We begin our response with a question which the consultation document hasn’t asked:
Income tax, National Insurance contributions, Tax Credits and welfare benefits together provide the structure for income maintenance. Should all aspects of this structure be considered together during this consultation?
The answer to that question surely has to be: ‘Yes, if the Government’s aims are to be met.’ The entire system needs to encourage employment, save money, promote fairness, and provide sufficient resources for those who need them most.
This positive answer to our own question underlies our responses to the consultation’s questions.
We believe that the objective of income maintenance reform in the longer term should be the implementation of a Citizen’s Income: a universal, unconditional, non-withdrawable payment to each legal resident individually. This should replace most Tax Credits and means-tested benefits, but we recognize that payment of Housing and Council Tax Benefits would have to continue alongside the individualized Citizen’s Income. The level of the Housing and Council Tax Benefits would be just sufficient to meet the different needs of claimants in single or multiple occupancy, with a cap varying geographically.
We therefore support the proposals in the Consultation Paper for an income maintenance regime in the shorter term for adults below pension eligibility age comprising the following elements:
- A progressive system of Income Tax (including employees’ National Insurance contributions) levied on individuals, with personal allowances, as at present;
- Universal Child Benefit which is not means-tested or taxed and which should be increased when economic conditions allow;
- Reimbursement of actual extra costs, as distinct from earnings impairment, incurred by people with disabilities, without taxation or means-test;
- The replacement of all means-tested benefits and tax credits by a Universal Credit for households with a single taper rate of withdrawal, along the lines proposed.
We see this as a step in the direction towards a regime comprising:
- A Citizen’s Income for each legal resident individually at different rates for children, adults of working age, and adults above pension eligibility age, with supplements for the actual extra costs incurred by people with disabilities, replacing personal tax allowances and tax credits and as many means-tested benefits as possible;
- A unified benefit payable with a single taper rate of withdrawal to replace Housing and Council Tax Benefits.
We support the policy that those with no earnings should be no worse off than now and that there should be a generous earnings disregard for those on low earnings. We await with great interest the DWP’s calculation of what single taper rate would be possible in the light of: the necessary reductions in public expenditure to reduce the deficit; the expectation that most of the £5.2 billion estimated to be lost by errors, overpayments and fraud could be eliminated; the reduced cost of administering the simplified system; and the need to ensure that, compared with the reduced welfare payments introduced by the June 2010 budget, no one below median income (not median earnings) now would be significantly worse off.
We do not expect any significant increase in tax revenue to occur initially from transitions into, and out of, work, because, until substantial economic recovery occurs, there will not be sufficient new jobs to absorb the increasing numbers wishing to work.
Turning to the questions posed in the Consultation Paper, we respond to each in turn:
What steps should the Government consider to reduce the cost of the welfare system and reduce welfare dependency and poverty?
The three parts of this question have a connected answer: If we are to reduce welfare dependency then we need to increase incentives to seek employment, incentives to learn new skills in order to increase earnings, and incentives to establish small businesses. This requires that marginal deduction rates should be reduced (that is, that less of each additional pound earned should be withdrawn through taxation and through benefits withdrawal). Increased employment and self-employment incentives will lead to more employment and self-employment, and this will in turn reduce poverty. It will also reduce the numbers of people in receipt of means-tested benefits and this will reduce costs.
It is true that increasing incentives will, in some cases, cost additional resources. Also, every restructuring creates winners and losers. The Government will need to agree an acceptable maximum for household losses in the lower earnings deciles and will need to test proposed schemes against this acceptable level. Schemes will also need to be tested as to whether they save or cost money in the aggregate. It will be particularly useful to develop a simple mechanism for regulating the ongoing costs or savings of a new tax and benefits system ( – for instance, the National Insurance contribution upper earnings limit: a higher limit will result in reduced costs for the tax and benefits system as a whole).
Which aspects of the current benefits and Tax Credits system in particular lead to the widely held view that work does not pay for benefit recipients?
