A possible Citizen’s Income scheme tested for labour market incentives

On the 27th January the House of Commons Work and Pensions Committee published a report, Decision making and appeals in the benefits system (HC313)

The last two paragraphs read as follows (italics in the original):

We do not underestimate the difficulty of the task facing decision makers across DWP’s businesses. The complex rules that govern the social security system increase the scope for both customer and official error and the challenge of decision making accuracy. We have previously recommended that the Department establish a body to examine complexity in the benefits system and this has been supported by a number of organisations, including Citizens Advice.

We reiterate a previous recommendation of this Committee, that the Government should establish a Welfare Commission to examine the existing benefits system and model possible alternative structures with the aim of creating a fair but simpler system that claimants and their representatives are able to understand more easily and DWP staff are able to administer more accurately. (our italics)

But of course it isn’t just the DWP’s section of the benefits system which is too complex: it is also Tax Credits, administered by HMRC, which complicate the financial affairs of large numbers of working households.

We wanted to test whether it is possible to revise the tax and benefits system in such a way as

  1. to increase employment incentives and make nobody worse off for household gross earnings up to £750 per week for families with children and up to £450 per week for single adults without children;
  2. to reduce administrative complexity considerably by scrapping Working Tax Credits and Child Tax Credits;
  3. and to do by it making as few other changes as possible to the current system.

The method:

We took three family types:

a) Single adult, no children, local authority tenant (working 40 hours per week)

b) Lone parent, two children under 11, local authority tenant (working 16 hours per week)

c) Couple, with two children under 11, private tenant (working 40 hours per week)

We have used the spreadsheet employed by the Department for Work and Pensions to construct their Tax Benefit Model tables to calculate net incomes after housing costs for gross earnings between £20 and £1,200 per week for a variety of schemes for each of the household types a) to c) and have compared those net incomes with net incomes under the current system. The housing costs assumed in these calculations are £58 for household a), £69 for household b), and £138 for household c).

The scheme which provides the closest fit with the criteria 1) to 3) above is as follows:

We have scrapped Working Tax Credits and Child Tax Credits and replaced them with Citizen’s Incomes of £60 pw for each adult and £31.59 pw for each child (effectively an increase in Child Benefit of £31.59 p.w.). (A Citizen’s Income is an unconditional, nonwithdrawable income paid to each individual as a right of citizenship)

Income tax is collected on all earned income as follows:

From £0 to £20,000 pa, 20%

From £20,001 to £40,000 pa, 35%

Above £40,000 pa, 40%

We have removed the Lower Earnings Limit for National Insurance Contributions, and also the Upper Earnings Limit (but see below). This means that National Insurance Contributions as well as Income Tax is charged on all earned income, not just on that above the Lower Earnings Limit).

We have reduced the Housing Benefit taper from 65% to 40%

The graphs show the results. The steeper curve resulting from the revised scheme indicates higher employment incentives, particularly for the couple with children.

(Note that because this project is only about households containing wage-earners working specified numbers of hours and a National Minimum Wage is paid, the first £232 of the gross earnings range can be ignored in the case of the couple and the single adult, and the first £93 for the lone parent.)

All three graphs show net income under the revised system diverging from net income under the current system as gross earnings rise towards the right hand side of each graph. This is because for the purpose of the project we have removed the National Insurance Contribution Upper Earnings Limit so 11% National Insurance Contributions are now paid on all earned income.

A political decision will be required to determine whether and where a new Upper Earnings Limit should be established. If there is no Upper Earnings Limit then the revised scheme will save money. If a low Upper Earnings Limit were to be established then the scheme would cost money. Somewhere along the gross earnings range there will be an Upper Earnings Limit which will enable the revised scheme to break even.

The Chancellor will therefore have available a simple mechanism for regulating the cost of the scheme.


By replacing tax credits with a Citizen’s Income, and by making a few other minor changes, the tax and benefits system can be amended to increase employment incentives across substantial earnings ranges for a variety of household types.

We hope that by offering this indicative scheme we shall encourage research into further options: into their effects on net income for different family types; into their consequences for labour market behaviour; and into their redistributive characteristics. The scheme studied here increases substantially the net income of employed couples with children across part of the income range, so either additional funding would be required (somewhat unlikely in the current economic climate) or significant redistribution would need to be acceptable. There might be feasible schemes which would offer the virtues of the scheme discussed here at the same time as increasing net income for all house-hold types by lower amounts, and there might be feas-ible schemes which would fulfil our criteria and which would save money. Such schemes would clearly be of interest to a Government attempting to reduce costs.

What is now required is a great deal more research on different household types and on a wide variety of different Citizen’s Income schemes. Of particular interest would be the net income effects on non-earning households as they make the transition from unemployment into part-time or full-time employment.

The graphs:

We are grateful to the Department for Work and Pensions for providing us with the spreadsheet which they use to calculate their Tax Benefit Model Tables