I could have been amused by reports that George Osborne was seeking advice from Conservative back benchers on how to resolve the tax credits crisis he has dug for himself if only the issue was not so serious.
Let's be clear what the tax credit crisis is about. First it is about people in work not being paid enough to maintain themselves and their families because the rates of pay offered to millions in the UK are insufficient to prevent poverty.
Second, it is about the cost of living in the UK, and particular housing costs which having risen disproportionately in recent years. The cost of land rental, however packaged to the consumer, are too high in the UK.
And third, there is the problem of integrating a necessary benefits system that is required to prevent poverty with a tax system with which it is poorly integrated.
Put bluntly, tax credits and housing benefit are a patch intended to cover the consequences of the first two issues. They do not solve the problem; they ameliorate it. The third issue is as significant: marginal tax rates of up to 93% are going to arise under the planned system of tax credit withdrawal, and there is (surely?) no one who can condone that in a system supposedly designed to encourage work.
Given the nature of these three issues nothing any backbench MP is going to suggest to George Osborne is going to solve the problem unless, in my opinion, it embraces the idea of a universal basic income. This is something I discussed in a paper I co-authored with Howard Reed in 2013, available here. It is an issue I also raised in The Joy of Tax (along with many other such ideas).
The principle is simple. Every qualifying person, without exception, in the UK would be paid a basic income by the state. This would be designed to prevent poverty. So, it would be greater than the current inadequate old age pension, and replace it. And the payment would, when joined with the payment due for each child (who would have their own entitlement) ensure that no family would live in poverty (defined as being income of less than 60% of the median wage).
This would be financed by giving a much reduced tax personal allowance (maybe just £2,000) and more progressive tax rates than now ending at a top rate of maybe 70%. Do however remember that everyone, including those on these top rates of tax, would get this universal basic income, tax free.
Why does this work?
First, because it is universal we know people will get it.
Second, it massively simplifies pensions.
Third it enormously simplifies benefits (barring those for disability and maybe housing in some areas).
Fourth, poverty is by definition eliminated.
Fifth, the tax system is simplified. In the Joy if Tax I discuss how alternatives to NIC could also reduce the highest rates.
Sixth, there are no high marginal tax rates on the withdrawal of benefits as they are never taken away.
Seventh, benefit fraud and even some tax evasion nay be dramatically reduced.
Of course there are behavioural issues to consider of whether people would work: my suspicion is the vast majority would as people desire the social functions, status and interactions work provides. And we could afford for them to do so doing the things that we need done.
If George Osborne wants to solve the tax credit crisis he should borrow David Cameron's notorious copy of The Joy of Tax. Will he gave the courage to do so?
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I think that employers would also have to make proper efforts to make work more palatable because with this system many people could choose more education or working for themselves. work seeems to have been reduced to uninteresting, repetariv.e, boring tasks with no way to execise any control.
Universal Basic Income is the way forward.
The Green Party have done some good work on this:
https://policy.greenparty.org.uk/assets/files/Policy%20files/Basic%20Income%20Consultation%20Paper.pdf
And the Citizens Income Trust have modelled various designs of UBI schemes and ways it could be implemented:
http://www.citizensincome.org/
UBI is feasible. The only impediment is political. It will take a radical shift in the ‘Overton Window’ to permit such ideas to be discussed rationally in the mainstream political arena.
“Of course there are behavioural issues to consider of whether people would work:” Apparently not, study here http://wes.sagepub.com/content/early/2014/11/20/0950017014542499.abstract says “… there are few signs that groups with traditionally weaker bonds to the labour market are less motivated to work if they live in generous and activating welfare states. The notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short term incentives to work, receives little support. On the contrary, employment commitment was much higher in all the studied groups in bigger welfare states and social differences were mostly smaller or did not vary across welfare states. Hence, this study’s findings support the welfare resources perspective over the welfare scepticism perspective. ”
Enable folk by giving them enough money, then, and they’re more productive than they would be trudging off to the 9-5. More on this from Bill Mitchell, here http://bilbo.economicoutlook.net/blog/?p=30557 Strike me an informed public wouldn’t be asking whether this was feasible, they’d be asking why we hadn’t always had it.
