Editorial
The Turner Report
The second report from the Pensions Commission, published on the 30th November, recommends ‘reforms to make the state system less means-tested and closer to universal’.
An adequate universal flat-rate ‘Citizen’s Pension’ (CP) for every resident adult over the state retirement age, and paid at the rate of £109.45 per week for a single pensioner (the same rate as the current Pension Credit), would allow most of the 5 million senior citizens without other financial resources to live with dignity and without recourse to means-tested benefits. A CP would provide a stable foundation for a portfolio including occupational and private pensions.
A Citizen’s Income (CI) (an unconditional, non-withdrawable income payable to each individual as a right of citizenship) could help to avert the impending pensions crisis by dismantling the artificial thresholds dividing retired people from working age adults.
A CI for all adults would replace most of the current array of means-tested benefits (the withdrawal of which as earnings rise discourages low-income earners from working). A CI and a CP together would allow individuals into their 60s and 70s to negotiate contracts for their preferred hours of paid work, probably choosing to reduce their hours as they get older, yet still yielding taxable earnings.
Setting the rates for the CP and CI as a proportion of GDP per capita would restore the former link between pensions and the prosperity of the country. The levels of the CP and CI, rising and falling with the fortunes of the country, would allow people to adjust their hours of work to cover any shortfall, and would help to stabilise economic cycles.
The Pensions Policy Institute has calculated that a Citizen’s Pension of £110 per week (approx. 30% of GDP per capita) could be afforded immediately within current government spending on pensions.
Just as important, a Citizen’s Income of £90 per week, approx. 25% of GDP per capita, is also feasible, as our main article in this issue shows.
ASSUMPTIONS AND CALCULATIONS FOR A SIMPLE CITIZEN’S INCOME SCHEME
By Anne G Miller
My object for this paper is to show that a simple partial Citizen’s Income system, with a standard CI for those aged 16-59 of £90 pw, is economically feasible.
My objectives for the CI scheme are:
To design a very simple, transparent and accountable system.
To reduce the need for means-testing, which leads to a reduced take-up of the benefit. Means-testing also has a built-in disincentive-to-work for those coming off benefits into work, who are caught by both income tax and benefit withdrawal rates, giving a high combined effective marginal tax rate. Those on Child Tax Credit or Working Tax Credit, are subjected to an effective marginal tax rate of 70% (22 % income tax, 11 % National Insurance contribution, 37 % CTC and WTC taper rate), which is higher than the highest rate of tax (40 % income tax plus 1 % of National Insurance contribution), paid by high-income earners.
Eligibility to be based on residency or domicile.
For the individual to be the tax and benefit unit.
To minimise the degree of contingency associated with the CIs (for instance, the amount of the CI will be independent of marital status, domestic arrangements or sexual preferences). It is designed specifically not to take circumstances into account. This should reduce the complexity, improve the efficiency and reduce the costs, of administering the system.
Although the CI and personal income tax systems will be co-ordinated, they will be operated separately, with the CI paid out to individuals, and the tax collected separately. (This makes all of us both CI recipients and potential taxpayers). Instead of assessing the incomes of some individuals twice, once for means-tested benefits and again for income tax, as at present, each will be assessed once only, for income tax. This should also both improve the efficiency and reduce the costs of administering the system.
ASSUMPTION 1.
The CI should reflect the prosperity of the UK, and I have chosen for it to be related to GDP per capita, rather than the (to me) more nebulous figure for annual average earnings. GDP per capita seems to reflect the prosperity of the whole country. A fixed proportion of GDP per capita also has the advantage that it will provide a stabilising influence on the economic cycles.
CIs for the tax year 2005-06, have to be determined before that, using the latest information available, which is the figure for GDP per capita for 2003 in the United Kingdom National Accounts, The Blue Book 2004 edition, published in the autumn of 2004. There will be a fifteen-month gap between the end of the year to which the GDP figure applies and the tax year starting 15 months later.
