Just a thought on this universal credit

Why not go the whole hog?

To a citizens\’ basic income or a negative income tax?

That way we could solve, once and for all, the marginal tax and benefit withdrawal rates.

Pay a cbi, whack up the basic rate of tax so as to claw it back at the middle and top end of earnings rather than from the marginal earnings of those scrambling out of poverty?

22 thoughts on “Just a thought on this universal credit”

  1. Well one obvious reason would be that your suggestion worsens the incentives to work for about (worse-than-back-of-envelope-figures) 30 million people, while improving it for 5m people.

  2. Paul, I don’t think this is a controversial issue. If you search Google you will find thousands of articles saying why higher marginal tax rates are a disincentive to work.

    You seem to be saying that someone shouldn’t mind a marginal rate of say 30% or 90% if they have a tax-free allowance. That makes no sense.

    Tim adds: But that’s not what I said either. Reducing the marginal tax rate on the working poor from 80% to say 30$ sounds like a good idea, even at the expense of increasing the marginal tax rate from 20% to 30% for all basic rate taxpayers. No, I’ve not done the sums but I put it forward as possibly at least reducing the total deadweight effects of marginal tax rates across the economy.

  3. “You seem to be saying that someone shouldn’t mind a marginal rate of say 30% or 90% if they have a tax-free allowance”

    No I’m not. I didn’t make a statement, I asked you a question.

  4. A citizen’s income would have to be pretty low. But if you set it at the minimum necessary to survive (say, whatever minimum wage is now) and then have a flat tax on top of that, it would encourage people to work (no complex worrying about whether your income would go down), while also giving low paid people an out if they were treated like shit by their managers.

    You’d have total liquidity of the workforce, which I would have thought would be a very good thing indeed.

  5. Ok great, I think then we’re all agreed. Raising the personal allowance increases the marginal incentive to work for those who earn less than it, at the expense of decreasing it for those who earn more.

    Tim adds: Sure….with a proviso. We’re not at all sure that the (dis) incentives to work are the same at each and every tax level. Does the 10% move from 80% to 90% have the same disincentive effect as from 20% to 30%?

    By lowering 80% rates on some millions and putting up 20% rates on some tens of millions, we might actually decrease the total disincentives in the economy. Can’t prove this of course but I find it intuitively plausible.

  6. Paul – I realise they were questions, but they seemed to ask things that were so blindingly obvious (if you believe marginal tax rates matter, which is I guess debatable) I felt I had to interpret them as rhetorical.

  7. Matthew: “Raising the personal allowance increases the marginal incentive to work for those who earn less than it, at the expense of decreasing it for those who earn more.”

    And given that the possible amounts of a negative income tax or CBI have not been specified, we don’t have any basis to assume that every basic rate taxpayer would be faced with an increased disincentive to work, when compared to the current regime of benefits, personal allowances, tax credits, etc.

    “if you believe marginal tax rates matter, which is I guess debatable”

    I’d say some matter more than others. I’m far more concerned about disincentives to work for those at the low end, who may be prevented from even covering their own living costs, than I am about incentives for someone earning £100k to earn £101k.

  8. i think tim’s points are good, my aim only to point out that I think many advocates of these cbi see them as a free lunch. Also as Tim points out most people aren’t affected by these very high marginal rates, which means on the one hand its not so costly to deal with them, on the other i expect the gains from a macro level will be quite small (by definition they aren’t going to be very productive). This does not, of course, mean its not worth doing on a personal level (though there i would note if people prefer being on benefits given the current system, which is the underlying assumption, their increase in utility from any reform will be small too).

    Paul, your example (from 100 to 101) hasn’t got much to do with this debate (though i believe the incentive at that point is particularly bad). And neither does mentioning tax credits etc. The issue here is simply if you extend benefits in work, someone else has to pay. The govt doesn’t have any money of its own.

  9. “though there i would note if people prefer being on benefits given the current system, which is the underlying assumption, their increase in utility from any reform will be small too”

    I find it strange that after spending the thread arguing that marginal tax rates matter, you claim that for the people facing the highest marginal tax rates, they don’t make that much difference.

    “Paul, your example (from 100 to 101) hasn’t got much to do with this debate (though i believe the incentive at that point is particularly bad). And neither does mentioning tax credits etc.”

    I don’t see how tax credits can not matter. They are a part of what determines the effective marginal tax rate. Part of the benefit of a CBI/negative income tax, from my perspective, is that it smooths out marginal tax rates at the lower end and makes them more predictable, rather than the mess of having huge spikes and even effective rates above 100%. In order to calculate that effective rate, you have to allow for everything the state does that turns gross pay into a take home figure.

