> a negative effective phase-out rate: "for every $1 you make up to $X, you get $0.25 more from UBI/Welfare."
The main problem with this is that the tax system is set up to prevent you from under-reporting your income. Over-reporting it is essentially trivial, e.g. two people who are in the relevant income range exchange favors (do each others' laundry etc.), or claim to have, and then actually report the transactions as income and get the credit.
But there's something else you can do here which is really neat. Stop using a complicated progressive rate structure, and instead eliminate the phase out entirely. Now instead of low income people having a nominal 0% tax rate but an effective 50% benefits phase out rate and high income people having a nominal 30% tax rate, you just use a flat 35% tax rate which implicitly has the benefits phase out built into the tax system. Which means you don't need any of this income reporting or annual tax returns or anything of the kind, the employer/seller just withholds the fixed tax rate and you're done, and everybody unconditionally gets the UBI to provide the effect of a progressive rate structure.
> Over-reporting it is essentially trivial, e.g. two people who are in the relevant income range exchange favors (do each others' laundry etc.), or claim to have, and then actually report the transactions as income and get the credit.
True, but this is less of a problem if the credit rate is comparable to the payroll tax rate. In that case, a worker who over-reports their income will create an obvious payroll-tax debt in the hands of the notional employer.
> Stop using a complicated progressive rate structure, and instead eliminate the phase out entirely.
From a welfare-cliff perspective, that's a fine idea. However, per the article here, the unconditional cash transfer seemed to lead to reduced labour income. That's an obviously worrisome sign, suggesting that integrated welfare system might need an even stronger pro-wage bias.
> True, but this is less of a problem if the credit rate is comparable to the payroll tax rate. In that case, a worker who over-reports their income will create an obvious payroll-tax debt in the hands of the notional employer.
But that's just an accounting sham to claim you're taxing them less than you are and you no longer actually have a negative marginal tax rate.
> However, per the article here, the unconditional cash transfer seemed to lead to reduced labour income. That's an obviously worrisome sign
Well that's mainly because they worked 1.3 fewer hours a week and were less desperate to take a low-quality job.
You might also notice that the effect you're referring to isn't net of the payments, and is also probably invalidated by the period the study was done -- it started during COVID. Between the first and last year of the study, the household income for the control group increased by $20,000 -- on a $30,000 base! The experiment group increased by almost as much before the payments and were ahead by more than $6000/year including them.
In any event, you don't have to use a different rate structure to do what you suggest, you get the same effect without the complexity by increasing the flat tax rate and adding the money to the UBI.
Suppose Alice makes $100,000 and Bob makes $20,000.
In a system that taxes at 5% up to $50,000 and 30% thereafter, the state gets a total of $18,500 from Alice and Bob.
In a system that taxes at 5% up to $50,000 and 40% thereafter, the state gets $23,500 from Alice and Bob.
In a system that taxes everyone uniformly at 25%, the state gets $30,000 from Alice and Bob. This is not a smaller number and 5/6ths of it is from Alice. In fact, you can use that money to give them each a $12,000 UBI, leaving Bob with an effective tax rate of -35%, delete all of the transfer programs that obsoletes and still have some left over for transit and uniforms.
You don't need it, it's already built in. The flat tax rate needed to serve as the implicit benefits phase out is already in the range as what you'd use in the high tax brackets in a progressive tax system with separate benefits phase outs.
If you want it to be more progressive you raise the flat tax rate and use the money to increase the UBI. If you want a less progressive system with lower taxes you do the opposite. Making it needlessly more complicated gains you nothing and costs you efficiency.
The main problem with this is that the tax system is set up to prevent you from under-reporting your income. Over-reporting it is essentially trivial, e.g. two people who are in the relevant income range exchange favors (do each others' laundry etc.), or claim to have, and then actually report the transactions as income and get the credit.
But there's something else you can do here which is really neat. Stop using a complicated progressive rate structure, and instead eliminate the phase out entirely. Now instead of low income people having a nominal 0% tax rate but an effective 50% benefits phase out rate and high income people having a nominal 30% tax rate, you just use a flat 35% tax rate which implicitly has the benefits phase out built into the tax system. Which means you don't need any of this income reporting or annual tax returns or anything of the kind, the employer/seller just withholds the fixed tax rate and you're done, and everybody unconditionally gets the UBI to provide the effect of a progressive rate structure.