New IT Disaster Looms Over Iain Duncan Smith

Iain Duncan Smith at Conservative Party Conference
Iain Duncan Smith – On the Right Track but Naive – image by Community Links via Flickr

The Daily Telegraph today reports an impending income tax disaster.

They are moving to “real time” PAYE. What this means is that any company, no matter how small, must now report any payments to staff immediately, using a new government IT system.

Even HMRC admits that only 85% of businesses are even aware of the new system. And predictably, the Telegraph is already reporting glitches with the IT. The government hardly has a great record at implementing huge new IT systems.

To compound the chaos, 55,000 HMRC staff have chosen this moment to go on strike.

What the Telegraph does not report is the reason for the introduction of the new system. It is part of the launch of Iain Duncan Smith’s new Universal Credit welfare benefit scheme.

That scheme, you will remember, replaces a raft of old welfare benefits with a single new benefit. The new UC is, of course, means tested. When people get a job, their UC is reduced, depending on their earnings. Therefore the Department for Work and Pensions needs to know their income. The more they earn, the more the benefit is reduced.

Sounds a bit like income tax, doesn’t it? And it is. As a matter of fact, there is no difference between reducing someone’s UC by £10 because of their income, and reducing their pay by £10 via income tax.

We now, therefore, have a major new IT system to tell the Department for Work and Pensions how much you earn, in real time. Your employer tells HMRC, who tell the DWP. HMRC work out your income tax and the DWP repeat the exercise to work out your benefit reduction.

The principles behind the UC are good ones – simplification, making work pay and consistent means testing. But this implementation is absolutely beyond belief.

Iain Duncan Smith was apparently told by his officials that they needed this new IT system to deliver his UC. If so, they were, quite simply, lying.

They could have simply paid the benefit and notified the tax office of the benefit, in the same way as employers notify them of income. Then the tax office could have used the tried and tested PAYE system to means test the benefit, i.e. take money back from claimants with jobs, by taxing their wages.

That would be the sensible way to do it. It would, of course, have reduced the role of the DWP and led to redundancies in that department. This may be not unconnected with the department’s apparent failure to suggest this option to Mr Duncan Smith.

If the DWP couldn’t bring themselves to be professional about it, there was another option. There was an existing benefit, Income Support, that worked in a very similar way to the new UC. And indeed, 20 years ago, Income Support was the main welfare benefit.

The new UC could have been paid using the old systems that handled Income Support. The key point is that there is absolutely no connection between the new benefit and the requirement for the new “real time PAYE” IT system.

The Department for Work and Pensions has been guilty of gross incompetence and worse, lack of professionalism, in all of this. Frankly, heads should roll in that department, very publically and without compensation. I fear though that it is Mr Duncan Smith who will find himself in the firing line when it all unravels.

And perhaps that is fair. Although Mr Duncan Smith’s benefit reforms are absolutely right, he does seem to have been pretty naive in his dealings with the DWP part of Britain’s poisonously bureaucratic State.

Sanity and Welfare

William Beveridge
It’s all gone a bit wrong since William Beveridge
Image is photograph D 17134 from the collections of the Imperial War Museums, via Wikipedia

An interesting article in the (still paywall-free for the moment) Telegraph today.

Jeremy Warner identifies most of the problems with our welfare state (and then rather unfairly accuses Iain Duncan Smith of making them worse – indeed of being the heir to Gordon Brown).

He quotes William Beveridge, whose report during the War was the foundation of the welfare state thus:

The state in organising security should not stifle incentive, opportunity, responsibility; in establishing a national minimum it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.

Our modern, insane, welfare system has of course departed far from those principles. Mr Duncan Smith has been trying to set a saner course. But Jeremy Warner is not impressed.

On Universal Credit, Mr Warner complains that the new Universal Credit and the single rate pension are not contributory:

The [Universal Credit] is an entirely means-tested form of entitlement which bears no relationship to what you might have paid the state in taxes and National Insurance. Likewise, the single-rate state pension is a no-strings form of entitlement. It has as little in common with the concept of insurance as a minor win on the National Lottery.