The relevant figures for 2003, from Blue Book 2004, Tables 1.2 and 1.5 are:
GDP (output method) at current market prices, YBHA = £1 099 896 m
GDP per capita, IHXT = £18 524
(This gives an estimate for UK population of = c. 59 377 000).*
* My estimates are calculated to 5 significant figures.
The four-letter labels are the item labels used in the tables.
Some further figures for population are available in Appendix A below.
ASSUMPTION 2.
The Citizen’s Income scheme will be financed out of personal income tax revenues.
I assume this for two reasons.
a) The expenditure by the government in 2003 on social benefits in cash at £131,799m is of the same order of magnitude as taxes on income, £145,326m, which implies that government expenditure can be financed out of the rest of taxation. (See Appendices B and C).
b) It is convenient to work with a hypothecated arrangement, in order to illustrate the feasibility of the scheme more clearly.
ASSUMPTION 3
Table 1
The income of the Households and Non-Profit Institutions Serving Households (NPISHs) is roughly 80% of GDP (See table 1)
|
2001
|
2002
|
2003
|
2004
|
|
| GDP at market prices, table 1.2, YBHA |
994 309
|
1 044 145
|
1 099 896
|
1 164 439
|
| Total resources, Hshlds & NPISHs, Table 6.1.3, QWMF |
818 861
|
839 881
|
876 473
|
922 837
|
| Incomes from hshlds/ GDP |
0.82355
|
0.80437
|
0.79687
|
0.79252
|
Source: The Blue Book 2004 and 2005
The sources of the difference between GDP at market prices, YBHA, £1 099 896 m. in 2003, and Total Resources, of Households and NPISHs, QWMF, £876 473 m. can be discovered by a comparison of Table 1.2 (income component method) and Table 6.1.3, and is accounted for as follows:
The difference between the Operating Surpluses (profits) of Corporations, and the Property Income of Households and NPISHs, QWME, (which includes interest, dividend payments and rent), yields £72 120 m, which will include retained earnings;
Gross operating surplus of general government, NMXV, is £10 722 m;
Taxes on production and imports, NZGX, less subsidies, -AAXS, giving a sum of £140 147 m;
A statistical discrepancy between the income components method of estimating GDP at market prices and the output components method, YBHA, (which is the official GDP at market prices), RVFC, accounts for £493 m; and
Payments to, less receipts from, the rest of the world, -KTMP, -£59 m.
ASSUMPTION 4. THE PERSONAL INCOME TAX SYSTEM: RECLAIMIMG THE TAX BASE
The personal income tax system will have the following properties:
1. National insurance contributions will be subsumed into the income tax system.
2. All of an individual’s taxable income, from all sources, will be treated in the same way for income tax purposes.
An individual’s taxable income is defined as gross income less any allowable essential expenses incurred in the generation of that income, from all sources, but before receiving their CI, and other government transfers such as housing benefit, or the benefits to cover the costs of a recipient’s disability.
Sources of income include:
EARNINGS (from full-time and part-time employment)
EARNINGS from SELF-employment
SHARE SCHEMES and OPTIONS (free or cheaply from one’s employer)
COMPANY PERQUISITES (such as a company car, private medical insurance, fringe
benefits, commission, tips, part-time free-lance earnings)
PENSIONS, occupational and personal
INTEREST from banks and building societies
DIVIDENDS
CAPITAL GAINS on the sale of shares and other assets, and
RENTAL income from properties.
GIFTS
3. No other tax reliefs, personal allowances or exemptions will be granted,
It is important that there are no exceptions, however apparently laudable, because, whilst they appear to benefit middle-income people to a modest extent, wealthy people find ways to exploit them much more fully. Thus tax reliefs are the thin end of the wedge of an ever-increasing raft of hidden tax expenditures, which erode the tax base and lead to a higher standard tax rate being imposed on the majority who cannot avoid the tax. The withdrawal of all tax reliefs, personal allowances and exemptions allows the tax base to be reclaimed. The case for restoring any particular concession would have to be argued from scratch and claimed as a visible benefit, rather than an invisible tax expenditure.
