any contribution bonus completely is 900e.
These are of course total incomes before taxation, but that only decreases all total incomes by 30%, the ratio between your own income and CB in the total income remains unchanged, so the point of the illustration remains.

EDIT: I forgot the SaS CB document with details, modelled consequences for the economy and more. Its taylored for Slovak economy, I have derived more general system from it. Neverthless if you want to read it, download it here

edit on 3/8/11 by Maslo because: (no reason given)

edit on 3/8/11 by Maslo because: (no reason given)

edit on 3/8/11 by Maslo because: (no reason given)

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posted on Aug, 3 2011 @ 12:44 PM
Britain actually played out many of these proposals with working tax credits and other allowances that allowed low wage earners relief, and although this scheme in it's allowances for the poor is credible, it had/has fantastic benefits for the UK economy it's spin off into infinity is once more a disguise to allow the very, very rich to pay less.

posted on Aug, 3 2011 @ 12:57 PM
It must be frightening to the political class that some people are smart enough to tell the government how things should be done.

I can hear the sound-bite criticism now.

It's communist.

I don't understand it.

He want's to reward failure.

Then the muppet brigade will be unleashed on you.

And when you appeal that the numbers show that it works and will help, they will call you paranoid.

David Grouchy

edit on 3-8-2011 by davidgrouchy because: (no reason given)

posted on Aug, 3 2011 @ 01:12 PM
reply to post by davidgrouchy

Lets see what they got.
I am of course open to honest criticism.

You just cant please all people - libertarians/anarchists demand absolutely no welfare of social system, or no taxes, communists want full colectivisation and equal outcomes, not just opportunities, and their brain shuts down imidiatelly when they hear there is no minimum wage.

I say let the extremists from both ends fight for our amusement while we moderates combine the best of both worlds.

posted on Aug, 3 2011 @ 01:34 PM
One of the hidden bonuses of your plan
is that it doesn't discriminate base on sex.

David Grouchy

edit on 3-8-2011 by davidgrouchy because: (no reason given)

posted on Aug, 3 2011 @ 02:43 PM

Originally posted by davidgrouchy
One of the hidden bonuses of your plan
is that it doesn't discriminate base on sex.

David Grouchy

edit on 3-8-2011 by davidgrouchy because: (no reason given)

Grumpy you may be mister but you just might be a femenists happy hour. Have you seen the gender differences accross the board. I suppose the old cliche comes into play, if one half of us are slaves how can any of us be truly free.

posted on Aug, 3 2011 @ 07:28 PM
Half way into it and have to give you an S&F as I read on. Some really great ideas in here but like has been posted be ready for the teabag brigade to step in and cry "communist!, socialist! dis is gamerika! I am copy and pasting it to word pad so I can study it further. so far it is really got my interest.

posted on Aug, 4 2011 @ 01:54 AM
While I think the Fair Tax is the most "fair" way to tax the public, as the public gets to choose whether or not to be taxed based on their consumption, I'll have to say that this plan is pretty painless. My libertarian/minarchist side still chafes at the Robin Hood elements that won't be solved with this plan, but the limitations included that call for a time limit on how long one can sponge off of everyone else allays that side of me, and allows my leftist/liberal side to come out (I don't particularly want anyone to starve, so I'll let them have some of mine...for a while

Pretty darned brilliant!


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