He also complains that the welfare bill has been rising for decades, but quite rightly notes that most of this is accounted for by the additional costs of old age pensions for an aging population.

He correctly points out that the new £26,000 welfare cap will not affect many claimants, and also takes a justified swipe at the so-called “bedroom tax” as being bad politics.

He then scores a bulls-eye on housing:

Housing benefit provides the obvious example. This has been one of the fastest-growing areas of entitlement spending not because of deliberate sponging off the state by the feckless, but because of inadequate social housing supply for the low-paid, allowing private landlords to game the government for excessively high rents. This in turn has spawned a new, and largely parasitic, industry in buy-to-let.

And he concludes that:

I fear [Mr Duncan Smith] has barely begun in rolling back the frontiers of welfare spending.

Some good points in that article – but some critical issues missed as well.

So what would a sane welfare system look like?

Housing

Start with housing. Mr Warner is on the right track there. It is sheer lunacy paying housing benefit to private tenants. All that happens is that private rents are driven up, and private landlords pocket the benefit.

Much more sensible to have a real program of old-fashioned council house building. It would without question be much cheaper, for a start. (The maths is pretty easy to do.) And it would give private tenants who don’t get housing benefit a break, delivering lower rents for them. It would also drive down house prices, which would clearly make everyone better off – despite the peculiarly British lunacy that believes otherwise.

A program of this kind, apart from saving taxpayers’ money, would give a much-needed boost to the construction sector as well.

What’s not to like?

Benefits

Mr Warner is also hesitantly on the right track here – but hasn’t really thought it through. Right now we have at least four means testing systems – the benefit system, the tax credit system, the income tax system and now the child benefit system.

What a ridiculous way to run things. Far better to pay the benefits in full, and do the means testing exclusively through the income tax system. From the politicians’ point of view, the disadvantage would be that the real marginal tax rates we all pay would be laid bare (most people pay over 60%). But the administration savings would be huge, and the system would be much less open to abuse.

Mr Duncan Smith’s Universal Credit is a welcome step towards this.

However, he missed the opportunity to do the tapering of it through the tax system. (Both Mark Wadsworth and I suggested this in Mr Duncan Smith’s consultation on the new system, but I guess the civil servants never let the suggestion get anywhere near Mr Duncan Smith.) Also, he let his officials persuade him that they needed a £1 billion real time income notification system to deliver the new benefit. Clear nonsense – and given the government’s record on delivering big IT projects, a pretty big concern.

But let’s not be churlish. Mr Duncan Smith, the “Quiet Man”, has been making a big hash of explaining the new system, but the system will actually be an improvement on the old one.

A Universal Credit would be at the heart of a sensible benefits system. The difference would be that it would be paid in full to all claimants, and clawed back when people started earning, via the income tax system.

Care of the Elderly

There has been a great deal of cant about this recently. The biggest nonsense has been talked about funding old people’s homes. The government (and the previous one before it) have been trying to prevent people having to sell their homes to pay for “care”. Who gets hurt by those sales? The elderly people themselves? No way.

Their heirs are the ones who are upset, because they don’t get to inherit their parents’ house. A big raspberry to them. If they want the cash, they could of course consider looking after their elderly mums and dads themselves. If they want an old people’s home to do the work instead, and their mums and dads have big assets, then why should taxpayers fund the protection of the kids’ inheritance?

Pensions

On pensions, the elephant in the room is the lie that has been at the heart of the old age pension system ever since it was introduced. The system pretends to be a funded pension scheme. You pay into a “national insurance account” and get your pension as a result of entitlements built up by these payments.

But the truth is that these “funds” never existed. They were grabbed by the government from day one to pay the pensions of current pensioners.

What this means is that the idea of the old age pension as a “contributory benefit” is basically a lie. It is funded out of tax, and national insurance is really an additional income tax.

So why not simplify the system by merging income tax and NI? (As UKIP have proposed by the way, and as the government is creeping towards doing.)

