This chapter elaborates on certain aspects of the optimum income tax and the design of benefits. In Chapter 2, we examined the Basic Income/Flat Tax (BI/FT) proposal, looking at the choice between different levels of basic income and associated rates of tax, given that such a scheme was in force. The next important question concerns the choice between the BI/FT and the Social Insurance/Graduated Tax (SI/GT) arrangements found in most OECD countries. Here we need to consider both the graduation involved in most current income tax structures and the categorical nature of existing social insurance benefits, where a person qualifies by being unemployed, sick, etc. What considerations may lead us to be willing to abandon graduated taxes, with increasing marginal rates of taxation on higher incomes? What are the arguments for replacing existing categorical benefits by a universal basic income?
Historically, the question involves moving from the SI/GT structure to the simplified BI/FT scheme, but analytically the effect may be most easily seen by starting with the BI/FT scheme and asking whether we would like to depart from this by introducing graduated marginal rates and categorical benefits. This is the approach adopted here. Sections 3.2-3.4 are concerned with the case for graduation; Section 3.5 deals with categorical benefits. In neither case is the analysis more than suggestive. A full discussion of just the theoretical merits of the two systems would require substantially more space; to examine the detailed institutional issues is far outside the present scope.