fiscal policy

The Curious Appeal Of Basic Income

Samuel Hooper8 Comments

basic income 1

 

What if the state stripped away the whole confusing, tangled web of benefits, allowances and tax credits, and replaced them with a fixed weekly government payment to every UK citizen, set according to age and regardless of wealth or employment?

What if an annual stipend of £3,962 for every British adult was the price of ending the endless debate and inaction about Britain’s broken welfare system?

This is the utopian future envisaged by The Citizen’s Income Trust, an organisation that generates ideas and policies around the concept of a guaranteed universal minimum income, or basic income, for everyone – no exceptions.

The New Statesman reports:

The Trust proposes a radical reform of the national welfare system, suggesting the annual spend on benefits should be distributed equally among all citizens, regardless of their income or employment status. Under their proposals, 0-24 year olds would receive £56.25 per week, 25-64 year olds would receive £71 per week and those 65 and over would receive £142.70 per week.

Analysing figures from the 2012-13 financial year, the cost of such a scheme is projected at around £276bn per year – just £1bn more than the annual welfare budget that year –making the implementation of a citizen’s income close to revenue and cost neutral.

Disability and housing benefits would remain intact, but the scheme would replace all other benefits including child benefits, income support and jobseeker’s allowance, national insurance and state pensions. Included in the current annual spend figures is £8bn in Department of Work and Pensions (DWP) administration and £2bn in HMRC tax credit administration and write-offs.

The idea is of particular interest because it is almost revenue neutral. Conservatives and libertarians might argue that the current welfare bill and resultant tax burden is far too high as it is, and that switching one expensive system for another of equal cost would be of no fiscal benefit. This may be true. But it is also the case that four years into a Conservative-led administration, little has been done to effect root-and-branch change of Britain’s welfare system. If not now, when will it happen? Is our current position really the high water mark of what conservatism is able to do to change Britain’s expensive but largely ineffectual system?

An exception must of course be made for Iain Duncan Smith’s Universal Credit programme, which promises to accomplish at least some of the same goals as the Citizen’s Income Trust by streamlining welfare payments into a single payment, calculated by a fiendishly complex formula, designed to ensure that there is a constant financial incentive at every point for citizens to switch from welfare to work when they are able. But Universal Credit doesn’t begin to touch pensions, which remain unreformed and very much the unspoken third rail of British politics. Neither does it address Gordon Brown’s toxic legacy of tax credits, which are essentially government subsidies to business to create more low-paid jobs.

Battle-weary conservatives and libertarians such as Semi-Partisan Sam, long used to a hostile climate for their views, might be forgiven for thinking – with the Cameron government’s popularity at an ebb and with Ed Miliband’s unrepentently unreformed Labour Party ahead in the polls – that the battle for shrinking the state has been lost, and the only scraps left to fight over are questions of how we administrate the massive bureaucracy of redistribution.

Here lies the advantage of the Citizen’s Income Trust’s proposal. The fact that such a radical change wouldn’t cost the treasury any more money forces us to focus not on the costs, but on the other benefits and disadvantages of transitioning to a universal income society. What would be the effects on motivation and incentive to work if the government provided such a floor below which no citizen could fall, unlike the current system of benefits which requires active and continual petitioning on the part of the claimant? And what are the broader moral implications?

A recent article by Noah Gordon in The Atlantic walked through some of these issues as they pertain to the United States, and outlined the beginnings of a conservative case for what they call “guaranteed basic income”:

Apart from lifting millions out of poverty, the plans promote efficiency and a shrinking of the federal bureaucracy. No more “79 means-tested programs.” Creating a single point of access would also make many recipients’ lives easier. If they knew they had something to fall back on, workers could negotiate better wages and conditions, or go back to school, or quit a low-paying job to care for a child or aging relative. And with an unconditional basic income, workers wouldn’t have to worry about how making more money might lead to the loss of crucial benefits.