So a sane welfare system would pay a basic pension to all, a credit to poorer pensioners, and tax people’s private pensions. In other words, a sane system would treat pensioners exactly the same as working-age benefit claimants – with a Universal Credit, and withdrawal via the income tax system. The only difference would be that pensioners would not be expected to be “available for work” to qualify for the benefit.

Immigrants

Of course a sane welfare system would not pay benefits to EU immigrants as soon as they land in the UK. A sane welfare system would not pay child benefit to Polish or Latvian immigrants for children who still live back home in Poland and Latvia.

Sanity of that kind would, of course, mean leaving the EU. So it is anathema to the establishment political parties.

Welfare Reform – and the Philpotts

Any welfare system is always a balancing act – between providing support to the poor to prevent their becoming destitute, and not providing enough for it to be a lifestyle choice to remain on benefit.

The Conservatives – in their guise as the nasty party – often rant on about the problems being the claimants’ fault. George Osborne was at it again today, in response to the awful Philpott murder case:

Mr Osborne was yesterday asked during a tour of a brewery in Staffordshire whether he thought the Philpotts were indicative of the type of people on benefits in the UK.

“I think the question for Government and society, if you like, is a broader one about the welfare state and a question we ask on behalf of the taxpayer about whether we should be subsidising these kinds of lifestyles,” the Chancellor said.

No, Mr Osborne, “these kinds of lifestyles” really are not typical of welfare claimants.

He got enthusiastic support from Tory MP Priti Patel, though, who said:

I completely support George Osborne’s comments. We are at a stage where society has to look at the way benefits are used and abused.

The Philpott case typifies that and it is absolutely legitimate to ask these kinds of questions.

No, Ms Patel, the Philpott case does not typify Britain’s welfare claimants at all. It was an extreme case of ghastly evil, and it is pretty rum to suggest that abuses like theirs are widespread – or to hint that everyone on welfare is morally repugnant.

Reform

What we need is some serious thought about reforming Britain’s creaking welfare system, not cheap political point-scoring. All credit to Iain Duncan Smith that, unlike most Tories, he doesn’t seem to indulge in it.

Perhaps a future government will build on Mr Duncan Smith’s Universal Credit to create a genuinely sane and fair welfare system, that provides a safety net for the poor without bankrupting the rest of us. In other words, perhaps a future government will build on Mr Duncan Smith’s work to return us to the principles of that original welfare system envisaged by William Beveridge.

Would You Like Left or Extreme Left?

 

Tax
Image by 401K via Flickr

Help Yourself – But Please Don’t Take More Than £26,000

The Alice in Wonderland nature of our politics has been exposed again today.

The Government wants to restrict the total benefit available to a household to £26,000 per year. That is, apparently, the average wage earned by working households after tax.

Now you might think that quite a modest proposal. Households on benefit are living off other people’s taxes. Stopping such households getting more in benefit than the AVERAGE taxpayer household is getting in wages, sounds pretty tame. It will apparently affect only 67,000 families.

In fact, in a sane world, we would be arguing about why the Government did not go further. Perhaps capping benefits at the minimum wage for example. The minimum wage is £6.08 per hour, or £12,646 per year. You would need two earners on the minimum wage to equal that proposed £26,000 cap – and that’s before taking into account the taxes they would pay.

Many millions of people in this country will be angry today at the very idea that there are 67,000 households getting more than £26,000 per year of other people’s taxes.

Labour, however, were against the proposal for other reasons. They thought it too tough. They backed an amendment proposed by some Church of England Bishops who wanted to exclude child benefit from the calculation.

That amendment would in effect increase the cap to £50,000.

It would be hard to find a more telling signal that the Church of England does not care for decent hard-working poor people, struggling to pay their taxes.

The Lords overall passed the amendment. Iain Duncan Smith, who seems to be one of the few sane people in our politics, has vowed to reverse the decision in the Commons. We must hope he succeeds – but we must also recognise that this measure can only be a very small start in the process of slashing back the welfare state. Britain’s taxpayers have had enough.