I thought that was what I implied
Glad we agree
For once, I do not agree with Mr. Murphy’s position.
First,UBI makes people dependent from an income which is set by law and by law may be turned off. Unless it becomes a fundamental constitutional point that no government can take away, it is an uncertain income.
Second, people are due to accept unemployment or under occupation more easily, being able to rely on a safety net. Instead of fight to maintain jobs and improve businesses to be profitable in the long term, entrepreneurs are further encouraged to build “use and throw away” companies. Hard to see technology or innovation coming from these.
Third, and key for me, we are trading the right to work, to be part of the economic and social development of our communities and country, for the right to a pittance that will let loose finance and industry as explained before.
Way better would be to institutionalize the duty of government and BOE to act together for the full occupation as their first obligation, with the state as “employer of last instance” as recommended by MMT.
I have the luck to work in a sector where companies are starved of people with the right level of competency, and I can enjoy the advantages of full occupation. I wish everybody be in the same position.
Re 1) I agree
Re 2) see other comments – there is no evidence to support this
Re 3) I think you wholly miss the logic of this: people earn on top of the income: every penny of work pays and minimu pay can still apply
Re 4) I agree this should be BoE objective
Re 5) I do not see this MMT proposal as viable: it’s a digging holes policy and there are betetr strategiues than that
It depends a great deal what paradigm one is designing for and whether or not there is a realistic possibility of that paradigm continuing into the future.
There exists sufficient evidence, and an example of this is laid out in Paul Masons recent polemic, that the unprecedented (since the onset of merchant and then industrial Captalism) weakening since the mid 1970 ‘s of the bargaining power of labor has broken the back of the regenerating dynamic of Capitalism. Whereas previous upswings in the approximately fifty year cycles were driven by the incentive to find newer more profitable technologies to invest in, because the relative strength of labour kept labor values relatively stable compared to profits, the widening gap between profits and wage labour values has resulted in an economy totally dominated by short term rent seeking.
In terms of the (currently) dominant paradigm of Capitalism which replaced the (previous) paradigm of Feudalism the ‘end of history’ crowd may well be right, but not in the way they falsely believe. Reason dictates that at some point the dynamics of change arising from individual and group human interaction with both each other and the environment (in every sense) means there will be a change from one system paradigm to another. What form any replacement system paradigm might take is open to speculation. Mason has his view, I have mine, which I have mentioned on a previous thread.
Proceeding on the basis that a change in paradigm is currently taking place, and the evidence seems reasonably sound, then a number of key realities follow.
Firstly, regardless of what I and probably a lot of others might wish for, the jobs (in terms of numbers and ability to provide a living) are not coming back. Not in the way they have existed under the Capitalist paradigm those of us alive at present have come to regard as an ever unchanging (in the sense of the paradigm never, ever being replaced it he way Capitalism replaced Feudalism).
Secondly, seen from this perspective the notion that social welfare represents some kind of dependency culture has the idea of dependency the wrong way around. The real dependency culture, for the majority, is that of having to depend on meaningless wage labour because the means to provide was, and remains, removed (common land confiscation using enclosure being merely one albeit powerful “legal” driver among other forms of enclosure used) in order to ensure a ready made and therefore dependent labour force. Now that much of that Labour force is no longer required and has effectively become disposable in the eyes and minds of the oxygen breathers operating and proceeding on the basis of the way things used to be done is to longer of any efficacy.
Finally, the narrow definition of the Protestant work ethic needs to be jettisoned as it has become not only moribund but also a millstone around the neck of any meaningful progress.
