Friday, 11 June 2010

The result of Means Testing benefits

No-one wants to pay benefits to rich people, right?

Wrong.

Benefits should be low, and where possible, universal. Means tests distort incentives and remove the incentive to work and save. Gordon Brown loved means tests in order to "target" benefits at "the most in need". As a shorthand, Gordon Brown liking something is a pretty good reason to be against it.

Mark Wadsworth
, land-value-tax fetishist extraodinaire, gives us one example involving Pension Tax Credit and Council Tax benefit. Spread this disincentive to save across the whole economy and you've solved the deficit which a reduction in the benefit bill would go a long way to sorting out, and the astonishing level of consumer debt explained. That's before you deal with the cost of administering 70-odd different benefits to which people might be entitled: It just does not pay the average man in the street to save at all, thanks to an idiotically complex welfare state.



3 comments:

SSH said...

What? I actually agree with you for once! Lower admin costs, no poverty traps, etc. Its no coincidence that child benefit is the most signed-up-for benefit.

asquith said...

Completely right, & that's not forgetting the child tax credit & working tax credit empire, which without mincing our words encourages people to stay poor. (Contrast this to the raising of the income tax threshold, which is good because it does the opposite).

I will condemn the coalition if they try to means test child benefit or winter fuel payments. If these benefits are going to exist, & it's safe to say they will, then they should be universal.

I used to volunteer at a CAB (I left more than a year ago but I remember what I learnt as if it were yesterday), I know exactly what it means for people to be discouraged from providing for themselves & doing the right thing in general.

It's hard to answer people when they say "Why should some rich old-timer get a pension?" I say, because we have decided state pensions should exist & administering a means test takes too much money, time & effort, contains perverse incentives, breeds resentment amongst those just above the line & a can't be arsed attitude amongst those below.

I wish Osborne & Alexander would show that they get this, seriously, & proclaim it out loud. Because I wonder whether they do at all.

Mark Wadsworth said...

Ta for link.

There was a good reader's letter in the FT today pointing out that means-testing is no different to income tax.

And let's not forget the Laffer Curve. It is quite possible that if you reduced the means-testing rate, the overall cost of welfare claimants (i.e. benefits they get minus income tax they pay) would go down.

Or, going back to my Poor Widow, why are benefits means-tested for cash wealth but not for housing wealth? If we means test for one we should means test for the other, but preferably for neither.

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