Guest Post: Negative Income Tax III – Implementation

By Ulrich Andree

Note: This is the third of three articles. For the extended original article see LinkedIn. The first post focused on the concept of a negative income tax, the second, on its (dis)advantages.

The Implementation of NIT

The implementation of NIT obviously is a “force act” which affects the entire Mongolian society – the politicians, the public administration and, of course, all citizens. If a corresponding political decision is made to introduce NIT, which absolutely should be confirmed by a peo­ple’s referendum as in other countries of the world, it is very useful to carry out the imple­mentation in three steps.

Development of a Theoretical Tax Model

This is about the most accurate recording of all individual, family and special loaded influ­ence dimensions. The individual characteristics include, for example, body handicaps, chro­nic diseases and the like. To the family-related components belongs amongst other things the martial status (single, married, divorced, etc.), the number of children and other depen­dents who are in need of one-time or ongoing financial support of the taxpayer/ recipient. And the latter group includes, for example, special burdens resulting from illnesses, disabili­ties, accidents, loss of income caused by climatic conditions and natural catastrophes and similar reasons.

Econometric Parametrization on the Base of a Total Tax Model

In the second step the main point is to determine the parameters of each of the individual influencing factors quantitatively. This will lead to provisional tax tariff curves, tax-free subsis­tence minimums and corresponding tax burdens with rising positive income. The determina­tion of tax burden or relief rates is particularly important because the degree of politically intended redistribution as well as the total amount of tax redistribution volume is manifested in the tax function.

To determine the correct tax function it is very useful to carry out computer simulations which allow both a variation of the macroeconomic conditions as well as the determining parame­ters. Due to the enormous performance of modern computer systems, this is no longer a pro­blem and therefore should be applied intensively.

Conduct of Practical Field Experiments

Even though computer simulations are an indispensable tool for determining possible tax tariff functions, they cannot replace practical field tests. In order to obtain results as realistic as possible, even taking into account probably changes in the behavior of the beneficiaries, suitable cities or aimags should be selected the above described positive and negative effects are most likely to be expected. This could be the case, for example, concerning the capital city of Mongolia ,Ulaanbaatar, the second largest city, Erdenet (Orchon Aimag) or the third largest, Darkhan (Darkhan-Uul-Aimag).

Methodologically it would be important to form homogeneous comparison groups whose be­haviour is examined once in consideration of NIT and on the other side without the same one. This could be best done with a multi-year “cohort analysis” which is a subset of behavi­oural examinations that take the data from a given dataset and rather than looking at all users as one unit, it breaks them into related groups for analysis. These groups or cohorts usually share common characteristics or experiences within a defined time-span.

Summary and Conclusions

The implementation of NIT – in whatever form – very likely would lead to more redistribution equity and justice and would give the “working” and “non-working poor” a basic or even better chances to participate in the prosperity of Mongolia. It would pave the way from “Big State” to “Smart State”, since in the long run a proliferating and intransparent social bureau­cracy could be completely abolished and all responsibilities would be concentrated in the tax administration.

But even if the concept of NIT is methodologically and substantially totally convincing and its advantages outweigh by far, it is very likely that there will also be strong resistance from powerful stakeholders, such as those from politics, social administration, trade unions which all lose an important public forum for the attainment or exercising of power and/or personal profiling. And it is to be expected that also most citizens entitled to the grants will have a greater interest in receiving direct social monetary transfers and in-kind benefits.

Besides this, there are a large number of practical problems that must be moved out of the way, but which seem to be all solvable if necessary expertise is available. In this respect, Mongolia could learn a lot from the countries that have already dealt with NIT concepts.

The most notable advantage, however, is the fact that NIT would enable the participation of all citizens in the increasing wealth of Mongolia thereby meeting the constitutional require­ments and thus makes a decisive contribution to the society’s cohesion and welfare altoge­ther.

About Ullrich Andree

Dr. Ulrich F. H. Andree is a Visiting Professor at National University of Mongolia NUM
and public sector consultant.

This entry was posted in Countryside, Demography, Development, Inequality, Public Policy, Public Service, Taxes, Ullrich Andree. Bookmark the permalink.

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