The TaxPayers’ Alliance: Not Entirely Wrong
The Tax Payers’ Alliance (TPA) have a new report on welfare reform. Don Paskini’s already had a review of it over on Liberal Conspiracy. He makes some interesting points but I think in his rush to rubbish anything the TPA come up with (and, generally, that would be my reaction too) he fails to quite get to the heart of the problem.
The report does actually have some sensible ideas; it quite accurately identifies a number of problems with our current welfare system. They tell us “It is almost impossible to understand, with over 50 different benefits, all with different rules and taper rates and a total of 8,690 pages of guidance for DWP benefits alone.” That take up rates can be “as low as 57 per cent in some instances” for some benefits. That “[p]eople who want to work and progress in work are financially penalised. A claimant who loses Housing Benefit, Council Tax Benefit and tax credits, at the same time as paying income tax and NICs, faces a marginal tax and benefit withdrawal rate of 95.5 per cent. Over 2.5 million non-disabled working-age households face a marginal tax and benefit withdrawal rate of over 60 per cent.” And that despite the number of children living in households on less than 60 per cent of the national median income falling, the number of people “living in households with less than 40 per cent of median income, has actually increased from around 5 per cent of households a decade ago to around 6 per cent today.”
These are all serious issues, and ones we need to deal with. The problem comes in their solutions. First of all, they claim it is impossible to do more than two of the three following objectives: “directly raise the incomes of the poor, increase the employment of the poor and reduce welfare spending”. They don’t seem to give much of convincing explanation for this assertion. They also decide that given that choice the most important objectives need to be increasing employment and reducing spending. And so they set out five criteria for an effective welfare system:
1. The state should provide a basic minimum to all citizens of working age, and through them, to all children, at an affordable cost to taxpayers.
2. Work should not be discouraged by excessive benefit taper rates.
3. There should not be too many people on middle or higher incomes unnecessarily receiving means-tested benefits.
4. The welfare system should be comprehensible for people to understand and to navigate.
5. The welfare system should be responsive to changes in people’s circumstances without a high level of fraud and error.”
Which actually all seem pretty reasonable, perhaps to the point of meaninglessness. You won’t find many people arguing for an unaffordable, incomprehensible and unresponsive system.
The TPA’s solution to all this is a negative income tax paid at either 50, 55 or 60 per cent of national median income (after tax and NIC) with taper rates of either 50, 60 or 70 per cent. Relative poverty is currently defined as 60 per cent of the median income. The TPA, in rejecting any proposal, that by their calculation, costs more than we pay now, favour a negative tax set at 50 per cent of the national median income with a 55 per cent taper rate. The taper rate is the effective tax rate you would face once you started earning until your net income (after negative tax but before other taxes) equalled your gross income (before all taxes). So a 50% taper rate means for every pound you earn you lose 50p of benefits.
They suggest that you could have all other income tax and national insurance starting only after the negative tax had tapered out but that this would be “unaffordable” so the negative tax would have to run alongside other taxes. Like the Lib Dems, though, they’d be in favour of raising the tax allowance. All this together means that the marginal rate of taxation could actually be pretty high for low income earners. Certainly higher than the marginal rates on higher earners in our supposedly progressive taxation system. At the start of their report the TPA point out that the excessive marginal rates at low incomes is a failing of our current system, yet their alternative could be almost as bad.
They do, partially, address this, suggesting at one point that the taper rate could vary over time, so those newly in work would face a rate of, perhaps, just 25 per cent, while those who had been in a low paid job for a number of months, would see their rate gradually rise and settle out at 65 per cent. Conversely, those just leaving work would have to wait a while before all their benefits came back again. That’s to make sure if you’re offered a short term contract you’ve more incentive to take it. There’s less detail on their final time based effect, perhaps because, as they admit it would be rather controversial. That’s to time limit some part of you negative tax benefit. So those out of work, over 6 months, maybe, would see their benefits drop.
It’s here, past the executive summary and into the real details of how their proposal works that you start to see the real problems. The basic idea of a simplified system isn’t a bad one, and a negative income tax isn’t, necessarily, much different to our suggestion for a citizens income. But where citizens income is designed to give you more freedom, to allow people not to take work if they don’t want it, to take time to study, or care or change their lifestyle, the TPA’s suggestion is designed to force you into work. Low paying work, short term work, any kind of work you can find, or you’ll be punished.
Welfare reform is going to be a major issue in the coming years, the government are going to be after ways to reduce costs whilst appearing progressive. A universal scheme that makes things simpler and eliminates some of the worst of the marginal rates facing people as they go back into employment may well look very appealing. We have to take the time to understand where the problems really are and to be clear on the alternatives. Otherwise we risk having nothing to offer in the debate and leaving the TPA an open goal
Fair enough on the point about £0 tax threshold, though I would be interested to see the Green Party costed proposals on basic income (how much income tax would go up to pay for it, is the NI threshold also going to £0 etc etc).
On the TPA report – they are proposing to disregard all assets when assessing eligibility (the £16k threshold is the current system – under their system more money would go to people who own million pound houses and less would go to people who have nothing). I think that is very relevant to mention in the context of a report which proposes cutting benefits overall by £20 billion.