These are all undeniably advantages that would aid, not hinder, the workings of a lightly regulated labour market such as those in the UK or US. One of the main problems for those on low incomes is that there never arises an opportunity to save and create a personal safety net in case of misfortune. In these circumstances, unforeseen events such as illness, unemployment or even an unexpectedly high bill can lead to disaster, a precipitous drop in living standards, and a return to benefits in an endless inescapable cycle. A basic income would at least do away with this honey trap that keeps so many people mired in poverty.

But a guaranteed minimum income would also perpetuate the scourge of the universal benefit. As the Conservative-led coalition government found when it tried to cap child benefit for higher income earners, there is often huge resistance when something once available to everyone is suddenly means-tested or restricted in any way. But unlike most of the commentary that suggests the solution is not to means-test at all, the problem was that people unneeding and undeserving of a financial benefit were ever receiving it in the first place.

When child benefit was capped in 2012, families with a single earner earning £60,000 or more per year lost the benefit, and the fallout was significant – people still cite the benefit cut high in their reasons for dissatisfaction with David Cameron and his supposed contempt for the Conservative grassroots. Of course, the conservative grassroots should never have been content to pay higher taxes in exchange for getting a fraction of their money back through a universal benefit anyway, but this shortcoming was widely overlooked.

Everyone squeals when a universal benefit is taken away, even when the payments are only subsidising violin lessons, wine club memberships or second holidays abroad. And the fact that a payment intended to help with the purchase of essentials such as children’s clothing or nutritious food is co-opted by the middle classes and those on upper incomes to subsidise luxuries speaks to the tremendous waste that such benefits represent.

The one other area where a minimum universal income holds some appeal is the fact that it attempts to reward work and contributions which are not recognised by the market. From the New Statesman:

A citizen’s income also helps compensate for people’s non-financial contributions in a society and culture such as caring for children or elderly parents, undertaking voluntary work or pursuing hobbies and creative interests. Given the safety net of a small guaranteed income, there’s more room for career changes, education and enterprise projects too.

This side of the argument is one too often overlooked by those on the right. Of course it is right and proper that conservatives should support and defend the role of the free market in Britain – that much is crucial. But sometimes – perhaps forgivably, since the free market is under such constant attack by so many voices on the left – we can overlook the fact that the market does not account for everything, and that there are externalities to be considered too.

At present, negative externalities such as environmental pollution or the social harm caused by bad parenting are inadequately accounted for, if at all. Just because it is difficult to apportion costs to such things doesn’t mean that we are granted a licence to throw our hands in the air and make no attempt – but time and again, this is what we do. Therefore, there is some argument that a minimum income could address this shortfall, though it would certainly be a very blunt instrument with which to tackle a problem that likely needs more surgical – or radical – intervention.

As Gordon writes in The Atlantic:

Yet the effort to create a reform conservatism and reconstitute the GOP as the “party of ideas” seems to demand contemplating legitimately radical new ideas on welfare reform.

Radical thinking is certainly required, in Britain as well as in America. If Iain Duncan Smith’s Universal Credit experiment ever actually rolls out on a significant scale and beds down sufficiently that it cannot be immediately unpicked by an incoming Labour administration, then this might be the start of a different radical solution. But at this point, it seems equally likely that Universal Credit will collapse under a mountain of bad headlines, negative spin from Labour and the ubiquitous government IT contract failures that seem to blight any ambitious effort of any scale. If this becomes the case, could a future British Conservative government turn instead to universal minimum income as an alternative?

The view of this blog is that a basic or universal minimum income should indeed be considered in the event of the failure of Universal Credit – though a higher payment incorporating (and doing away with) housing benefit, making it a truly single payment, would be preferable to the model proposed by the Citizen’s Income Trust. Arriving at this viewpoint requires the realisation that the libertarian ideal is not achieveable in modern day Britain, at least not in the short to medium term – there are simply too many people beholden to the idea of a big, activist state.

