A VAT tied to a BI solves overconsumption-driven pollution.

1.6 UBI: from flat tax to progressive personal consumption tax

Mirrlees’ (1971) redistributive theory of optimal income taxation is the dominant tax theory. The optimal income tax depends on the distribution of abilities, and it assumes that income is the only indicator of ability. Distaste for inequality and the responsiveness of work and effort to incentives are core factors. For instance, Hoynes and Rothstein (2019) state that given rising inequality and the motivation of offsetting increasing income shares of capital owners, one might prefer to finance UBI through a more progressive tax. In public finance textbooks, the central issue in the design of fiscal policy is this trade-off between equity and efficiency. Marginal tax rates discourage exerting effort, generating efficiency costs (Mankiw, Weinzierl & Yagan, 2009). The optimal tax is a lump-sum tax6 , for it does not result in changes of behaviour or in relocation of resources. The flat income tax concerns the same marginal tax rate for all income earners. To keep it simple, the flat tax should be combined with a lumpsum transfer for the lower income earners and is close to optimal (Atkinson, 1995; Mankiw, Weinzierl & Yagan, 2009; Islam & Colombino, 2018). The level of the flat rate is a political decision. A high flat rate implies the priority is to fight poverty; the tax burden is shifted from low to high income earners, protecting the vulnerable groups (equity). A low flat rate (efficiency) implies the tax burden is shifted from high to low income earners.

The ‘just desert theory’ (Mankiw, 2010) does not require a distributive motive to increase marginal tax rates. According to the ‘just deserts theory’ taxation should ensure that individuals receive their social contribution, i.e. individuals’ compensation should reflect his or her social contribution. Who contributes more to society - more goods and services - deserves a higher income, it is rightfully his or hers. However, paid employment is not the only resource for state income/government revenues. Also other resources, including land, knowledge, security, and political stability contribute to inter-country differences in productivity. Part of this state income can be divided as a social dividend (Haywood, 2014).

There is a considerable gap between how much different professions are paid and what they contribute to society. UBI can play a positive role in closing this gap. The New Economics Foundation (NEF, 2009) found that some of the most highly paid jobs benefit us least, and some of the lowest paid jobs benefit us most. The least well paid jobs are often those that are among the most socially valuable - jobs that keep our communities and families together. The market does not reward this kind of work well. For instance, leading London City bankers, advertising executives, and tax accountants destroy more social value than the money value they generate, while childcare workers, hospital cleaners, and waste recycling workers generate more social value than they are paid. Bringing a better world about requires a new approach to looking at the value of work: look beyond the narrow mainstream economic notion of productivity - more products and services produced and sold through the market - to quantify its social, environmental and economic value. By making social value creation an important economic and societal goal, we could set the right incentives to maximise net social benefits, ensure a greater return to labour rather than capital, and a more equal distribution of economic resources between workers.

Capitalism is supposed to be the most efficient economic system. However, about 8% of workers perceive their job to be socially useless. An additional 17% seem doubtful about the social usefulness of their job. These, socially useless jobs are not productive, i.e. inefficient. These inefficient jobs are more likely in the private sector than the public sector. The highest share of workers reporting a socially useless job are in finance and law (Graeber, 2018; Dur & van Lent, 2019).

High-paying professions have negative externalities. Low-paying professions have positive externalities. These externalities are large and have important implications. There is evidence that arts, engineering, research and teaching generate positive externalities, and finance, management7 and law generate negative externalities (Piketty 2014; Piketty, Saez & Stantcheva, 2014: 508-512; Lockwood, Nathanson & Weyl, 2017). Raising marginal tax rates for the well-off can be used to incite workers to move into socially (more) productive professions and has an efficiency benefit. Progressive income taxation can be used to reallocate talented individuals from professions that cause negative externalities to those that cause positive externalities and can be considered a social welfare generating Pigouvian optimal tax. Pigouvian subsidies can be used for professions that cause positive externalities. Hence, it is not only solidarity, i.e. the distributional motive, it may also be for pure efficiency reasons to introduce a UBI financed by progressive income tax, i.e. an optimal taxation that fits Mankiw’s ‘just deserts theory’.

The introduction of the UBI is preferably to be financed by a progressive personal consumption tax. Both are designed according to identical principles, allowing for coherence and complementarity, i.e. compatible combination of policies (Schmid & Schömann, 1994). A progressive consumption tax should replace the progressive income tax, for people should be taxed on what they take out of society (consumption), not on what they contribute to society (income). Advocates of replacing income tax with a progressive personal consumption tax have asserted its superiority to the income tax in terms of fairness, economic efficiency, and simplicity of administration (Graetz, 1979). Moreover, it encourages sustainability (Easterlin, 1974; Layard, 2005; Frank, 2011). The hedonic treadmill (rising aspiration levels) (Brickman & Campbell, 1971) and the positional treadmill (status seeking behaviour) turn economic growth into a rat race (Frank, 1985). Both treadmills indicate that happiness is affected by relative, rather than absolute income levels. Overconsumption is not only a waste of scarce natural resources, it is also accompanied by air, water and soil pollution. However, it shows positive in GDP growth rates. All will benefit from progressive consumption tax on activities that are harmful to society. If consumption were taxed at a progressive rate, we would save more, buy less expensive houses and cars, and feel less pressure to work excessively long hours (Frank, 1997). This improves the quality of our lives.8 The results of a laboratory experiment by Blumkin, Bradley and Ganun (2012) support the switch from income to consumption tax (value added tax, VAT): less reduction in labour supply plus potential welfare gains and confirm the equity, efficiency and simplicity arguments for a consumption based tax.

UBI may also increase the total amount of wasteful and inefficient expenditure on positional goods, i.e. conspicuous consumption that is detrimental to investments and the longer-term needs of the society (Goldsmith, 2010). There may be a ‘mailbox effect’: the marginal propensity to consume windfall income is higher than income from other resources (Pech, 2010). The latter depends on how UBI is perceived and the tax scheme, and hence is an empirical question. UBI combined with progressive consumption tax and progressive income tax not only influences consumption, the demand side of the economy, it also impacts the supply side of the economy, the production, and how production is organised.