Tax Credits, means-tested out-of-work benefits, Housing Benefit, and Council Tax Benefit. The tapers on these benefits, when combined with Income Tax rates, impose high marginal deduction rates of 85% on large numbers of household types across a wide range of earnings, and marginal deduction rates of 95% on significant numbers of households. The complexity of claiming benefits, the uncertainty relating to net income after moving into employment, and the complexity of reclaiming benefits if employment ends after a few months, are significant disincentives. These are even more significant for the large number of people who are out of work but very much want to work, particularly if they have dependents.
The diagram on p.12 of the consultation document is a little misleading as it suggests that Child Tax Credit isn’t part of the problem. It isn’t part of the problem for the earnings range along the horizontal axis for the household type for which the graph has been drawn. (We’re not told the household composition, nor what rent they are paying). At only slightly higher earnings the Child Tax Credit will be withdrawn as earnings rise, thus contributing to the high overall taper and becoming part of the problem.
The only benefit that does not contribute to the problem is Child Benefit, which is paid unconditionally.
To what extent is the complexity of the system deterring some people from moving into work?
If a household has one earner in full-time employment and is receiving Tax Credits, then for another adult to move into employment can provide little financial gain for the household. (This problem doesn’t show up in tables and graphs of household gross earnings against household net income.)
If a household has no earners, then only if someone can enter employment which they know will be permanent are they likely to do so. The disruption to net income experienced by households in which someone enters employment and then leaves it again after a few months can be considerable.
If someone in a non-earning household is offered part-time employment then there will be little incentive to accept it and the disruption to the household’s income maintenance strategy will generally be too daunting to contemplate. Here the combination of no financial incentive and the unpredictable changes to benefits can create a substantial hurdle which the household is unlikely to wish to attempt to cross.
The above responses relate to formal employment with employers who deduct Income Tax and National Insurance contributions, or to legitimate self-employment. Bill Jordan et al, in Trapped in Poverty? Labour-market decisions in low-income households (Routledge, 1992), has shown how low income households will seek or create employment opportunities in the informal economy, and will only enter the formal economy if the net change in income will be stable and significant. The system today is no less complex than it was in 1992, and is arguably more complex.
Four factors work together to discourage legitimate employment and self-employment: 1. negligible net financial rewards; 2. complexity and the resultant unpredictability of outcomes of changes in employment status; 3. the serious disruption to income maintenance strategies which households face as their members enter and leave employment; 4. the sheer hard work of making benefit and Tax Credit claims: always time-consuming, often frustrating, and with the resulting benefits too often miscalculated. If they are too low then additional deprivation is the result, and if too high then the repayments demanded can cause debt and hardship. Most people know someone who has suffered these problems, even if they haven’t suffered them themselves, and the danger of Tax Credit overpayments are therefore a significant disincentive to taking employment.
To what extent is structural reform needed to deliver customer service improvements, drive down administration costs and cut the levels of error, overpayments and fraud?
In the current system, any change in circumstances requires human intervention: to receive and check information, and enter data. Reducing the level of such human intervention will save administrative costs and will reduce error rates. To remove it almost entirely, as with Child Benefit, will lower administrative costs and error rates as far down as they can go.
As the consultation paper identifies, duplication is a problem in the current system. It is a problem because each component of the system requires frequent human intervention. If such interventions were not required, or were required in only one part of the system, then duplication would not be a problem.
Integrating the benefits system and Tax Credits would create savings, and these would be significant if human intervention could be removed from large parts of the system. Even greater administrative savings will be achieved by integrating the tax and benefits systems as far as possible. This would mean that duplication between the tax and benefits systems would no longer occur. The transition into and out of employment would no longer require information to be received, checked and recorded, for those benefits paid that were not related to earnings or labour market status.
Structural reform of both tax and benefits based on a single simple, unconditional system would almost eliminate administrative costs, and would remove almost entirely the possibility of error, overpayment, and fraud (all of which are minimal for Child Benefit). Such a change would remove almost all need for customer service. (The reason we hear almost no complaints about Child Benefit customer service is that almost no customer service is required).
Successive Governments have failed to recognise that a substantial fraction of those claiming benefits for incapacity are, because of back pain, ME, clinical depression, etc., available to work intermittently, but liable (unpredictably from day-to-day) to have to cease work. The proposals to allow seamless transitions between out-of-work and in-work benefits would facilitate such people being able to obtain at least casual work, although their erratic availability for work does not make them good candidates for employment.