Some of the tax reliefs in the past have been given with laudable aims, such as the tax reliefs on charitable donations. Charities rely on this extra subsidy from government, but it is recommended here that it could be given as a direct subsidy to each charity as a proportion, say 20 or 25 %, of all of its donations received, rather than relating them to the incomes of some individuals.
Tax relief on pensions and superannuation contributions were given to encourage people to provide for their old age, which was thought to be absolutely essential for the future financial health of our senior citizens. However, with a reasonable Citizen’s Pension, indexed to GDP per head, this would not have the same urgency, although individuals could still contribute to private schemes if they wished, but without the current subsidies, which are massive. The UK government has been exhorting the population to save for its old age, but the fall in the stock market, and the withdrawal of many company occupational pension schemes has left people with much uncertainty, which a Citizen’s Pension would go some way to ameliorate. There is popular support from various pensions organisations for such a move. A Citizen’s Pension could provide the foundation in a portfolio of pensions. It is far more important to make this foundation as adequate as possible for all, rather than to subsidise the private pensions of those who are already better off.
Appendix D lists some of the most expensive tax expenditures and structural reliefs, (but excluding those for Corporation tax), in descending order of cost. In the source material, published by Her Majesty’s Revenue and Customs, HMRC, (renamed after the merger of the Inland Revenue and Customs and Excise in April 2005), the tax expenditures are grouped by type.
4.The standard rate of income tax will be that required to finance a CI scheme, together with most of the other benefits in cash that will still be necessary, including a residual welfare system for those who do not qualify for a CI, etc, but these can be supplemented out of a higher rate of tax.
ASSUMPTION 5. THE CITIZEN’S INCOME SCHEME.
GDP per capita in 2003 was £356.23 pw, or £18 524 pa, representing 100 % of GDP per capita.
There will be three levels of CI, at roughly 31, 25 and 14 % of GDP per capita.
Citizen’s Pension of £110 pw, £5 720 pa, 30.88% of GDP per capita, for men and women aged 60 and over (as with the current Pension Credit of £109.45 pw for a single pensioner).
The age threshold can be raised, as proposed for the Basic State Pension for women, from age 60 to age 65 over the decade 2010 to 2020.
Standard Citizen’s Income of £90 pw, £4 680 pa, 25.26% of GDP per capita, for all individuals aged 16 to 59.
Child Citizen’s Income of £50 pw, £2 600 pa, 14.04 % of GDP per capita, for children aged 0 to 15,
This rate for CCI is based on 2005-06 rates for Child Tax Credit per child of £1 690 pa, and the higher rate of Child Benefit (£17.00 pw, £884 pa), yielding £2 574 pa, which I have rounded up to £2 600 pa.
Table 2. Recommended initial rates, based on GDP per capita for 2003
| % of GDP per head | £ per annum, based on 2003 GDP p cap | £ per week, based on 2003 GDP p cap | |
| GDP per head |
100.00
|
18,524
|
356.23
|
| CP |
30.88
|
5,720
|
110.00
|
| SCI |
25.26
|
4,680
|
90.00
|
| CCI |
14.04
|
2,600
|
50.00
|
This is a partial basic income scheme, because it recognises that few adults would be able to live comfortably on the SBI alone, but it assumes that able-bodied people would be able to find at least a few hours of work each week in order to top up their incomes.
I am assuming that the costs of disability will be paid separately from the CI payment, and will continue as at present, through the Disability Living Allowance, and through grants paid by Social Services or local authorities.
The total cost of the basic income scheme can be calculated in advance (ex ante), using the 2003 figures for GDP and population, and is presented below in Table 3a. The table is calculated on the basis of everyone receiving the Standard Basic Income, SBI, and then adding on the extra cost of the Citizen’s Pension, and deducting the shortfall on account of the Child Citizen’s Income.