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The Riots – Iain Duncan Smith Is Tackling the Causes

 

Discussing welfare reform with Sainsbury's staff
Image by the Prime Minister's Office via Flickr

Iain Duncan Smith Discusses Welfare Reform with Sainsbury’s Staff

The BBC today reports a study by the LSE for the Guardian newspaper into the summer riots.

The study interviewed 270 rioters to try and understand why they took part in the rioting.

Their conclusion is that it was above all “anger at the police” that drove the rioters.

Of the 270 people interviewed, 85% said policing was an “important” or “very important” factor in why the riots happened.

They repeatedly expressed frustrations about their daily interactions with the police, saying that they felt hassled, bullied and complaining that they were not treated as equals.

Seventy per cent of the rioters said they had been stopped and searched in the last year.

And time and again interviewees described the violence as a chance to get back at the police.

Well, if 70% of the sort of people who get involved in riots were stopped and searched during the previous year, it seems at least that the police stop and search is targetting the right people. Is it really surprising that the sort of people who are happy to smash shop windows and loot the contents have little respect for the police?

It is, I suppose, also not surprising that the Guardian would seek to blame rioting on the police. The BBC article duly drones on about “police tactics”.

The results of this survey actually go much deeper than that.

The police are a symbol of the society in which the rioters live. The rioters are, in fact, alienated from the whole of society, and not just from the police. At the time of the riots, well-meaning chattering class types spent a lot of time wondering why anyone would choose to smash up their own communities. I suspect the people involved actually do not think of those places as “their” communities, any more than they think of the police as “their” police – as people in more peaceful kinds of places normally do.

The reasons for the alienation are many, and go back ultimately to what the Prime Minister has described as our “broken society”.

The dynamic is one of broken homes, families without fathers, and a culture of welfare entitlement. The latter goes with the rest of it. In normal societies, people see a link between work, income and providing for your family and yourself. Never mind if you are “only” a shelf stacker at Tesco – if that job provides the money that feeds your kids, then your life has a worth and value, and you can derive a pride and a place in society from that.

Socialists will say that there are no jobs. The truth is different. Companies cannot get the employees they need, and sometimes prefer immigrants to local people. Why? Because the local people have the wrong attitude. They don’t really want those jobs. Why not? Because in their minds, there is no connection between the obtaining of possessions including necessities like food, and working. Food is a right; a job is just an alternative way of obtaining it.

If all material possessions come from State handouts by entitlement, then the connection between obtaining those things and working for them is broken, and one of the bonds that hold families together is broken.

If a father (or indeed a mother) is not responsible for the material well-being of their children, because the State provides, then one of their key roles in the family is removed – indeed, one of the purposes of the family itself is removed. The State has then usurped the role of the family, but carries out that role without any love or personal involvement, according to bureaucratic processes and forms.

In turn, fathers especially become irrelevant – mothers supply love and the State supplies money. That’s fine – until the kids grow up and notice that the people who do work have more than they do.

If all that you have comes from a State handout, it is easy to believe that possessions and material wealth are an entitlement rather than something to be earned. If you then see other people who have much more than you, you will see that as unfair. You will not imagine that those other people’s material well-being came from working for it; you will believe it came from an unfair decision to award those other people extra that you don’t have.

And then the problem spreads out. Those from better backgrounds see “welfare scroungers” getting handouts from the State, while they, who work for a living, get none and pay high taxes to boot. They too get the message that society is unfair, that there is no connection between the work they do and the possessions they have or even their ability to obtain the necessities of life.

In turn, their commitment to the rules that bind us together as a society is weakened. They may even find themselves deciding that if those scroungers have big-screen televisions – whether through rioting or otherwise – well then, they who work should certainly have the same.

Finally, of course, one of the prime functions of the police is to protect property, and to protect society in general. If society is unfair, and the possession of property is allocated at random, then the police automatically become an agent perpetuating the unfairness.