Although the benefit and other income of pensioners has been excluded from the scope of this consultation, it is worth taking into account the savings possible by including winter fuel payments and the value of free television licences in taxable income (but not means-testing the separate components). Poor pensioners would lose nothing, about half would lose 20% of their value, and a few would pay tax at 40% on these benefits.
Has the Government identified the right set of principles to use to guide reform?
Yes. However, two of the principles make assumptions which, if made differently, would deliver solutions more coherent with the other five principles.
Principle 5: Omit ‘in tandem … reinforcing conditionality’. There is no need to reinforce conditionality if the income maintenance system itself encourages responsible behaviour.
Principle 7: Rather than ‘Ensure that the benefits and Tax Credits system is affordable in the short and longer term’, the principle could read: ‘Ensure that the income maintenance system is affordable in the short and longer term.’ This allows for an integration of the tax and benefits systems and for the abolition of Tax Credits and means-tested benefits if that might deliver the kind of overall system which our economy and society need in the twenty-first century.
Would an approach along the lines of the models set out in chapter 3 improve work incentives and hence help the Government to reduce costs and tackle welfare dependency and poverty? Which elements would be most successful? What other approaches should the Government consider?
We welcome the approach of a Universal Credit and a single taper rate, which is the DWP’s own model in Chapter 3, as an acceptable reform for the time being with the possibility that it could be developed later into a scheme based on a Citizen’s Income. We reject each of the other three models outlined as incompatible with some of the principles for income maintenance and as inconsistent with the later implementation of a Citizen’s Income.
The IPPR’s Single Working Age Benefit is unacceptable because it fails to integrate Tax Credits with benefits and because making benefits universal for twelve weeks and then means-testing them is incompatible with integrating in-work and out-of-work benefits to allow seamless transitions in and out of work.
The IFS / Mirrless model is unacceptable because Child Benefit is included in the income which would be withdrawn and because families out of work would receive substantially less than now.
The Taxpayers’ Alliance’s Negative Income Tax model, although superficially appearing to enable progress to a Citizen’s Income, is unacceptable because it does not have a disregard for low earnings and does not integrate all benefits, leaving multiple taper rates.
The responses above suggest that a particular scheme which ought to be considered seriously is a Citizen’s Income: an unconditional, non-withdrawable income for every citizen, which would be paid for by reducing means-tested benefits (including Tax Credits) and Income Tax allowances.
The Citizen’s Income Trust submitted evidence on a Citizen’s Income scheme to the House of Commons Work and Pensions Committee’s Benefits Simplification enquiry in 2007. We enclose a reprint of the evidence printed in volume II of the enquiry report. We also enclose our most recent Citizen’s Income Newsletter, which contains a research note on the effects of replacing Tax Credits with a Citizen’s Income; and editions containing costings exercises for particular schemes. All of the schemes which we have researched are revenue neutral or potentially so, which means that minor variants could achieve cost savings.
A Citizen’s Income would deliver every one of the seven principles for reform (as adjusted in our response to question 5):
- To the extent that a Citizen’s Income replaces means-tested benefits and Tax Credits, marginal deduction rates would be reduced and there would be improved incentives for seeking and taking employment and for improving skills in order to increase earnings. The Citizen’s Income would be a constant contributor to net income, whatever the employment statuses of household members, and so it would not discourage transitions into and out of employment.
- These effects would be particularly noticeable at low wages, and would encourage individuals on low wages (and particularly those in part-time employment) to increase their earnings.
- Because everyone would receive a Citizen’s Income, it would unite taxpayers and benefits recipients in a single category. People in employment would receive a Citizen’s Income and be taxed on all or almost all income. People not in employment would receive a Citizen’s Income and would continue to need means-tested Housing Benefit and, if the Citizen’s Income was not high enough to live on, other means-tested benefits. But the level of means-tested benefits required would be much reduced, making the transition into employment more attractive than the current conditional benefits regime.
- Those most in need would, if able to work, be encouraged by lower marginal deduction rates to seek and enter employment, thus reducing the number of children in poverty. A Citizen’s Income would operate in the same way as Child Benefit, and integration of the two systems would be easy to achieve. Interfaces with taxation and other benefits would be only as difficult as those tax and benefits systems. The Citizen’s Income itself would contribute no difficulties to the interfaces.