But in proposing a basic income, conservatives and libertarians can at least make all of their concessions in one unpalatable gulp. Subsidising those who choose not to work may be distasteful, but it is a concession that has to be made only once, as opposed to endless tweaks and patches to a leaking and inefficient welfare system with numerous defined benefits. The mere fact that the dull debate about the extent and cost of benefit fraud would be eliminated at a stroke is in itself almost enough of a reason to support the idea.

Accepting a basic income could thus be acceptable, and even desirable,  if concessions were won from the left ensuring that other regulations (particularly in the labour market) would be reduced commensurately, leading to a more flexible labour market and a more competitive economy. The left can have their cherished goal of a safety net and minimum guaranteed standard of living below which no citizen may fall, but only if the right can have their prize of light-touch regulation throughout the economy. And as with all the best political deals, both sides could legitimately claim victory.

The Swiss will be the next to decide on whether or not to adopt a guaranteed basic income for all citizens. Theirs will be an interesting test case. But opportunities could soon arise for the radical policy to find its way into the manifestos of Britain’s main political parties – Conservatives in the event that they lose in 2015 and are forced to return to the drawing board, Labour if Ed Miliband decides to actually stand for something at the election, and even UKIP as they seek to square the circle and please their newfound ex-Labour supporters while retaining the backing of their energetic conservative-libertarian wing.

Of these, UKIP would seem the most likely buyers at present. Nigel Farage’s party need a strong narrative to cling to as their core messages on the EU and immigration tumble down the list of voters’ priorities in the general election campaign. What better way to eclipse the shambles of their 2013 party conference than to storm out of the gate with a bold policy proposal that could unite both left and right, whilst simultaneously wrongfooting the two legacy parties?

If we cannot have our libertarian Jerusalem in England’s green and pleasant land, perhaps we could at least be partially satisfied with the curious compromise of universal basic income.

Comment Is Free, But Death Could Soon Get Pricey

Samuel HooperLeave a comment
One day, Timmy, all of this will be seized by the government to stop you from gaining an unfair advantage in life
One day, Timmy, all of this will be seized by the government to stop you from gaining an unfair advantage in life

 

Never mind tinkering around the edges and tweaking the rates for inheritance tax or the level at which it takes effect – those arguments are so 2013. The real movers and shakers of the left are now questioning the right of anyone to pass on anything to their children at all, and their self-appointed spokesman, James Butler, has taken to the Comment Is Free pages of The Guardian to argue his case.

In high dudgeon, Butler points to several universally-acknowledged flaws in society, wildly extrapolates from them and reaches the conclusion that we would all be much better off if parents were actively discouraged from working hard and getting ahead for the benefit of their children. Apparently, goes this argument, the natural human instinct to provide for one’s offspring should be forcibly curtailed by government in order to ensure a strictly level playing field for everyone – and what is more, the government should have the right to enforce this usurpation of property rights:

Why do we permit this? The transfer of wealth between generations is an injustice: it is a reward for no work, and a form of access to privileges that are otherwise beyond reach.

The ‘we’ that are permitting this is never fully identified by Butler, but appears to consist of himself, his friends and others of a similarly cataclysmically communist bent. Butler clearly does not start from the basis that the people determine the powers that government may wield, instead approaching the issue from the basis that government should decide which powers and rights to grant the people. And to Butler’s mind, free agency and the ability to do what you like with your own assets is a liberty too far:

Far from a Keynesian “euthanasia of the rentier”, we are seeing the triumph of a rentier economy: in such conditions, rather than further accumulation by the sons and daughters of the wealthy, we should instead demand an end to inherited wealth entirely.

An end to inherited wealth entirely. Quite how such a policy would ever be implemented remains conveniently unmentioned by Butler, but would clearly happen only over the dead bodies of the thousands and millions of people who believe in the right to pass on to their children that which they have built or preserved during their lifetimes, to do with as they see fit.