This problem is not a policing problem. It goes much, much deeper. We have a very nasty underclass, especially in our inner cities, for whom society and community mean nothing. That is not their fault. They have grown up amidst the wreckage caused by the decline of morals, religion, the family and everything that holds our society together. But the root cause, the very root cause, is the welfare state itself. For too many people, it has destroyed the link between work and material possessions, destroyed the family and destroyed the bonds that hold communities together.

It is easy to be pessimistic, to give up and say that our society is in terminal decline, as many on the Right do. It is also easy, as the Guardian and many on the Left often do, to go for glib and quick answers like blaming police tactics.

Neither of those has much appeal for me. Let’s at least try and sort this mess out. We need to get the Left to understand that their welfare state has caused these problems. We also need to get the Right to understand that simply writing off the underclass, and using force to keep them under control, is a recipe for ultimate collapse.

I do not belong to his Party, or even support it, but listening to Iain Duncan Smith in many interviews, I believe he understands what needs to be done, and is trying to make a start doing it.

His welfare reforms will not tackle the hard core of disaffected youth who took part in those riots. But they will start to nibble away at the margin, at the edges of the problem, encouraging people on the edge of worklessness to get out and work – and ultimately it is the concept that people need to work for a living that will stop future riots.

It is a bit like “no tolerance” policing. If you always tackle minor crimes like vandalism, you end up with less murder and armed robbery. Similarly, if you can nudge a few people to get out and work who would otherwise be on the dole, the core problem will diminish. It is social pressure to work that gets people to work instead of scrounge; the more people are out at work, the greater that social pressure will be.

In future, the government (of whichever party) will need to build on Mr Duncan Smith’s plans and go much further. The Guardian will not like that, and they will rant against it, but it is the only way to put things back together again. “Making work pay” has been a slogan of both parties for years – but truly making work pay actually means making not working not pay. And that is the hard part.

We should therefore support those reforms. Sure, there is a much simpler way to do the means testing, via the tax system, and the civil service petty turf wars between the Deopartment for Work and Pensions and HMRC stop that even being considered. Sure, as a result of that, Mr Duncan Smith’s civil servants have told him they need a massive new IT system to implement the reforms. But the reforms are the first attempt since the War to do what needs to be done.

Mr Duncan Smith is in the front line, fighting against the greatest problem of our age – greater even than the government deficit. We should be in the trench beside him.

What Would a Sensible Social Security System Look Like?

Income tax
Image by alancleaver_2000 via Flickr

Iaian Duncan Smith is the Government’s Work and Pensions Secretary. He has been pushing through a major reform of social security benefits. He deserves huge credit for persisting with that, against much scepticism and even Treasury opposition.

Most of the existing benefits will be swept away, and replaced by a single “Universal Credit”. This credit will take into account your personal circumstances, and will be reduced as your income rises.

The idea, basically, is to drastically simplify the system, and also to ensure that the bizarre twists of the current system are eliminated. That single taper rate will ensure that everyone who earns a bit more, or who earns a little when they earned nothing before, will keep at least some of the extra they earn. In turn, that should improve incentives to work and support your family.

So far so good. The reform is one I strongly support, as far as it goes.

However, there is still one problem with this new system. The new benefit will depend on your income. That sounds innocuous, doesn’t it? Of course, those who earn more should get less benefit, right?

The trouble is that this means the social security system needs to assess the income of every claimant. Of course, they have been doing that before, after a fashion, with the current dog’s breakfast of a system. But it makes no sense. Claimants who earn as well as receiving benefits end up having their incomes assessed twice – once by the social security office, and again by HMRC’s PAYE income tax system. Mr Duncan Smith’s reforms will not change that.

Because there are two systems whose treatment of claimants depends on their income, those systems can interact in unpredictable ways. It is perfectly possible for somebody with an income of £40,000 a year to have a marginal tax rate of over 80%. (In other words, for every extra pound they earn, the government takes 80p.)

Somebody else earning a great deal more may be paying not much more than 50% of every extra pound they earn, even with the top rate of income tax at 50%.

The rates can be very high, because people can pay more tax and lose benefit, when they earn more.

