Dave's Part, not a website with whom I usually agree has a nice article up about benefit fraud. Like him, I find the current "benefit thieves: We're closing in" advertising campaign abhorrent.
The problem is that the choice is claim benefits
OR work. Clearly there needs to be some system that allows the hard up workless to take cash-in-hand work to supplement their income without losing benefits to the extent they become homeless, thus maintaining the habit of work and preventing total despondency leading to welfare dependency.
Simply allowing a few hours a week or earnings up to a small amount to be ignored, or turning a blind-eye to cash in hand work, as Dave suggests, is a recipie for schooling entire populations in tax evasion like Italy.
Any means-tested benefits lead to problems with exceptionally high marginal tax rates as the benefit is withdrawn. The same is true of specific benefits like housing benefit. This is an artefact of an unduly complex system, with myriad benefits targeting behaviours and lifestyle choices with which Governments down the ages have sought to punish or reward. The result of the system is the jobless and those otherwise dependent on the system are forced to negotiate a daunting bureaucracy of multiple agencies and securing multiple streams of benefit, which in practice becomes a full-time job.
So let's go back to first principles.
- Simplicity is a virtue
- Marginal tax/withdrawal rates should not be punitive anywhere on the income scale, in practice this means 50%.
- The tax and benefit system should not be used to punish or reward lifestylye choices.
- No marginal tax rate should be higher for lower earners than the bands above it.
- No-one should starve.
What we need is a system which combines the whole tax and benefit system into a consistent, simple, fair progression, from benefit support through to earnings and tax-paying without the 80 or 90% withdrawal rates faced by a single male on the minimum wage , which falls to 20% for middle earners, and rises (in the 10/11 tax year) sharply to 62% between roughly £100,000 to £125,000 before falling again to 51%.
That is not consistent or fair.
What we need is a system where people at the bottom of earners (£0.00 per year) recieve a subsistence from the Government. Any pound earned subsequently must mean at least 50p to the worker net of benefit withdrawal. If there is to be a minimum wage, and with a sensibly designed benefits system, there would not need to be one, it seems grotesque that people earning it pay any tax at all. Is it not better for the state to subsidise employment than unemployment?
Though I have often mentioned it, I am not wholly convinced by the
citizen's basic income. It strikes me as ludicrous to pay comfortably off people money when they don't need it.
I have come down instead on the side of a "negative income tax", a variant of the flat-tax system. The Government guarantees you a subsistence income, say £6,000, which doesn't depend on where and with whom you live, and the Government takes no interest in what you do with it, thereby discharging its responsibilities to see to it that no-one starves, increasing freedom and increasing self-reliance. I would include a universal child benefit, and some incapacity benefit for the genuinely disabled - perhaps by starting the basic income element at a higher rate depending on the level of disability.
Someone earning nothing will recieve £6,000. Everyone then faces a marginal 40% tax rate. So first pound earned is taxed at 40%, the same as the Millionth, and the total tax due is calculated net of the £6,000.
This means that someone earning £15000 pays no tax, but recieves no benefits, compared to paying £3,400 under the current system. Someone on the median income, £24,000 pays a total of 18% in tax or £6,000 compared to £8,100 and someone earning £250,000 pays a total of 39%, £4,000 less than under current rules. The amount of tax paid by the rich is equivalent, but everyone is better off through the income distribution. Raising the withdrawal rate to 45% should see everyone over £33,500 slightly worse off, and everyone underneath better off, and should therefore be roughly revenue neutral, especially when you consider such a radical simplification of the system would free up huge resources from the civil service.
Obviously one can finess the numbers. Different Guaranteed minima and different witdrawal rates. It would be possible to have 0% withdrawal for the a tranche, perhaps around break-even, or at the bottom. The whole system would be administered through PAYE, leaving no need for the costly overheads of benefit offices and the vast back office of the DWP, allowing for a significant reduction in headcount in HM R&C. With a marginal withdrawal rate of 40%, this would have to account for substantially all personal taxation: this would only be fair on middle earners if things like Council tax were withdrawn, perhaps being replaced by a percentage of income tax being earmarked for councils.
I have tried to include an estimate of Working Tax credit, but the calculation is fiendishly difficult to model. I cannot think of a system so fundamentally flawed as Gordon Brown's greatest achievment, whose complexity leads to overpayment, which gets clawed back from the poorest families in the land. Why tax them only to hand some of it back to them by some absurdly complicated formula, which is not accessable to any auditor, cannot be checked by the system's vicitms?
Simplicity is a virtue of Flat-tax systems. This one is steeply progressive, which should please the left, but is fair and doesn't substantially change the tax paid by the majority of people, but removes a large number from the tax-burden, and provides an income to the poorest, without the obscene disincentives to work. Clearly the ideal is to have corporate taxes covered by the same marginal rate, but at the 40-45% level this is not going to be possible, but could be an aspiration for a right-leaning government. It also means the marginal tax rate is roughly equivalent to the Government take as a share of GDP. If this system was stuck to, it would be difficult to hide a big expansion of the state like the recent Labour Government has.
So there we have it. The Very British Dude solution to the tax and benefit system. Are you listening, Dave*?
*Cameron, not Osler.
[Does anyone know if it is possible to put a Spreadsheet up on Blogger?]