None of this is to say that Butler does not hit on some of society’s ills; indeed, he is quite right to point out the fact that too many people in Britain are born with almost impossible odds of achieving success in life, whilst for children of privilege, failure is next to impossible. He detail many of the ways in which this problem perpetuates itself in a way that is impossible to refute:

Despite nominal efforts to curb this kind of [tax] minimisation, there remains a booming market in financial advice tailored to avoidance. The knock-on effects of this minimisation are huge: it permits further concentration of wealth in the hands of those who already possess it, rewarding those cunning enough to avoid taxation, and cushioning their children with an influx of unearned wealth. There are obvious uses to which this can be put: paying off student loans early, thus avoiding interest, investing in buy-to-let property, or high-return financial products. It permits the children of the middle classes to sustain themselves through unpaid internships or unfunded study into secure middle-class careers, while locking these off from those without such resources.

The diagnosis is spot-on, but the prescription that follows is barking mad. And as is all too often the case with solutions from the left, Butler seeks a remedy by tearing down the successful or privileged rather than building up the weak or disadvantaged. He legitimately seems to believe that Britain’s societal ills can be cured if the counter is reset to zero as each generation expires, with all of the winnings confiscated by the government and scooped into a big pot for the communal good.

Neither does it occur to Butler or other death tax proponents that the human brain and spirit – if given an adequate starting point via a good quality education, a safe upbringing and ambitious goals – is capable of outmatching and overtaking others born with far more advantages but much less motivation or natural ability.

So here is a different prescription: what if Butler and others of his persuasion placed more trust in human ability properly nurtured, and less reliance on the government to be the final arbiter of who gets to keep what when the music stops at life’s end?

Not all rich and wealthy people achieved their favourable position in life through the fruits of their own talent and labour – this is abundantly and indisputably clear. But equally, not all poor or less successful people arrived at their less favourable position because of a lack of resources and opportunities.

So why do people like James Butler and his inheritance tax-supporting friends on the left continue to clamour for a one-size-fits-all remedy to a complex problem?

Bold Proposals On Tax, Ignored By Cameron

Samuel HooperLeave a comment

taxcuts

 

As more people come out in support of scrapping the 40% tax band – or doing something, anything that might alleviate the pinch on middle income earners – David Cameron remains resolutely set against the idea.

This time, it was the turn of one of Cameron’s own No. 10 Policy Board members, Nadhim Zahawi, to advocate for 800,000 people caught up in the fiscal drag which has seen them start paying the 40% rate on their marginal income in the last three years.

The Telegraph reports:

Mr Zahawi on Wednesday praised plans by Renewal, a Tory pressure group, to abolish the 40p rate entirely and deliver a tax cut worth £2,000-a-year for 2 million middle class workers. 

Under the proposals, the move would be funded by lowering threshold for the 45p rate from £150,000 to £62,000. 

In a speech at Policy Exchange, a think-tank with links to the Conservative Party, Mr Zahawi said: “It is a welcome development that Conservatives have started to seriously debate where next for income tax. 

“Labour have the 50p, the Lib Dems have the mansion tax, we need our own iconic tax policy. I think Dave Skelton’s [from Renewal’s] contribution, and his suggestion that we abolish the 40p rate and pay for it by lowering the 45p rate was a great way of starting the conversation.”

Renewal’s plan is not perfect – £62,000 seems far too low to impose what is a very high top marginal rate of 45%, for instance. Nor is the idea of making an ‘iconic’ tax proposal just to have a handy catchphrase with which to compete with Labour and the Liberal Democrats redolent of good policymaking or government.

But this is a problem that affects people up and down the income scale, and the idea of giving some relief to those slightly higher up the scale deserved more than the immediate dismissal that it received from David Cameron. As the Telegraph continues:

Mr Cameron on Wednesday defended the government’s focus on increasing the tax free threshold. 

Asked if Tory back-benchers were right to call for the 40p threshold to be raised, Mr Cameron said: “I’m a tax cutting conservative. I want to see us relieve people’s tax burden. We’ve chosen to do that through raising the personal allowance which helps everyone earning under £100,000.”

David Cameron, the tax cutting conservative. It sounds good, but it is hardly an accurate claim.

