A second and distinct income tax

Common criticisms of Citizen’s Basic Income (CBI), assuming that most existing benefits and tax reliefs intended to alleviate poverty (primarily the personal allowance and tax break for pensions) were replaced with a flat-rate universal payment, are as follows:

  1. a) the amount would not be enough to live on;
  2. b) it would not cover housing costs, and it would not take into account special needs/disability and
  3. c) it is a ‘waste of taxpayers’ money’ to pay it to wealthy people.

We might refute these criticisms as follows:

  1. a) how much a single adult needs to live on is open to debate anyway, but the illustrative schemes that the Citizen’s Basic Income Trust publishes are designed to ensure that as few non- and low-earners as possible receive less than under the current system;
  2. b) we would keep Housing Benefit/Local Housing Allowance (HB/LHA) and severe disability benefits as separate benefits and not roll them into the CBI; and
  3. c) for wealthy individuals, the CBI is merely giving them back a small part of the taxes they pay and might also be a swap for a reduction in tax breaks for pension saving, which of necessity benefit higher earners most.

Nonetheless, these criticisms have a lot of political traction. An appropriate response is available. A CBI which replaced all benefits except severe disability benefits would actually only require one tweak to address the other criticisms. Instead of having a flat rate CBI with no withdrawal rate at all, we could pay out a larger basic amount and add a modest withdrawal rate as a second income tax – a ‘CBI withdrawal tax’. For a given total payout, the higher the basic amount, the higher the CBI withdrawal tax, and it would be question of striking a reasonable balance.

We know that the available pot is big enough to pay every working age adult a flat rate CBI of £4,000 a year or so, which is slightly more than Income Support/Jobseeker’s Allowance etc (IS/JSA). Based on HMRC’s figures for taxpayers’ income percentiles (https://www.gov.uk/government/statistics/percentile-points-from-1-to-99-for-total-income-before-and-after-tax) and an estimate of incomes of non-taxpayers, if the CBI is increased to £5,000, this would require a 5% CBI withdrawal tax to keep the total pay-out constant. If the CBI is increased to £6,000 then it would require a 10% CBI withdrawal tax. Additional rates are as follows:

CBI – required CBI withdrawal tax

£4,000 – zero %
£5,000 – 5%
£6,000 – 10%
£7,000 – 16%
£8,000 – 23%
£9,000 – 30%

A reasonable compromise seems to be paying £7,000 a year with a 16% CBI withdrawal tax. This would mean a combined income tax of just under 50% of earnings, i.e. 16% CBI withdrawal tax, 20% income tax, and 12% NIC for employees (assuming that the tax-free personal allowance and NIC lower earning thresholds are abolished to pay for the system). This sounds high but it would clearly be a vast improvement over a) the Universal Credit headline withdrawal rate of 63% of net income, an effective overall rate of about 75% for those earning more than the personal allowance, and b) the Working Tax Credit withdrawal rate of 41%, an effective overall withdrawal rate of 73% for those earning more than the personal allowance.

Such a modified CBI scheme would go a long way to addressing the four criticisms listed above:

Is it enough to live on?

£134 a week is clearly enough for a single adult to live on, excluding housing costs.

Housing costs – private tenants

With a basic CBI of £7,000 a year (£134 a week) there would be much less need for HB/LHA. Single adults aged 25 and over would receive £61 a week more than they currently do in Income Support/Jobseeker’s Allowance (IS/JSA). So if three adults are prepared to house share, this gives them a rent budget of about £800 a month (i.e. £61 x 3 adults x 4.33 weeks) which is enough to rent a small house in most towns in the UK outside London, with the same amount left over for other living costs as each receives under IS/JSA,

The position for a couple is even more favourable. They would receive £268 a week, £150 more than they currently receive in IS/JSA, giving them a monthly budget of £650 for rent, which is enough to rent a one-bed flat in most towns in the UK outside London, with the same amount left over for other living costs as a couple receives under IS/JSA.

So while there would still be some need for HB/LHA (in London, for example), it would only cost a fraction of the current total paid out to private landlords (about £10 billion a year).

Housing costs – social tenants

Social rents are lower than private rents, so there would be even less need for HB/LHA for social tenants. Even better, instead of the merry go round where one branch of government pays rent to another branch of government, social rents could be set at a certain percentage of each tenant’s income so that social housing is always affordable to all.

Disability related benefits

£134 a week is considerably more than Incapacity Benefit, and only slightly less than the maximum Disability Living Allowance plus higher rate Mobility Allowance, so the amount of top-up payments needed to ensure that nobody loses out (especially those also receiving Severe Disability Premium) would be negligible.

Children

The total Child Tax Credits and Child Benefit paid out each year is about £36 billion, which could be used to pay a flat amount of about £60 for each child under 18 still living with their parents. This is of course less than the maximum amount that Child Tax Credit claimants receive, which is about £84 a week for the first child, including the family element and Child Benefit, so the same principle applies – the basic amount could be increased and clawed back from parents via the tax system.

It is very difficult to calculate or even estimate what the withdrawal rate would have to be to be able to pay out higher amounts to non-earning parents, so I will not attempt it here.

The Child Care Element of Working Tax Credits is merely one kind of subsidy for childcare costs, and ideally would be merged with the other overlapping systems anyway, and is not considered here.

Higher earners

The full CBI of £7,000 would be clawed back from individuals with annual earnings in excess of £43,750 (i.e. they would pay back 16% x £43,750 = £7,000), just below the income level at which higher rate income tax is payable.

Administration

A modest CBI withdrawal tax of 16% does not require a parallel system of means testing as it can be done via the tax system. For example, employees would receive the full CBI and their PAYE codes would be adjusted so that that they repay some or all of their CBI depending on how high their income is. This means that the net amount received (CBI minus clawback) would adjust automatically to changing earnings.

 

 

 

 

 

Footnotes