Table 3a. The Total Cost of this Proposed Citizen’s Income Scheme, ex ante.
| Population numbers** 2003 thousands | Citizen’s Income per annum | cost estimates | |
| Total population |
59,553.9 (100.0%)
|
£ 4 680
|
£ 278 712 m
|
| People aged 60+ |
12,452.6 (20.9%)
|
+ £ 1 040
|
+ £ 12 951 m
|
| Children aged 0 – 15 |
11,712.2 (19.7%)
|
– £ 2 080
|
– £ 24 361 m
|
| Total |
£ 267 302 m
|
** Mid-year population estimates for 2003 were obtained via
www.statistics.gov.uk/Statbase/Expodata/Spreadsheet/D8548.xls
The total cost represents 24.302% of GDP of £1 099 896 m for 2003.
A quick method for estimating a ball-park figure for the cost of the CI scheme is given below, based on the fact that the population aged 60 plus is roughly 21 % of the total population, and that of children aged 0 to 15 is about 20 %: It allows one to get a rough estimate of the costs for different levels of CI, or for different sections of the population.
Table 3b. Quick Method for Calculating the Cost of the CI Scheme as a Proportion of GDP.
| Proportion of the population | CI as a proportion of GDP per cap | Cost of CIs as a proportion of GDP | |
| Citizen’s Pension |
0.21
|
0.3088
|
0.06485
|
| Standard CI |
0.59
|
0.2526
|
0.14903
|
| Child’s CI |
0.20
|
0.1404
|
0.02808
|
| Total |
0.24196
|
In this case, it provides an estimate for the cost of the CI scheme as a proportion of GDP, which is reasonably close to the more precise method.
However, this proportion of GDP (24.302 %) will have to be grossed up by dividing by 0.79687 (the proportion of GDP accounted for by the income of households in 2003). Thus, the total cost represents 30.497 % of the income of Households and NPISHs. This also represents the rate of income tax necessary to finance the CI scheme, but it will have to be augmented to allow for any extra benefits in cash that may be required.
There must be enough additional revenue to finance:
the costs of disabilities, including the costs of care, including residential care, special equipment, mobility, extra fuel or laundry costs or special diets, etc. and
a social fund for those with emergencies, and
a redundancy fund (which in 2003 totalled £2,385 m.),
and
a residual safety net, which will be required:
for those who are still in poverty (despite the CI scheme), operated mainly through a housing benefit and council tax benefit scheme for those with no other income, and for those who do not meet the residency or domicile criteria to qualify for a CI, as well as
a residual National Insurance scheme for those who will still be entitled to National Insurance benefits, such as SERPS (the State Earnings Related Pension), Non Contracted Out Pensions, S2P pensions and UK pensioners living overseas
(National Insurance benefits to overseas residents in 2003 totalled £1,404 m. and other benefits paid to overseas residents in cash in 2003 came to £48 m (See Appendix C)).
There must also be enough to cover the grants replacing those tax expenditures for which a case is justified, (such as charitable giving, for instance).
Adding a further 2.503 % to income tax, to cover these extras costs, brings income tax to 33 %, which is the same as the current 22 % plus 11 % for national insurance contributions, which would have yielded an extra £21 940 m (0.02503 x £876 473m in 2003). Thus, a simple, partial CI scheme could be financed out of a personal income tax system with a standard rate of tax of 33 %.
We can estimate the revenue from a 41 % higher rate of income tax on taxable incomes greater than £31,400 for 2004-2005, (or £32,400 for 2005-2006; see Appendix F below), as follows. HMRC’s estimate for the tax yield from the 40 % highest rate of income tax, by 3.430 m higher rate taxpayers in 2004-05, is £46,730 m. This higher rate comprises the current standard rate of 22 % plus an extra 18 %, which will be 33 % under the new regime, (which has already been accounted for here), plus an extra tax of (7 + 1) % of the £46 730 m. Thus the top slice is about £9 346 m, which is only 0.8% of 2004 GDP.
Of course, all of the gross income of higher rate taxpayers will now be taxed, so the equivalent of (7+1)% will be levied on the former personal allowance of £4,745 in 2004-05 for each higher-rate taxpayer, yielding £1,302 m. Thus, a higher tax rate of 41%, and using the same thresholds as at present, would yield an extra 0.9 % of GDP as income tax revenue. The corresponding estimates for 2005-06 indicate that 3.560 m tax payers paid £49 290 m in the higher rate income tax of 40 %, and their personal allowances were £4,895, but we do not have a GDP figure for 2005 yet, with which to compare these. (www.hmrc.gov.uk/stats/income_tax/table2-6.pdf).
