Welfare reform for the 21st century.

“21st Century Welfare” consultation.
Alison Marshall, August 2010.

Work should be allocated by self-selection not compulsion, but beneficiaries should have a reasonable financial incentive to do paid work.

Benefit withdrawal is effectively a tax, and the marginal tax rate is the tax rate on the last part of an income, and so on any increase in that income.  The total amount withdrawn from an individual’s benefits plus their income tax should not add up to an effective marginal tax rate which is higher than the top tax rate paid by people with high incomes.

This concept, that effective marginal tax rates should ideally be no higher for beneficiaries than for high-income taxpayers, is an alternative to two others, “benefit trap” and “poverty trap”, which are often mentioned but in my opinion are not explicit enough.

The most efficient way of keeping effective marginal tax rates down to the same level as the top tax rate is to have universal benefits which are not income tested, and to tax all income at the same rate.

But a flat tax on all income would be quite unpopular politically. Progressive taxes are taxes which take a higher proportion of high incomes than of low ones.  Regressive taxes do the reverse, and flat or proportional taxes take the same proportion of all incomes. Many journalists, intellectuals, and people with low incomes are devoted to the concept of progressive tax, but don’t understand the inverse relationship between progressive average tax and progressive marginal tax.  An example of this relationship is shown in ammpol.files.wordpress.com/2009/07/graf.doc. Two systems with the same top tax rate and net revenue are compared.  The flat tax system has more progressive average tax rates than the system with progressive marginal tax rates. For more details about this graph, see ammpol.wordpress.com/ammgraf.

To get around the misunderstanding about progressive tax, the tax and benefit system could be presented as having two income tax rates and two rates of benefit withdrawal.  A benefit for adult citizens would be withdrawn against income, and the threshold for the high income tax rate would be the point at which the withdrawal of the citizens benefit is completed.  The benefit withdrawal rate would make up the difference between the two income tax rates, so that effective marginal tax rates on low incomes would be equal to those on high incomes.

. . . Administratively this system could be run as a flat income tax rate with a universal benefit or tax credit, which would replace the current tax allowance and some benefits. . . Students and unemployed spouses would no longer be treated as financial non-persons. . . Some benefits, such as housing and disability benefits, would have to remain conditional.  Some of these would not be income-tested, and the rest could have a unified taper.  So for example if the taper for conditional benefits was 15% of income before tax and the flat rate income tax was 40%, the Marginal Deduction Rate including 12% National Insurance contributions would be 67%. 

Women should have their own money as individuals not just as part of a family or household.  In the Department for Work and Pensions consultation document (“21st Century Welfare”, July 2010), four of the five models suggested are for households not individuals. In a similar consultation in New Zealand in 1985, a Budget Task Force found that a major issue was the unit of assessment for benefit entitlement, with 90% of the responses on that issue favouring the individual as the unit of assessment, rather than the family or some other unit. (“Benefits, Taxes and the 1985 Budget: A Review and Summary”, Dept. of Social Welfare, February 1986.) If married adults as individuals got exactly the same benefits and taxes as single adults, there might be fewer solo mothers and single males needing separate homes.

Children need at least as much money as adults, if the cost of childcare, including the opportunity cost of parental childcare, is taken into account.  But . . . only two children per mother should get citizens incomes.

. . . A flat income tax rate with a universal citizens income for all adults and most children would be a huge simplification of the tax and benefit system. The saving in administrative costs could be enormous.

Welfare policy in the 2010s.
A. Marshall, February 2013.

I don’t think the Citizens Income should be just a distant vision. It could be appropriate right now.

It wouldn’t be necessary to explain it to the media or the general public. The system could just be presented as a simplified benefit with a conventional “progressive” tax. But it would be more efficient, less judgmental, and no more expensive than the current mess.

The tax allowance, jobseekers allowance, and some of the basic pension and disability benefit would be combined into a single benefit. The maximum amount of benefit would be reduced by x percent of income. Income would be taxed by y percent, up to the level of income at which the benefit has been reduced to zero, and t percent above that.

If x plus y was equal to t, this would be equivalent to taxing everyone at t percent on all their income, and giving them the maximum level of benefit. So it could be run much more efficiently than the current mess, as a flat t percent tax with a citizens income, without bothering to explain this to anyone except Revenue staff. Wider understanding and approval would follow some time later.

A. Marshall, December 2013.

Some socialists and feminists are shocked at my suggestion that only two children per family should get citizens incomes. I remain unrepentant.

Some of the child’s citizens income should be seen as a payment for childcare. The production of the first two children in a family is a public service, but any further children are a private enterprise.

If each of the first two children in a family received a citizens income equal in value to the revenue-neutral adult’s citizens income ( which exceeds the jobseekers allowance, as explained in https://ammpol.wordpress.com/ammgraf ), the combined payments would be approximately equal to current child benefit payments for a family with 10 children.

Means tested benefits for large families, in which the first two children may have left home, and for housing, etc., should continue, and third and later children could get citizens incomes after they become adults.

Further reading.

An income of one’s own: the citizen’s income, Bill Jordan, Red Pepper, October 2012.

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