    “The issue here is simply if you extend benefits in work, someone else has to pay. The govt doesn’t have any money of its own.”

    Someone has to pay, but to say that it is someone else who has to pay sounds like the lump of labour fallacy creeping in.

  10. “you claim that for the people facing the highest marginal tax rates, they don’t make that much difference.”

    No, I’m not saying that at all. What I am saying is that if we have Mr X, who prefers being on benefits to having a job, and then we reform welfare so he prefers having a job to being on benefits, as these are marginal changes, it is likely that he’ll only be very slightly happier. So a gain, but not a huge one on a personal level (and as I said on a macro-level it’ll be small, as by definition these aren’t highly productive workers).

  11. “So a gain, but not a huge one on a personal level”

    I don’t think that necessarily holds true. If the marginal tax rate is such that, in the short term, the individual is better off not working, that individual may actually be much happier working, but not doing so because of the marginal tax rate.

    “and as I said on a macro-level it’ll be small, as by definition these aren’t highly productive workers”

    That’s a sweeping generalisation, which also seems to rely on the assumption that each individual has a fixed productivity. It’s just not credible.

  12. No, I think both make sense.

    First, if an individual is much happier working, then there cannot be a marginal rate which stops them.

    Second, tht’s not a sweeping generalisation. The very high marginal rates only operate at very low levels of income.

  13. Tim’s argument that the gains from cutting the high marginal rates (say 60% and above, and there are large numbers of people facing marginal deduction rates of 70%+ with the withdrawal of housing benefit etc) are likely to outweigh the disincentive effects of raising the basic rate of income tax makes sense if you simply think about the effects on take-home pay in each case.

    Example 1: Marginal deduction rate is reduced from 90% to 80%. The value of each extra £ earned is doubled from 10p to 20p.

    Example 2: Marginal rate is increased from 20% to 30%. The value of each extra £ earned falls from 80p to 70p.

    How powerful the incentive effect is depends not on the tax rate but on the proportion of income left after tax.

    Thus, cuts in very high rates are likely to have much larger incentive effects than equal percentage cuts in lower rates.

    Cutting a marginal effective tax rate from 90% to 80%, which doubles the marginal income employees keep for themselves, can be expected (in theory at least) to have an effect on incentives equivalent to cutting a 50% rate to nil.

    Cutting tax rates is therefore a policy subject to declining marginal benefit the more you cut.

    That’s not the only reason for cutting taxes of course – but in terms of incentives specifically, it is much more important to tackle the high marginal rates low earners face than it is to worry about the disincentive effects higher up the income scale.

    Ideally we wouldn’t have either tax rates or benefit withdrawal rates greater than say 40% at any point in the income distribution, but it won’t be easy to achieve that in this fiscal climate!

  14. Matthew: “First, if an individual is much happier working, then there cannot be a marginal rate which stops them.”

    You started the thread emphasising the importance of marginal tax rates as incentives, but you’re now claiming that for the people who would see a reduced marginal tax rate as a result of a CBI, marginal tax rates are so unimportant that the present no incentive no matter what level they are set at. It’s not a consistent argument.

  15. Alex – Ok, yes, as you say the marginal rate on other earners gets worse because we are lowering the rate on the low paid. This is my argument.

    You then add that the effect is more for the same % point cut at lower incomes, e.g. to go from 90 to 80 is a doubling of what you get, a much larger proportion than is lost by going from 20-30.

    I think that’s a fair point, but surely what’s missing is the magnitude of the changes in pounds, not %. If someone on 50k a year works 5% harder, that’s the same as someone on 5k working 50% harder?

    Paul – You said someone may be happy working than not working but is put off by the marginal rate. But clearly unless the marginal rate is more than 100% this can’t be true (and in fact will be true over 100% if they really prefer working to not working).

  16. Matthew: “Paul – You said someone may be happy working than not working but is put off by the marginal rate. But clearly unless the marginal rate is more than 100% this can’t be true”

    maybe, if there were no such thing as opportunity costs, no costs generated by working and people who wanted to work would continue to be perfectly happy to toil in order to receive a take home pay taxed down to 1p.

    I don’t think any of the three are credible assumptions.

  17. Well then they’re not happier working! It’s you who is wishing the away in making airy statements like ‘they’d be much happier working’.

Leave a Reply

Your email address will not be published. Required fields are marked *