- A Citizen’s Income would encourage employment and self-employment and thus responsible behaviour. A Citizen’s Pension ( – it’s a pity that pensions are not considered in the consultation document) would function in the same way as a Citizen’s Income and would encourage saving for retirement because the Citizen’s Pension would not be reduced as income from savings rose. Means-tested benefits and Tax Credits based on joint applications encourage parents to live apart. A Citizen’s Income, being individualised, would encourage them to live together.
- A Citizen’s Income would be as easy to automate as Child Benefit. Child Benefit attracts almost no fraud, and almost no errors or overpayments, and a Citizen’s Income would exhibit the same characteristics. Employers’ administrative systems would not be involved at all in the delivery of a Citizen’s Income, thus reducing their costs and creating a more efficient economy. The need for customer service would be almost non-existent.
- An income maintenance system based on a Citizen’s Income could be affordable in the short and longer term. The costs of the Citizen’s Income component of the system would be entirely transparent and predictable (as is the cost of Child Benefit). Any unpredictability would lie with remaining means-tested benefits such as Housing Benefit. A simple mechanism such as an adjustable National Insurance contributions upper earnings limit could be employed to regulate the cost of the scheme closely.
Do you think we should increase the obligations on benefit claimants who can work to take the steps necessary to seek and enter work?
The more significant the incentives, and the smaller the disincentives, to seeking and taking employment and to training for employment, the smaller will be the need for enforcement of labour market behaviour. All of the proposed schemes should therefore reduce the severity of compliance mechanisms required. A complete absence of disincentives would deliver the lowest possible requirement for such mechanisms. The enforcement of specified labour market behaviour is expensive, so a reduced need for it will deliver cost savings.
Do you think that we should have a system of conditionality which aims to maximise the amount of work a person does, consistent with their personal circumstances?
A free market in labour, with as few artificially imposed rigidities as possible, would be efficient for our economy. Only in such a free market will remuneration deliver efficient amounts of labour in relation to other production factors. Therefore, for an efficient economy, there should be as little interference as possible in the labour market. It is inefficient to require a particular individual, with their particular skill set, to perform an artificially imposed number of hours of labour. Therefore to create an efficient market in labour, that market needs to be isolated as far as possible from the worker’s subsistence needs and the tax and benefits system needs to be isolated from wage rates and from the numbers of hours worked by any individual. Complete disjunction is clearly impossible, but any decrease in the connection will deliver greater efficiency. The schemes discussed in the consultation document all achieve greater disjunction. A Citizen’s Income would do so to the greatest available extent, the increase in efficiency increasing with the level of the Citizen’s Income.
If you agree that there should be greater localism, what local flexibility would be required to deliver this?
Local discretion incurs costs and, because similar cases in different places will be treated differently, it can increase injustice.
The most successful benefit in terms of not increasing employment disincentives, low administrative costs, and almost no fraud, is Child Benefit. (The wealthy pay far more in Income Tax than they receive in Child Benefit, so it isn’t a problem that they receive it). The universality and unconditionality of the scheme are what make it work. Benefits such as Child Benefit need to be administered on a national basis. If we are to reduce costs and increase employment incentives, our system needs to move in the universalist and unconditional direction, and so towards national provision and away from localism.
The Government is committed to delivering more affordable homes. How could reform best be implemented to ensure providers can continue to deliver the new homes we need and maintain the existing affordable homes?
Given the mismatch between earned incomes and housing costs in many parts of the country (especially London), a Housing Benefit system will still be required. However, the taper will need to be reduced if Housing Benefit is not to continue to be the disincentive to households increasing their earned income, as it is at present.
The Housing Benefit taper is a problem because so much of the current system is means-tested, creating a total taper of up to 95% for many households across wide earnings ranges. For the rest of the system to cease to be means-tested would mean that the Housing Benefit taper and the Income Tax rate would be the only tapers contributing to employment disincentives, so Housing Benefit would no longer be as much of a problem as it is now.