The other obvious issue with the whole approach is that the administration involved in assessing incomes is being done twice – once (fairly efficiently) by HMRC and again (pretty shambolically) by the social security system.

It is even worse with the current system. In the current system, tax credits are paid by HMRC. So HMRC, incredibly, assess your income twice – once for income tax and again for tax credits. And anyone claiming benefits also goes through a social security department assessment. Mr Duncan Smith’s new system will at least mean incomes are “only” assessed twice.

Iain Duncan Smith’s civil servants have told him that it will take ten years to introduce his reforms. One of the reasons for that is that they want a “real time” income information system installed at HMRC to tell them about every fluctuation in people’s incomes. They need that in order to assess incomes properly for the new Universal Credit.

That will be a £1 billion IT project in the public sector. Good luck with that one.

It could be so much better, and so much simpler.

The better system is based on one simple idea. It sounds like a foolish idea at first glance, but once you get your mind around it, everything falls into place.

The idea is this: pay the benefits to everyone regardless of income. Call it a Truly Universal Credit.

You may be coming up with two objections to this:

1. That would be very expensive. You would be paying benefit to millions who don’t currently receive it.

2. That would mean loads more admin. You would be paying benefit to millions who don’t currently receive it.

The first of those objections is easily dealt with. You would reduce or abolish the income tax personal allowance. This allowance effectively acts like a benefit anyway. Anyone who pays tax, then, would end up getting the new Truly Universal Credit but pay more tax (because they would lose their tax allowance). Overall, they would not be either better or worse off.

The second objection is also not what it seems. True, you would be administering the payment of the new Truly Universal Credit to everyone who currently does not claim a benefit. However, most people do actually already claim benefits. You might think you aren’t a “benefit claimant”. But do you claim child benefit? Or tax credits? Both of those would be rolled into the new Truly Universal Credit.

And of course any extra admin would be completely swamped by the key advantage of this system: the social security system would no longer need to assess incomes. And that, in turn, means no new £1 billion “real time incomes information system”, as well as huge savings on administration in the social security system, and greatly reduced scope for fraud.

Think of the new Truly Universal Credit as a kind of extended child benefit. Child Benefit is extremely simple to administer, and consequently has an extremely high take-up rate and hardly any fraud. (George Osborne, of course, wants to put a crude means test onto it, but that’s another story.) Effectively, you would have a system like the Child Benefit system, but paying out for adults as well as children (and obviously paying much larger amounts, since the amount would be intended to be enough to live on for the unemployed).

The social security system would pay out this simple benefit to everyone, regardless of income. And HMRC would tax incomes, thus ensuring the means testing of benefits as well as the taxing of high earners.

It’s a top idea. Of course, I am not clever enough to have invented it. It’s not really called the “Truly Universal Credit”. It is really called the “Citizen’s Income”.

You can read a lot more about it on the website of the Citizen’s Income Trust. A reform of this kind is the policy of UKIP, as well as, for what it’s worth, the Green Party.

Let’s hope that Iain Duncan Smith’s decision to go for the “Citizen’s Pension” means he is also thinking about the “Citizen’s Income”. It is not too late for him to adopt it in place of his half-baked reforms. Those reforms are likely to be a disaster as they stand – that £1 billion IT system will be well over budget and years late and will probably run into privacy and security concerns, and the reforms will be delayed…and delayed…and delayed…and won’t ever happen.

The civil service loves inertia. It loves stopping politicians changing things by submerging them in this kind of treacle. A move to a Citizen’s Income would cut through all that, and give us a social security system that would be fit for the 21st Century.

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The Citizen’s Pension

Iain Duncan Smith, British politician and form...
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Iain Duncan Smith – On the Right Lines on Pensions

The BBC, along with most of the media, seem to be rather confused about pensions.

Iain Duncan Smith is putting forward very sensible suggestions to replace the current basic state retirement pension, and the means-tested Minimum Income Guarantee (copyright G. Brown) with a larger non-means-tested pension. There has been a rumour that could be around £140 per week for a single person, compared with under £100 per week for the current basic state retirement pension.