When Cameron says that “we’ve chosen” to raise the personal allowance, he neglects to admit that this was a Liberal Democrat, not a Conservative policy. Had the LibDems not manoeuvred their way into coalition government, the Conservatives would likely never have entertained the idea of a personal allowance up to or exceeding £10,000. Now that he is also rejecting the idea of doing anything at all about the 40% tax band – either scrapping it or increasing the level at which it applies – he is committed to doing nothing significant for middle income earners either.

This leaves only those who earn enough to qualify for Gordon Brown’s new top rate of income tax, which George Osborne reduced from 50% to 45%. And that is the situation currently faced by the Conservative Party – the only concrete actions of this ‘tax cutting conservative’ party have been to cut the taxes for the very highest earners. This track record is every bit as bad as the optics make it seem.

Ed Miliband and the Labour Party like to talk about the “cost of living crisis”, and they are right to do so. Aside from the fact that there is obvious electoral mileage to be gained, someone needs to talk about the fact that despite the better economic news of late, wages remain stagnant while inflation continues to eat away at purchasing power. Economic growth means absolutely nothing to people if it is not reflected in their own personal circumstances.

At some point soon, people might start realising that another UK economic recovery built on booming property prices alone is unsustainable and undesirable. And when this happens, the focus will turn to consumer spending, and why it isn’t more buoyant.

Perhaps then the foolishness of treating ever more British wage earners as higher rate taxpayers will become more readily apparent.

The Middle Class Needs Relief Too

Samuel Hooper3 Comments
Too many people paying too much.
Too many people paying too much.

 

David Skelton, director of the campaign group Renewal, has penned a provocative article for The Telegraph in which he dares to suggest that the 40% rate of income tax should be scrapped because it punishes the hard-working middle class rather than skimming off superfluous income almost unnoticed from the ultra-rich.

This is a bold move given that most of the political focus is currently on helping the lowest-income earners by increasing the tax-free allowance again and again. And while the current approach certainly has merits, it is undeniable that the middle class has received far less support.

It may have been quite right to begin means-testing child benefit – this blog certainly thinks so, as the first step toward ending universal benefits which simply should not exist. But actions such as this, while correcting discrepancies, anomalies and moral wrongs in the tax code, were not accompanied by countervailing efforts to lower the overall tax burden. This is where Skelton’s proposal shows its value.

Skelton writes:

It is also important for the Government to help middle income earners who have played such a big role in making sacrifices during the recession and in reducing the budget deficit. George Osborne should take a major step to unwind the undesirable drift towards an ever higher proportion of the working population paying higher rate tax. In doing so he could relieve the pressure on the squeezed middle, so many of whom have borne the burden of paying for Labour’s profligacy.

His proposal would see more than two million people taken out of the higher rate tax band:

A number of Tory MPs have argued that the Chancellor should look to raise the higher rate threshold to £44,000. Our proposal at Renewal would go much further, taking many more people out of paying the 40p rate while simplifying the tax system. We believe he should scrap the 40p rate and start the 45p rate at a much higher level of income. 

Potentially, this could take more than two million people out of higher rate tax, giving a significant tax cut to the squeezed middle.

The retention of the punitively high 45% top rate of income tax is the only unwelcome part of the proposal, but was clearly included to keep the break-even point at what was considered a politically palatable level. But aside from this regrettable acceptance of Gordon Brown’ final act of economic vandalism before being kicked out of office, Skelton’s proposal is very strong.

It is long past time to address the fact that the 40% tax band now includes a very different sort of person to the type envisaged when the rate was set by chancellor Nigel Lawson. As Skelton rightly notes:

More and more people on middle incomes have been dragged into paying the 40 per cent rate of tax over the past decade. That includes teachers, nurses, bricklayers, police officers and Tube drivers. These are not people who should be in the higher rate tax bracket but are because the threshold at which it is paid has been repeatedly frozen. 

The number of people paying 40p tax has risen steadily from just over 1.7 million in 1993/4 to 4.4 million in the current tax year. That is a staggering one in six of taxpayers, up from one in 20 when Nigel Lawson was Chancellor.