Similarly, they might have some words about the need for allowances to cover the cost of housing in London, but their figures show that they have allocated a grand total of £0 for these allowances. n.b. they haven’t rebutted either of these points. I think that this is exactly the kind of scrutiny which shows up the hypocrisy and weaknesses in their report.
The English and Welsh party manifesto for May’s general election had a costed proposal for the citizens pension, though not, it seems, any immediate proposal for a full basic income for all. http://www.greenparty.org.uk/assets/files/resources/Manifesto_web_file.pdf
In terms of their failure to account for housing allowances, you’re quite right. It is something that would need to have resources allocated to it and they don’t. I agree it’s worth mentioning that they’d remove any regard to assets in the context of the cuts proposed. However, I think the asset threshold is quite low at present and as someone who’s very much in favour of the simplicity and principle of universal benefits that doesn’t bother me too much (as long as it’s not at the expense of those with less assets).
Overall though, my point was really that they get some of the problems right but, as you point out, their solutions don’t really address the issues they raise and in many cases would make things much worse.
Blanco: Society should support people to a basic standard of living whether they work or not as a mark of civility. We do it right now, just not very efficiently or fairly. But would you rather see people who choose not to work starve, or forced into workhouses?
The truth is most people would still choose to work, the level of a basic income wouldn’t exactly be luxury. It would make it easier to get back into work, to take time to learn new skills, to get qualifications, to try to start your own business.
We should value contributions to society that don’t provide you with a wage. Some will take caring responsibilities, will create artwork, will learn. All these things enhance our communities but don’t provide you with an income, as a community we should support them.
And it’s not like we don’t have more than enough labour to provide all our needs anyway (http://brightgreenscotland.org/index.php/2010/02/21-hours-a-week-time-to-aspire-to-fun/).
Don: I don’t think I am bring excessively generous to the TPA. I’m quite critical of their proposals but they do point out what are significant failings of the current system.
It’s true that benefits are too complicated at present, it’s true that take up rates are too low for some benefits and it’s true that there are huge marginal rates that create a poverty trap. None of those problems are solved by free childcare, better housing regulation or a living wage, though those are all policies I support.
But making those smaller scale changes that you suggest won’t affect the real problems with welfare, nor are those changes incompatible with actually fixing welfare.
In terms of the economics of a basic income, the cost of pensions is going to go up year-on-year whatever system we use, unless you think pensions shouldn’t, at least, track inflation. And If you give everyone a guaranteed minimum income it’s quite possible that income tax can go up significantly and still leave most people better off, whilst reducing the marginal rates at the income bands where it has most effect in incentivising work. I don’t have the figures to hand right now, but I’d question that you really need an increase of 14% anyway, since there’d be no need for a 0% band (tax-free allowance) as that’s effectively provided (and more) by the basic income itself.
In terms of the points you make to criticise their report, your final paragraph is entirely wrong. People who have £16,000 in assets, clearly don’t own one or more houses (where can I buy a house for £8000?). It can be very difficult for people who do have some assets, in property, say, who then lose their jobs and can’t qualify for help.
They also clearly state that although housing benefit would go, being incorporated into the negative income tax, there would have to be allowances for different costs across the country.
That isn’t to say that I support their plans, but we should be clear what’s wrong with them, not just pick points whether they illustrate our case or not. That just makes it easy for them to rebut our criticisms.
The TPA plans would result in a cut in spending, and a cut in many people’s income. They would force many other people into low paying and short term jobs. They proposals would give people less freedom when the point of welfare should be to free people from the worry of where their next meal and next month’s rent is going to come from. But their report does illustrate the shortcomings of what we do now, and no small scale changes are going to fix that. If we want a genuinely humane, fair and efficient system we need to look at whole scale changes of the level they suggest.
Alasdair, why should taxpayers pay for other people to not work even if those others are capable of doing so?
I think this is excessively generous to the Taxpayer’s Alliance. They do note some of the problems which many other researchers, from across the political spectrum, have previously found such as high marginal tax rates, but that is about as far as the merit of their argument goes. And the aim is to give support to the Coalition’s plans to slash welfare spending in the Comprehensive Spending Review.
As for the basic income, I think it has some merits, but I don’t see how the sums add up (though these are back of the envelope, so please advise where I’ve gone wrong!)
The cost is approx £60/week x 40 million adults + £130/week x 10 million pensioners + £25/week x 10 million children = £205 billion per year, plus £21 billion in housing benefits, plus £11 billion in disability benefits plus (say) £2 billion lone parent supplement, plus 1% admin.
Total cost is roughly £240 billion, or roughly £70 billion more than at present. To cover that through income tax rises would mean putting the basic rate and higher rates up by 14%. And as the number of pensioners is rising, the cost rises quickly year on year.
I’m not sure that these kind of large scale changes to the benefits system are the best way to go. If we’re looking at what our alternatives, I’d prefer to see us putting forward smaller scale proposals rooted in what people in poverty are calling for, whether that’s free childcare, a living wage, more affordable housing and rent controls and better regulation on private landlords.