Scrap the Benefit System!

Well, quite:

Nor has the scheme made work pay. Nearly 1.7 million Britons — double the number in 1997 — now have a marginal tax rate of 70 per cent: for every extra pound they make, Mr Brown takes 70 pence. As they make more money, they lose more benefits, so it is barely worth their while to work — exactly the opposite of what the Prime Minister was trying to achieve.

The solution seems simple. Scrap many of these benefits and increase personal income tax allowance. This would take millions out of income tax altogether, easing the burden on those hard-pressed tax and benefits men. There will, of course, be winners and losers, and the genuinely poor will have to be protected, but it would save us all a vast amount of money in administration costs and help prevent further such disasters — whether one-off or systemic.

The idea that the poor should even be in the income tax system is absurd. Which is why sensible people, like the Adam Smith Institute, suggest that the allowances be raised to £14,000. There\’s even a sensible political party, UKIP, which has made a similar thought (similar, although not exactly the same amount) part of their proposals.

Yes, yes, I know, there are those who would deny that those two groups are "sensible", but this specific proposal clearly is.

21 thoughts on “Scrap the Benefit System!”

  1. warning: unworkable bloggertarian policy prescription ** paging Paulie **

    Do you deny the existence of people looking for work, despite marginal benefit withdrawal / tax rates, and who cannot find it? What’s scrapping benefits going to do to them? Even if you think their numbers are lower than often supposed, they certainly exist in the popular perception; how’s scrapping benefits ever going to be politically tenable?

    Secondly, and relatedly, most of us face unemployment risk, don’t benefits have a role as unemployment insurance? Do you know of a form of unemployment insurance that doesn’t suffer from essentially the same problems as benefits?

    I wonder if I’m going to get it in the neck as a lefty here – here I appeared to taken as a heartless righty when arguing from the same position.

    Oh woe is me, why’s the middle of the road such a lonely place?

    Tim adds: I think you’ll find that both Chris D and I offer the same policy prescription on this. A citizen’s basic income.

  2. yes I thought you’d say that. OK, as far as it goes.

    Although I remain to be convinced that it is possible to set a CBI high enough for the involuntarily unemployed to live on, once housing costs are factored in (a prerequisite for political feasibility imho), and yet low enough to avoiding decimating the labour supply. I’ve said it before, but if the CBI were enough to scrape by on, I’ll certainly opt for not working (with a bit of freelance noodling thrown in to pay for treats).

  3. It’s also much more complicated than this. Raise the personal allowance to £15,000k, and make the benefits based only on working status, and we now have a 100% withdrawal rate for people on benefits, which is not such an improvement.

  4. LE, a fiscally neutral CBI would be roughly the same as Income Support and Pensions Credit rates, say £60 and £120 per week respectively. Not enough for working age people to live on, but one heck of a top up for very low earners.

    Housing benefit is different topic. If people want more than the CBI and don’t have a job, what’s the harm in paying people £100 a week (on top of CBI) to do something that is vaguely of benefit to society, cleaning streets, shopping for old ladies, whatever?

  5. Tim

    I’ve often wondered what would happen if we went further and put the threshold up to say £20k or even £25k.

    What would happen politically? Would such a move affect so many people that the party proposing it would be swept to power in a landslide?

    What would happen to the taxpayer, particularly if he lives in a lower income parts of the country? Given he/she would now have the ‘gross’ rather than ‘net’ in his pocket, would suppliers (e.g. local supermarkets, landlords etc) be tempted to increase prices, rents etc knowing the capacity to pay has increased? As a result, the customer finds his £100 now stretches the same distances as (say) £80 used to stretch, so he is no better off.

    What would happen to the revenue – a big dent or a small dent? If the local suppliers increase their prices in the circumstances above, wouldn’t they be paying more tax on their additional profits, meaning that the money finds its way back to HMRC eventually – but the tax itself is just physically paid by a different person?

  6. ‘ Matthew, can you expand on your point a bit? I don’t understand what you mean by benefits based on working status. You’re not talking about CBI are you?

    Mark, well OK I guess you could use state job creation so that the involuntarily unemployed have enough to live on, but I’m surprised to see state job creation proposed as a solution to unemployment here!

    If the CBI would be close to existing benefits in value, I would be interested to know the effect of a switch to CBI on labour supply, given the benefits do have an element of conditionality.

    What we really need is a trial run somewhere, to study the effects.

  7. Worth also noting that in that Telegraph article she has a go a universal benefits, saying she is too rich to need them. So she’d hate a CBI, the ultimate universal benefit.