For working out the actual costs of the CI scheme in retrospect, (ex post), we need the latest population figures available, which are currently for 2004, but the most relevant figures will be for 2005, when they become available.
Table 4. The Total Cost of this Proposed Citizen’s Income Scheme, ex post.
| Population numbers** 2004 thousands | CIs per annum | Cost estimates 2004 | |
| Total population |
59,834.3 (100.0%)
|
£ 4 680
|
£ 280 025 m
|
| People aged 60+ |
12,600.8 (21.1%)
|
+ £ 1 040
|
+ £ 13 105 m
|
| Children aged 0 – 15 |
11,645.6 (19.5%)
|
– £ 2 080
|
– £ 24 223 m
|
| Total |
£ 268 907 m
|
** Mid year population estimates were obtained via www.statistics.gov.uk/Statbase/Expodata/Spreadsheet/D9081.xls
This total cost represents 23.093 % of GDP of £1,164,439 m for 2004, which, when grossed up by 0.79252 for 2004, yields 29.139 %. A further increase in GDP is likely to have occurred in 2005, and will reveal a fairly comfortable margin for errors in the ex ante calculations in Table 3a. It is obvious that a simple partial Citizen’s Income scheme, such as the one illustrated here, is feasible, with a standard rate of tax of 33%.
Some of the rates for the current main benefits, for the tax years 2004-2005 and 2005-2006 are given in Appendix E, most of which will disappear under the new scheme.
The appendices can be found in the Word or pdf versions of the Newsletter.
BIBLIOGRAPHY
Department for Work and Pensions, April 2004 and 2005, Social security benefit rates, Leaflet GL23.
Dickens, James and Philip Vince, 1997, How Citizen’s Income could become a practical reality, A Citizen’s Income Trust Position Paper, London: Citizen’s Income Trust.
Her Majesty’s Revenue and Customs, http://www.hmrc.gov.uk/stats/income_tax
Mid-year population estimates, http://www.statistics.gov.uk/Statbase/Expodata/Spreadsheet/D8548.xls
And http://www.statistics.gov.uk/Statbase/Expodata/Spreadsheet/D9081.xls
Miller, Anne, 2004, ‘The Blue Book: Taxes, transfers and government expenditure’, Citizen’s Income newsletter, 2004, issue 2, pp. 3-7.
Torry, Malcolm, ‘The truth the tables tell’, Citizen’s Income newsletter, 2004, Issue 1, p.1-2.
United Kingdom National Accounts: The Blue Book, 2003, 2004 and 2005, Office of National Statistics. http://www.statistics.gov.uk
Which? Tax saving guides 2004 and 2005, Which? Ltd
The Citizen’s Income Trust Essay Prize for 2006
The Citizen’s Income Trust invites entries for its 2006 essay prize. Entrants should be studying at a UK university during the academic year 2005/6 at undergraduate or graduate level. Essays should be in the fields of philosophy, political science, social policy, economics, or other social sciences; should be of up to 5,000 words in length; and should contribute to the current debate on the desirability and feasibility of a Citizen’s Income: an unconditional, nonwithdrawable income payable to each individual as a right of citizenship. Provided that at least one entry is of sufficient quality the winner will be awarded a prize of £500 and the winning essay will be published in the Citizen’s Income Newsletter.
Rules: A hard copy of the essay, along with the entrant’s name and address, should be sent to: Dr. Malcolm Torry, Director, Citizen’s Income Trust, P.O. Box 26586, London SE3 7WY, and an electronic version (in Word or Rich Text Format) either by disc to the same address or by email attachment to info@citizensincome.org. Confirmation that the entrant is studying at a UK university needs to be sent, signed by a faculty member. The closing date is 1st May 2006. No trustees, employees, or former trustees or employees of the Citizen’s Income Trust, or their relatives, may enter. The judges’ decision is final, and no correspondence will be entered into.
© Citizen’s Income Trust 2013