Citizen’s Income News, Summer 2013

News

The think-tank Demos, in collaboration with the insurance company Zurich, has published a report: Control Shift, by Max Wind-Cowie. The report calls for a shift of financial responsibility from the state to individuals, and asks for the policies necessary to achieve this (such as the new policy of auto-enrolment in occupational pension schemes). ‘Nothing sums up the UK’s paradoxical and incoherent approach to individual financial responsibility better than the way in which our public services interact with individuals’ savings. In a range of areas, savers – those who have taken long-term, financially responsible decisions and have chosen to mitigate their financial risk by building a cash asset – are actively punished for their prudence. This is most obvious – and most problematic – in our welfare system’ (p.59).

The think-tank Compass has published a briefing paper, Social Security For All – The renewal of the welfare state: ‘The widespread nature of an aging population and ill health due to modern lifestyles and endemic job insecurity means costly targeted systems should be replaced by services that are open to all in a way that is universally preventative; this means providing services for everyone to reduce harm to us all. This universalism is essential to the renewal of the welfare state; it reduces stigma, ensures proper take-up, is more efficient to deliver, promotes gender equality, binds all into a progressive taxation system and ensures the sharp tongues and elbows of the middle classes improve services in a way that benefits everyone. It is no wonder that by all measures of economic and social success, international league tables are topped by societies with strong universal welfare states. It is important to note that the so-called “universal” credit which aims to combine both in-work and out-of-work benefits for those on low incomes within a single unified model is not universal at all but cements means-testing into the foundations of the social security system (while contributory benefits are being further marginalised at the same time). It also contains more conditionality than the existing system’ (p.6).

In February the Institute for Fiscal Studies published The IFS Green Budget: ‘The most significant [structural change] in 2013-14 will be the beginning of the multi-year roll-out of Universal Credit … Universal Credit should be a positive reform. But this welcome simplification is being at least partly undermined by the devolution of much of the design and administration of Council Tax Benefit … to English local authorities … The operation of a separate means test that sits outside of the Universal Credit system may lead to awkward interactions with it, weaken work incentives and lead to additional complexity for claimants (particularly since every local authority in England could in principle design a different scheme)’ (p.215). … At the highest level, one needs to be clear to what extent there is a role for a social insurance system, how important means-testing should be and what role one sees for universal benefits.’ (pp.242-3).

From the International Labour Organization‘s report, Social security for all: Building social protection floors and comprehensive social security systems (2012) pp. 6 and 36: ‘Basic social security guarantees should be provided through the most effective and efficient combination of benefits and schemes in the national context. Benefits may include child and family benefits, sickness and health-care benefits, maternity benefits, disability benefits, old-age benefits, survivors’ benefits, unemployment benefits and employment guarantees, and employment injury benefits as well as any other social benefits in cash or in kind. Schemes providing such benefits may include universal benefit schemes, social insurance schemes, social assistance schemes, negative income tax schemes, public employment schemes and employment support schemes.’

The 2013 budget

In his budget George Osborne announced that the individual tax allowance will rise to £10,000 in 2014. This means that £10,000 of an individual’s earned income will be tax free. The basic rate of income tax is 20%, so if instead of receiving a tax allowance of £10,000 each individual was given a Citizen’s Income of £2,000 per annum (i.e., about £40 per week) and they paid tax on all of their earned income, then their net income – the money they had to spend – would be exactly the same.

The higher the tax allowance, the higher the Citizen’s Income that could replace it. We look forward to the tax allowance going even higher.

The important difference between a tax allowance and a Citizen’s Income, of course, is that everyone would get the Citizen’s Income but not everyone gets a tax allowance. If you’re earning, then you receive the benefit of a tax allowance, and it’s not taken away from you, however much you earn. But if you’re on means-tested benefits (which includes so-called Tax Credits, of course) then as your earnings rise your benefits are taken away.

There are few social policies that could do as much both for work incentives and for a cohesive society as a Citizen’s Income would do.

Plan B+1

In response to the Government’s policies for reducing the debt generated by the previous Government’s bail-out of the banks, in 2011 the thinktank Compass published Plan B: a good economy for a good society. It was full of good ideas: investment in renewable energy and in energy conservation; government support for new technology; the separation of retail and investment banking; a financial transaction tax; and a social investment strategy. The report also contained a suggestion that means-tested benefit rates should be raised so that people on lower incomes could receive higher incomes which they could then spend in order to stimulate the economy (Plan B, p.20). The report showed no understanding of the fact that to increase the levels of means-tested benefits would carry the disincentive effects associated with the withdrawal of means-tested benefits higher up the earnings range, thus extending higher labour market disincentives to additional sections of the workforce. As we pointed out in our editorial in the Citizen’s Income Newsletter (issue 2 for 2012), there was nothing ‘plan B’ about means-tested benefits, that Compass needed to think again, and that it needed to see that universal benefits combined with a progressive tax system would successfully target money on the poor at the same time as increasing incentives and choice in the labour market.