  8. Luis – Sorry missed your comment. No, I’m not talking about a CBI, which would presumably have a withdrawal rate the same as the level of income tax (high, btw, in most of the examples I’ve seen – 45% on one this site linked to, which is another problem).

    I meant just simple (say) unemployment benefit, which you either get or you don’t. The amount you get is therefore withdrawn at 100% rate on getting job. In other words there’s always going to be an issue like this with any contingent benefit, it’s hardly a Brown thing.

  9. Matthew,

    thanks for response – I’m still confused though. I thought CBI had not withdrawal rate as it is paid regardless of employment?

  10. E&B, no doubt that would happen – but it would improve net income of lower earners relative to higher earners, which is the aim of all this.

    However, CI purists say that if everybody got the CBI (instead of a tax free personal allowance) and everybody paid the same rate of tax on all their income, then the pressures to keep the tax rate down would largely balance with the pressure to increase the CBI, the State just has to play referee and find some fair-ish balance.

    Luis, it’s not State job-creation in the Nulab sense (it wasn’t my idea – I was arguing with somebody about the topic and we realised that you could put 2 and 2 together here). If the taxpayer is paying people an extra £100 a week for Housing & Council Tax Benefit and/or disability top-ups, why shouldn’t people who need/want that £100 a week do something for the taxpayer in return?

  11. tired and emotional

    One primary reason for cutting benefits and increasing tax thresholds is to reduce the number of people who look to the State to solve their every need. The CBI does precisely the opposite, all it would do is engender yet more of the entitlement mentality and be vulnerable to politically motivated increases which end up cutting the differential between work and welfare again.

    Benefit entitlement should be limited, firmly, and the Working Tax Credit extended hugely along the lines of the TANF programme in the US which grew out of the Wisconsin reforms. (CTC and child benefit and the CTF have to go).

    If we lifted the Income tax threshold to £12,000, we would need to find about £30 billion to pay for it. This would have to come from scrapping CTC, Child Benefit, the CTF and time-limiting benefits, and a whole lot more… any ideas how to raise this kind of money?

  12. Luis – yes, you’re right. But I think the 70% quote above includes income tax payable on earnings, which would in a CBI system be the rate of income tax. I might be wrong though.

  13. So we have had 25million peoples records open to fraud AND people are suggesting the solution is a even bigger CBI database.

  14. “any ideas how to raise this kind of money?”

    How about instead of a CBI you gave carbon credits to everyone equally, then let them sell those credits to those who emit CO2 for the right to emit that CO2.

    No “entitlement” culture, but the economic benefits of a CBI. Also you get to eliminate the neo-communist tendencies in the eco movement: no possible air-envy or anti-4×4 rage because the effects have been paid for.

  15. Matthew, the 70% = 33% income tax plus NI plus 37% Tax Credits withdrawal.

    Kit, if you don’t want the CBI, then don’t claim it. Nobody says you have to!

    Kay Tie, you can exactly achieve the same thing with far less “bureaucratic crap” (pace Martin Wolf) if you have a nice fat carbon tax and distribute the proceeds equally per capita as a Citizen’s Income (on a national level, or if you are mad enough, on a global scale). The tensions between high- and low-carbon users are the same as I explained before. The government just has to play referee.

  16. “you can exactly achieve the same thing with far less “bureaucratic crap” (pace Martin Wolf) if you have a nice fat carbon tax”

    I agree completely. It’s just that a “personal carbon allowance” resonates better than a redistributed tax.

  17. “Kit, if you don’t want the CBI, then don’t claim it. Nobody says you have to!”

    Can I opt-out of paying for it too?

  18. You raise the income threshold, and then instead of the rest of the benefits system, you create millions of nationalised jobs, so that they can earn their benefits, not just sit back and be paid them anyway.
    People looking for jobs could have a time to find one, or carry on in their nationalised job.

  19. In fact, let’s go further. Raise the income threshold, create jobs for all the people without jobs, so they don’t feel entitled to every last thing the government can provide, which they feel is their right. You then have a nation full of people who are working, and therefore conditions go up, because of the extra capacity for maintenance.
    The only services the government needs to provide the taxpayer with are education, public transport, healthcare and housing, benefits are a drain on the country’s economy.

    Effing & Blinding…
    I don’t think that this would increase the prices of goods, as there would be a smaller percentage of the population who are better off, than there are who would stay paying the same tax. What we have to watch out for is a culture where those who earn just under the threshold are in effect richer than those who are just over the threshold and are in fact paying enough tax to lower them below those earning below the threshold.

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