Outside the marginals

a commentary on the politics that followed the UK 2010 & 2015 elections

Universality and the nothing for something society

The Conservatives have refused to take the winter fuel allowance off the rich, yet Labour say they will – to the horror of some (ref: “”Why Britain will suffer if the welfare state pays out only to poor people“, Guardian 5 June 2013). Now we see that “Welfare for wealthy must be cut first, says Nick Clegg” (BBC News Website 16 June 2013).

The argument against universality is that we cannot afford universal benefits and the rich should be prepared to make bigger sacrifices – and they don’t really need the benefits anyway.

The argument for is that universality avoids means testing (which involves an expensive bureaucracy and can inhibit take up by some of the deserving at whom the benefit is targeted) and it links us all into the welfare system.

I think this latter point is important.  The “Welfare State” is (at least conceptually) an insurance scheme and you pay in to it so that if you are in need it can pay out.  If, however, some are told that they have to pay in, but they cannot expect to see a payout, they will challenge why they should pay in.  If contributions were made discretionary, there will be a flight of the rich from funding the welfare state and it will in due course collapse. Some may see this as a good thing and will encourage self-reliance in a similar style to the US. I do not and I would see such a change as being fundamentally corrosive to the cohesion of our society. (The same argument applies in respect of School Education and Health Care)

In addition as Neal Lawson (ibid) points out, “Benefits and services for the poor always become poor benefits and services.”  If the rich do not use our schools and hospitals, we lose out on the pushy parents and relatives – our society is still such that the articulate and knowledgeable tend to be the rich.  Some will say that benefits like the winter fuel allowance are marginal and will not suffer from being detached from the rich.  Leaving aside the “thin end of the wedge argument”, many of the “non-poor” are still sufficiently stretched/squeezed to appreciate an allowance like the winter fuel allowance – but posh boys who are not stretched or squeezed probably don’t appreciate that.

There is of course a relatively easy solution – make all benefits taxable.  That way the really poor, who pay no or minimal levels of tax see the maximum benefit, whilst the rich see a substantial portion of the benefit returned to the exchequer.  The same should apply to tax allowances.

To some the idea of “giving with one hand, whilst taking away with the other”, seems to be a nonsense and inefficient, but if it allows the rules for “giving” to be simplified (no means testing) and allows the rules for “taking” to be simplified (no tax allowances, just a rate dependent on income), it is actually more efficient.

It also tackles the “nothing for something” syndrome detailed above.  By making all income taxable it also avoids the “something for nothing” syndrome brought about by the coalition’s policy of raising tax allowances.

When the coalition’s policy of raising personal allowances to £10,000 per annum is achieved, the lowest paid will be detached from the income tax system – paying none.  They therefore have little interest in “how you pay for benefits”.  If instead the £10,000 per annum allowance was converted to a £2,500 per annum credit paid as reverse PAYE someone earning £10,000 would be neither better or worse off given current tax rates. (£10,000+£2,500 @ 20% tax = £2,500). A tax computation would show:

Pay received:    £10,000
"Citizen credit": £2,500
Total income:    £12,500
Tax at 20%:      (£2,500)
Net Income:      £10,000

The net result would appear to be the same, but the person is now a tax-payer and has an interest in the rate of taxation.

  • If the rate of income tax had to go up to 25% (to for instance fund the NHS), there would be an increase in tax of £625 – a reduction in income of £625.
  • Alternatively if there was popular support for a reduction in public spending and the base rate of tax was to reduce to 10%, this “poor” tax-payer would see a £1,250 per annum increase in income.

With the current proposed tax allowance of £10,000 this person would have no interest in the tax rate and would not be a contributor to the state.

If all allowances and benefits were treated in this way, you can:

  • maintain universality,
  • ensure appropriate take-up,
  • avoid high marginal tax rates where benefits currently drop out, but
  • still ensure that the rich “pay back” at their marginal tax rate.
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