A lot of merit in that
I agree such a transition is occurring in which we wholly need to rethink work
NEF for, Paul Mason, Andrew Simms and others are working on this
Good points Dave and very much the tenor of a recent book by James Galbraith called ‘The End of Normal.’ he advocates for a basic income supported by taxes on economic rents. He also advocates a ‘slow-growth economy’ with ‘relatively low expected rates of return but mutually supported by a framework of Labour standards and social protections.’
And land value tax should be explored, especially with a growing population. How to persuade those with vast swathes, there’s the rub.
It’s more a case of how to identify those with vast swathes, that’s the rub in this case http://www.newstatesman.com/life-and-society/2011/03/million-acres-land-ownership
Seconded. Land needs to be taxed, urgently.
Should be interesting in 2016 when the Swiss have a referendum on it.
http://www.basicincome.org/news/2015/10/swiss-parliament-opposes-popular-initiative/
“Every qualifying person, without exception”
Difficult to understand what this means unless you explain who would qualify. Are you able to?
“And the payment would, when joined with the payment due for each child (who would have their own entitlement) ensure that no family would live in poverty (defined as being income of less than 60% of the median wage).”
Are you suggesting the wage would be means tested?
If so, the prospect of means testing every man woman and child in the UK would, I suggest, be unworkable.
If not, the wage would have to be set at a level such that the person with the LEAST other income would be above the poverty line (which would in itself presumably raise the poverty line level). Having set the wage such that the lowest incomes were raised above the poverty level, the prospect that everyone else would be getting the same amount suggest an enormous amount of money.
Have you done even the slightest amount of financial modelling on this? If not, surely it remain fanciful wishful thinking rather than serious economic comment.
A) Qualifying might only relate to new arrivals in the UK, which many would think reasonable
B) this is not means tested: the aim is that families shoukd get 69% of median pay, at least
The payment to each person would be exactly the same
And yes, we have modelled this
I provided the links
As I’ve said before, due to big leaps in production techniques, we could reduce the working day significantly. This in conjunction with a Universal Basic Income, would go a long way to improve people’s quality of life and reduce greenhouse gases.
In the past when there was strong unions and the political will, advances in production were passed on to workers in the form of a reduced working week, yet this doesn’t seem to have happened for some considerable time now.
The idea of people being encouraged to form cooperatives and producing things more locally is well worth exploring too.
I recollect with great clarity the constant and consistent media commentary in the late 70 ‘ s and early 80’s that the microchip would give us all more leisure time than you shake a stick at.
Everyone took it that this meant a shorter working week/year/life with no relative loss of ability to afford to live.
It has turned out rather different. With plenty of people on enforced leisure jumping through hoops in order to survive in a system in which everything is enclosed to extract maximum rent value whilst many others work excessively long hours in non jobs chasing meaningless, contradictory and inefficient tick in a box targets.
What seems to have occurred in the world of work is that the likspittle copers (to manage means to cope) have used the new technology to take the scientific from Taylor’s Scientific Management and turbo charged the time and motion element whilst at the same time getting rid of those aspects of Taylor’s theory about fitting people to the optimum role/job. Today’s chip in the brain managers work on the basis that there is no such thing as a skilled job (except their own job) and that you can recruit people direct from the bus stop to do anything with no training other than anything on the job CBT package as though we are all interchangeable work units.
I’ve always thought that work should not be in any sense ‘compulsory’-people feel better when not coerced and as Richard and Bill point out, most people would choose to do a rewarding job, the notion that welfare makes people ‘lazy’ is a gross neo-liberal myth-that should, logically also apply to inherited money and rentier money but never is.
The basic income would, to an extent ameliorate the appallingly high housing costs which our wealth syphoning economy has created but would not obviate the need for housing benefit (as Richard points out in his book) -this means the state is still ‘subsidising’ the wealth syphoners – the housing ‘genie’ won’t go back in the bottle any time soon.