Compass has now thought again. Its new report, Plan B+1: Rebuilding Britain and a Good Society, is in many ways a second instalment of its previous report. It outlines the economic and human costs of austerity; shows why current government policies (in this case quantitative easing, the Business Investment Bank, and deregulation) are unlikely to work; and suggests Green capital investment, a social investment state, a living wage, industrial democracy, and reform of the financial sector. But in one respect Compass has performed a U-turn. Gone is the plan for higher means-tested benefits, and in its place we find a proposal for ‘a universal family basic income’ and a ‘comprehensive direct tax which would replace the current income tax and National Insurance Contributions systems’ (Plan B+1, p.16). It is worth repeating in full the report’s arguments for this proposal:

The system of tax and transfer payments needs to be reconfigured to ensure that:

  1. All families reach a basic minimum standard of living in or out of work.
  2. The tax system is progressive, with people on high incomes paying a higher proportion of their incomes in direct tax than at present;
  3. Marginal withdrawal rates on earned income for people on low wages (including second earners in couples) are low enough to make work worthwhile. (p.16)

The plan for a universal family basic income and an appropriate comprehensive direct tax would achieve these aims, and therefore has something to recommend it. The universal, and presumably nonwithdrawable, basic income would take marginal withdrawal rates as low as it is possible to take them. It would also therefore make employment as financially beneficial as it is possible for the benefits system to make it, and at the same time would provide an automatic standard of living in or out of work.

The one criticism of the plan that we would offer relates to the word ‘family’. If this means that two adults living together will be granted a lower joint basic income than twice the rate for an individual living on his or her own, then Plan B+1 will deliver colossal administrative problems and might end up being highly unpopular, and for good reasons.

Current means-tested benefits, both in and out of work, pay less to a couple than twice the rate for an individual. This means that the Department for Work and Pensions and Her Majesty’s Revenue and Customs need to know who is living with whom, resulting in intrusive bureaucratic investigations into people’s private lives and the stigma inevitably attached to such intrusion; that when relationships change government departments need to be informed; and that when someone moves in with someone else their benefits might be withdrawn. At the moment these problematic aspects of our benefits system apply only to those on no pay or low pay.

In his 2010 Conservative Party Conference speech, the Chancellor of the Exchequer proposed that households containing higher rate taxpayers should be deprived of their Child Benefit. This too would have required him to know who was living with whom: and for the first time the higher paid would have been brought into this bureaucratic and stigmatising net. He performed a sensible U-turn, and Child Benefit remains universal; but because he still wished to extract all or some of the value of their Child Benefit from households containing higher-rate taxpayers, self-declaration by a higher-rate taxpayer of being in a household containing someone in receipt of Child Benefit has left us with the first ever tax on children.

We would counsel against a ‘family basic income’. It would suffer from the same problems suffered by every benefit based on households rather than on individuals: it would interfere with decisions about relationships, would complicate household formation, and would require the Government to investigate people’s intimate relationships; and it would require a major and expensive government agency to administer it (which presumably means that we might see departmental approval for the idea).

A Citizen’s Income – an unconditional, nonwithdrawable income paid to each individual – would avoid all of these problems. It would be simple and cheap to administer, it would not interfere with personal relationships or household formation, and it would make it entirely unnecessary for the Government to know who was living with whom. A particular advantage of a Citizen’s Income paid to individuals is that any economies of scale relating to people moving in with each other would accrue to the people concerned, thus making household formation more likely.

It may be that the authors of Plan B+1 are concerned about the affordability of a genuine Citizen’s Income. This is an understandable concern. However, if, as they suggest, a radical overhaul of the entire benefits and tax systems is what is required, then there will be numerous gainers and losers as changes occur – as there have been in relation to recent changes to the benefits and tax systems, and as there will be when Universal Credit is implemented. Transitional arrangements will in any case be required, and transferring from a household-based to an individual-based system will not overly complicate the temporary arrangements required. The additional factor related to any change that delivers lower employment disincentives is that any net income gap resulting from a drop in benefit levels is more easily repaired through additional earnings.

What is essential is to get the structure right. A Citizen’s Income would deliver all three of the criteria for an appropriate tax and benefits system listed above, and without imposing new stigmatizing complexities.

We look forward to a Plan B+1a and to a recommendation of a genuine Citizen’s Income.

 

Footnotes

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