Quite right. A person on around £40,000 a year in the early 1980s was far more affluent than someone on that same salary today. But cowardly government after cowardly government have deliberately chosen not to increase the tax rate threshold in line with inflation, bringing this whole new cast of characters into a tax realm originally intended for those who were genuinely, comparatively rich.

The chances of this proposal becoming concrete policy remain slim, however. As James Kirkup notes in the Telegraph, the increasingly boisterous and assertive Liberal Democrats are intent on defending the laser-like focus on raising the minimum tax threshold above all other ideas:

Increasing the basic threshold has been driven by the Liberal Democrats and the party’s Danny Alexander, the Chief Secretary to the Treasury, defended the focus on lower-paid workers. 

He said he “understood the argument” around 40 per cent tax, but insisted that lower-paid workers had to come first. “I think it’s right that we have a policy that is focused particularly at that part of the population.”

More worryingly still, the Conservative leadership also appears slow to embrace the idea – perhaps because it is a good piece of economic policy that originated somewhere other than Number 11 Downing Street. The Daily Mail reports:

In a major speech on the economy, the Prime Minister promised that further savings from public spending would be used to fund tax cuts.

But Mr Cameron, who confirmed the Government would accept a rise in the minimum wage to £6.50 an hour, appeared to indicate that any future tax cuts would be targeted at the low-paid.

He made no reference to raising the starting point for paying 40p tax, which is emerging as a key Budget demand among Conservative MPs.

Whether the Conservatives have any fire left in their belly to enact a genuinely useful tax cut in the face of this opposition and distraction remains to be seen, and go some way toward showing whether there really is any conservatism left in this coalition government at all.

If they do find the courage, it will be a major victory for middle class earners and for common sense.

Finally, An Argument For Scottish Independence

Samuel HooperLeave a comment
One world, but many more favourable aviation tax regimes
One world, but many more favourable aviation tax regimes

 

Finally, a positive reason to vote for Scottish independence in the September referendum, and it comes not from Alex Salmond, the SNP or the Yes to Independence movement. It comes, instead, from that most iconic of companies, British Airways.

The Telegraph reports:

Asked about the Scottish referendum on BBC Breakfast, Mr Walsh said: “If anything, it might be marginally positive because, I suspect, the Scottish Government will abolish air passenger duty because they recognise the huge impact that tax has on their economy.” 

He added: “So, it is probably going to be a positive development, if it does happen, for British Airways.” 

The Scottish Government’s White Paper – the blueprint for independence unveiled last November – proposed a 50 per cent reduction to air passenger duty. 

It said Westminster’s refusal to devolve the power had “hampered our ability to attract new direct flights” and said halving the tax would boost Scotland’s international connections.

This argument from Walsh is quite unassailable. The punishingly high level of Air Passenger Duty make the UK one of the most expensive places to fly from, or through, in the world. The government may whine that they need to be seen to be doing something for the environment, but as with all other taxes the revenue goes into the same big pot to be frittered away on the same wasteful expenditures – certainly nothing to do with environmental protection or carbon offsetting.

While the UK government wrings its hands and does nothing as Britain’s disjointed aviation policy stymies economic growth, at least the Scottish Government wants to attract business and tourism rather than repel them.

But what we really have here is not an argument for Scottish independence – though BA’s chief executive rightly notes that his particular company would perform marginally better if independence came to pass. Rather, it is an argument for a more enlightened and business-friendly aviation policy, and/or for greater devolution of tax matters within the UK. It would do the UK government great good to see lower aviation taxes bringing economic benefits north of the Scottish border, and perhaps chasten them into lowering air passenger duty throughout the rest of the country.

This intervention by Willie Walsh is being hailed by Alex Salmond and the pro-independence movement, and it certainly comes as a welcome respite from what has been a non-stop volley of bad news and negative endorsements as business after business has raised concerns about the prospect of Scottish independence and the damage caused by the current uncertainty.

But as a justification for splitting up the United Kingdom, it lands well short of the runway.