As well as not being means tested, the new pension would not depend on national insurance contributions.

The BBC reckons:

The big driver is the greater opportunity it offers those who have stopped work to look after children – usually women – who have not built up enough National Insurance qualifying years under the current system.

This is complete nonsense, in fact, since women with children under 12 already get national insurance credits assuming they claim child benefit. (This was introduced last year – before that there was a similar but rather more complicated system called Home Responsibilities Protection.)

The real significance of the proposals are that they would almost completely destroy the case for having national insurance contributions as a system separate from income tax. In this they would take a small step towards the UKIP proposal to merge income tax and national insurance into a single tax.

There are, of course other benefits – much lower administration costs, elimination of the problem of eligible people not claiming their minimum income guarantee, and better incentives to save.

The BBC reports that

Michelle Mitchell of Age UK welcomes the plans but says it is unclear who the winners and losers would be.

Labour’s Rachel Reeves obviously heard that comment, as she said:

Labour supports a fairer, simple state pension system. But we want to see the detail – who will be better off and who worse off under this system?

which is quite amusing, really, considering Gordon Brown introduced the current system as Chancellor in the last Labour government. Obviously, though, to the Official Opposition (not to mention Age UK), what matters is winners and losers. There are votes in losers, after all.

IDS is on the right lines here. One day he might even consider whether what is right for the retired might also be right for the rest of us, and seriously consider the citizen’s income.

There is one other little-noticed fact about the proposals by the way. They would mean that relatively recent immigrants, provided they met residency tests, would get a British State pension. Expect the BNP to make hay with that one.

>>> Update: the details of the proposals have now been published. Contrary to the media reports and government leaks over the last few weeks, the new pension will still be dependent on National Insurance contributions. The only difference from the current system is that Gordon Brown’s means-tested “pension credit” (minimum income guarantee) will be paid to all without means testing. All this means that migrants will not be entitled to the new pension.

It also does indeed mean that all those media reports were complete nonsense since this has nothing whatever to do with national insurance contributions.<<<

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Welfare Reform Proposals

Iain Duncan Smith, Secretary of State for Work and Pensions, Wants Your Views

The government has issued a Consultation Paper on Welfare Reform. It sets out some principles and asks whether they are right – but then it actually asks for suggestions. Quite a welcome departure from the government consultations we are used to, which are usually along the lines of, “Here’s a proposal. Do you support it?”, with the government intending to ignore the response.

Mark Wadsworth did a couple of blog posts on the subject (and thanks to Mark for drawing my attention to the consultation – it hasn’t exactly been well publicised).

The government’s paper basically sets out a pretty good summary of everything that is wrong with our welfare system (complexity, cost, destruction of incentives to work with very high marginal effective tax rates often well over 90 percent, unfairness and so on). It sets out some rough principles for reform, and outlines a number of generally similar approaches to it.

The paper asks for views on the suggested approaches, and suggestions as to how they might be implemented.

Both Mark and I liked the idea of a Universal Credit with Single Unified Taper.

Universal Credit means that a whole range of existing benefits (Income Support, Jobseekers’ Allowance, Child Tax Credits and Working Tax Credits, Child Benefit, Employment and Support Allowance, Housing Benefit and Council Tax Benefit) would be amalgamated into a single credit. The credit would assess your “needs” based on number of children, disability and so on (but not income) and arrive at a benefit figure.

If your income was zero, you would get that benefit. As your income rose, the benefit would be cut at a single unified rate (the single unified taper). That would be in contrast to the current system, where multiple benefits are cut as your income rises, leading to high marginal benefit withdrawal rates.

Mark suggested that this could be accomplished via the PAYE system as follows:

Claiming the Universal Credits is entirely optional, but if you do so, the total value of your UCs (including a notional amount for social rent/Council Tax) is divided by 31% and deducted from your £6,475 personal allowance to give a negative PAYE code (aka K-code). The PAYE deducted from your salary is then the lower of a) 50% of the cash salary or b) 31% of [the cash salary plus the K-code]. These are tried and tested PAYE rules already in existence.