From a cultural angle, the basic income would allow people not to be coerced into ‘crap’ jobs but there would need to be better educational/training opportunities and cultural activities with which people could enrich their lives.
Hi Richard,
Have you done the maths on this one? I ask because the amounts seem very large indeed. Median household income is about £22k, and there are about 25 million households in the UK. Total cost therefore around £330bn. Let’s say we then scrap all pensions and state benefits – that saves c160bn. So best case total net cost somewhere North of £170bn.
£170bn is an awful lot of money, given that the entire income tax system currently raises £160bn. Doubling the yield from income tax seems ambitious, and I am not sure it’s possible.
Also note that the proposal is then equivalent to a £22k benefit cap; considerably lower than the Tories have proposed. That plus the elimination of the personal allowance make the overall effect regressive for the poorest in society. For that reason I’m sure you wouldn’t actually want to eliminate all benefits and allowances, so the actual net cost will be higher than £170bn. This is the point the Green Party were heavily criticised for missing.
Ciaran
I provided a link to the maths
Yes, it’s been done
And it works
And it is not a benefit cap at £22k
The benefit goes up for each person in a family
And we make clear it may not cover housing
So that suggestion is definitely wrong
Ah, thank you – but your maths give an even bigger number. £294bn (on your figures) is a truly staggering, colossal amount… it’s 15% of GBP, and 115% of the current income tax and NIC receipts.
And, with respect, you have not done the maths on the tax increase necessary. With a proposal this ambitious you can’t really just assume gross household income remains static, and then apply two lines of multiplication to it. Would certainly need more analysis.
Without that analysis, it seems highly counter-intuitive that such amounts could be raised simply by making income tax more progressive. After all, the increase from 40% to 50% raised a relative pittance.
We disagree
The model is fundamentally different
And your assumption on marginal tax disincentives ignores the 93% on tax credits we have now
And as for average household income and GDP – tell me how this will not be higher? I will note the reasons why tomorrow
A quick observation.
The statement about the figures being 115% of income tax and NIC receipts appears to ignore the fact that income tax and NIC are only two of a number of available tax revenues sources.
Treating these two tax elements as essentially the only source of funding and ignoring other sources whichcan be increased (Capital gains, financial transactions etc) is therefore misleading a shows a fundamental flaw in the model from which they are used.
There was a thread on this site the other day with a number of charts on tax receipt projections over the next five years. Perhaps this would be helpful in developing a workable mathematical model from which to adequately assess the model the site author is author ruing for?
What seems always to be overlooked is that if Osborne thought he was going to create ‘a high wage, high growth economy’ – the tax credit problem would ipso facto go away. Tax credit cuts are proof that he doesn’t actually believe his own rhetoric.
How do the figures look for this plan and what sort of level would you anticipate the 70% tax kicking in at?
Would you anticipate the Basic income to be recalculated on an annual basis to match the 60% of median wages? Would it be just wages taken into that median calculation or self employed income as well
Any chance it would be inflationary?
I think you have found the answers
Ignore my comment as I’ve found the answers now. Didn’t spot the link on first read. Sorry
Even the Adam Smith Institute are advocating essentially the same thing:
http://www.adamsmith.org/news/replacing-welfare-with-a-negative-income-tax-would-solve-osbornes-problems-ben-southwood-for-conservative-home/
With growing support across the political spectrum, This idea really should be getting more public exposure.
Interesting, isn’t it?
So why isn’t it getting more mainstream political traction? It just seems like a fundamentally sensible idea, regardless of whether you think the welfare state should be larger or smaller.
It’s not even that radical really, we already have similar systems in place. Just with loads of unnecessary complexity on top.
There is a lack of political will
And a belief that people cannot be trusted
Th Green Party has adopted it
Labour claim to want a more equal society though, and The Conservatives claim to want a more efficient state. This would achieve both in the simplest way I can imagine.
It seems like we should have an all-party parliamentary group advocating for it.