It is not obvious how structural changes in the benefits and income tax systems can have a direct effect on the housing market. The solutions lie elsewhere: in the building of more single-person homes, regulating the mortgage market to control house price inflation, applying Capital Gains Tax when householders down-size their homes, and generally discouraging wealthier people from using residential property as speculative investments.
What would be the best way to organise delivery of a reformed system to achieve improvements in outcomes, customer service and efficiency?
The payment system diagram for Child Benefit looks like this:
If a Citizen’s Income route to reform were adopted, then far less information would need to be received, recorded and monitored. These would include name, current address, date of birth, bank account details, and proof of identity and citizenship.
For any remaining means-tested benefits, such as Housing Benefit, the payment system will continue to be as on page 35 in the consultation document: but as the level of the Citizen’s Income rises the number of people on means-tested benefits will fall (because increasing numbers will choose employment in preference to the means-tested system), and if a Citizen’s Income replaces Tax Credits (as our recent research note suggests) then no further Tax Credits will need to be paid.
Instigating a Citizen’s Income scheme would entail no information technology challenges. Outcomes would automatically improve as the number of claimants on means-tested benefits fell. The need for customer service would be almost entirely eliminated (as with Child Benefit). A Citizen’s Income would offer the maximum possible administrative efficiency as well as the maximum possible economic efficiency. Crucially, employers’ systems would not be involved in the delivery of a Citizen’s Income.
Is there anything else you would like to tell us about the proposals in this document?
It’s a pleasure to see the new Government taking seriously the problems relating to the current benefits system and considering radical reform; but because the consultation paper is issued by the Department for Work and Pensions rather than by the DWP and HMRC together, and, because it treats benefits and Tax Credits in isolation from Income Tax and National Insurance contributions, the Government is in danger of missing an important opportunity for the radical change which our economy, labour market and society require.
The major reason for suggesting that tax and benefits need to be treated together is that only by considering Income Tax allowances and rates along with the structure of benefits and of Tax Credits can all of the available options for reform be considered. In particular, a Citizen’s Income, which would deliver all of the Government’s principles for reform (adjusted as suggested above), requires that Income Tax allowances be turned into cash payments as well as those parts of the Tax Credits and benefits systems becoming unconditional, non-withdrawable and individualised. In this way a Citizen’s Income can be created and transitions into and out of employment can become seamless in relation to the tax and benefits structure.
The 21st century really does need a new approach, and a genuinely reforming Government offers the necessary opportunity to consider the broadest possible range of reform options. Back in 1983 a House of Commons Treasury and Civil Service Committee Sub-Committee recommended that a Citizen’s Income should be seriously considered as an option for reform, and in 1994 the Social Justice Commission came to the same conclusion.
Particularly important in the context of the fast-changing society and economy which we are bound to see during the twenty-first century will be a tax and benefits system which is as simple as possible and with as few rigidities as possible. If for no other reason, a Citizen’s Income would be a serious candidate for the necessary reform. But as we have made clear in our responses to the questions contained in the consultation document, there are numerous reasons to consider a Citizen’s Income as an important option for the basis of the tax and benefits system that we now need.
Universal credits would be an important step towards a Citizen’s income. A Citizen’s Income would offer all of the advantages of Universal Credits; would offer additional advantages in terms of administrative efficiency, lower marginal deduction rates, the reduction of fraud, a more flexible labour market, and the strengthening of families; and would involve no disadvantages.
We recognise that further research is necessary. The Citizen’s Income Trust has few resources of its own, and is most grateful for the help that it has received towards its contribution to the debate on tax and benefits reform. We are currently working with the University of Greenwich on a costings project, and would be pleased to work with others. We would be particularly pleased to be invited to work with the Department for Work and Pensions and with HMRC so that together we can explore the variety of feasible and cost-saving Citizen’s Income schemes available.
Equality Impact Assessment
Household-based tax and benefits systems should be assessed for their impact on equality within the household. Universal, unconditional and individualised systems automatically treat everyone equally. Therefore any inequality in the system as a whole will be ameliorated by the extent of the universal, unconditional and individualised component, and any inequality remaining will be the result of the remaining means-tested elements of the system.
This response is the result of consultation amongst the trustees of the Citizen’s Income Trust and has been agreed by its Chair as representing the view of the Trust.