As a simple example, single adult claims £65 per week UC, divided by 31% = £210. This is deducted from the weekly personal allowance of £125 (£6,475 divided by 52) to give a (weekly) K code of £85, and our hero earns (say) £130 per week. The tax deducted is the lower of £65 (50% x cash salary) or £67 (31% x [cash salary + £85]).

In other words, at that level of earnings (£130 per week or £6,760 per annum) the UC received and the PAYE deducted net off to nothing, this is the effective personal allowance (although not the official one – it would be helpful if the two were aligned).

If our hero earns more than £130 a week cumulatively over the course of the year, then his marginal tax rate falls back to 31%, but if he is sure that he will consistently earn more than that, he might not bother claiming the UC and just use his tax-free personal allowance instead.

The key part of this proposal, basically, is to do the tapering via the PAYE system rather than having the Department for Work and Pensions assess income and take it into account in the UC payment. The proposal would mean that the DWP would not need to take income into account in their UC calculations!

I left a comment on his blog saying that I seconded his proposal. And I still think it’s a great idea.

I have been thinking a little more about it though and I think there are three problems with Mark’s scheme that would need to be overcome.

Problem 1

Benefit entitlement is assessed on a weekly basis. But income tax is assessed on a yearly basis. Imagine someone is out of work for the first six months of the tax year. They then take a job that pays £30k, so they earn £15k in the second half of the year.

In Mark’s system, they would have a negative tax code designed to claw back UC for the year based on income. But the PAYE system would claw that full year’s UC back from six months of income. That wouldn’t be correct, because that person should keep their first six months of UC – at that time their income was nil.

Problem 2

Emergency tax codes. At the moment, if you move from one job to another and don’t get your P60 before you move, your new employer will tax you on an emergency tax code. This effectively gives you no personal allowance and simply taxes you at a flat 20 percent rate. For most people, this ensures that they pay too much tax, and they get the overpayment back when they get their proper tax code.

With Mark’s system, though, someone claiming the UC would be properly taxed at a much higher rate, maybe 50 percent (to taper the UC payment). So the emergency tax code would result in a tax underpayment.

Problem 3

The UC benefit entitlement is designed to be per household and not per individual. (There is room for debate on whether that is a good idea, but that is the intention that the government’s paper makes clear.)

The tax system, though, is per individual. Imagine a woman claiming UC whose income is £3k per annum. Imagine that her husband earns £100k per annum. If the tax code adjustment is made only for the woman, then she will lose only part of her UC because of the lowness of her income – despite the fact that her household income is huge.

This would mean that adjustments would be needed to the tax system so that her husband’s tax allowance could also be adjusted. This is not straightforward, because the amount you would need to take off her husband’s income would depend on her income. So her husband’s tax code would need to depend on her income. The whole point of tax codes is that they don’t depend on income! And all this would become extremely complex if both husband and wife were on low and fluctuating incomes.

Solutions

How to address these concerns?

My suggestion to get around Problem 1 is a slight revision of Mark’s scheme. There is a tax that is levied weekly rather than yearly, namely National Insurance. Therefore my suggestion is that the UC should be clawed back by employers via National Insurance and not via Income Tax codes. Simply put, the tax office wouldn’t just issue a tax code for each employee. They would also issue a “UC Claimant” flag that would cause the employer to levy a higher rate of NI on the first part of that employee’s income.

Because NI already has a “lower earnings limit” there would be an income disregard built into the system automatically. (An earnings disregard is something the government paper says it wants to have in the system.)

This solution also helps with Problem 2. Emergency tax codes would continue to work as they do now. Employees would simply need to tell their new employers if they were not claiming UC. Otherwise the employer would deduct the higher rate of NI.

Problem 3 is the hardest, and difficult to resolve unless you move to benefits that are, like the tax system, assessed on an individual rather than household basis – or of course move to a more radical full Citizen’s Income idea. At this point I confess I’m stumped. Any ideas, anyone?