Why benefits shouldn’t rise faster (or slower) than earnings


12:45 pm - January 10th 2013

by Don Paskini    


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The main way that the Tories justified their rancid Welfare Uprating Bill is by claiming that ‘benefits shouldn’t rise faster than earnings’. They obviously think it is the most powerful part of their argument. So what if there were a simple, progressive way of disarming this argument?

Peter Kenway and Tom MacInnes have, for many years, written the annual report on Monitoring Poverty and Social Exclusion, and suggest that the principle about how benefits are uprated is one that both the Labour Party and anti-poverty campaigners should want to revisit.

They argue that:

Osborne’s underlying principle is the correct one: out-of-work benefits and in-work tax credits should move in line with some suitable measure of earnings not prices. Technically, this is the right principle because it is the only one that over the long term – and benefit uprating is very much something that should be judged over the long term – preserves the necessary proportions, both between earnings and benefits, but also between the money available (from taxes on earnings) and the total value of those benefits which need to be funded.

Agreeing with George Osborne’s underlying principle?!? Surely, by definition, a grotesque attack on the poor?

Except that linking benefits to earnings, rather than inflation, would have actually been better for people on lower incomes over the past ten years (or any other long term measure that you care to consider). As MacInnes and Kenway put it, ‘Taking the last decade as a whole, rather than the five year horizon the Chancellor prefers, earnings rose by 36% while prices rose by 30% (CPI). Frankly, if earnings continue to rise more slowly than inflation then we have bigger problems than benefit uprating to worry about.’

They conclude that ‘a favourable principle, stated by a Conservative Chancellor, is an opportunity not to be missed. Instead of mere outright opposition, the principle of linking benefits to earnings should be extolled at every opportunity, with an eye to the years beyond 2014 and 2015 about which something could still be done’.

With the current link to inflation which we’ve all been trying to defend, during times of growth benefits fall further and further behind earnings, increasing inequality. Then during hard times, benefits are meant to grow faster than earnings, providing an opportunity for the Right to pit people on low incomes against each other and pass populist attacks as they did this week.

I think that the level of benefits need to be revisited anyway to enable people to live with dignity (as MacInnes and Kenway point out, the short term consequences of linking to earnings are very tough for people on low incomes). But as a long term principle, uprating benefits with earnings rather than inflation would be more redistributive and take away one of the Tories’ biggest sticks.

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About the author
Don Paskini is deputy-editor of LC. He also blogs at donpaskini. He is on twitter as @donpaskini
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Reader comments


Sure, the link should be to earnings. So should the pension link be. For you’re right, over the long term that’s what matters.

But, further, so should the income tax brackets: fiscal drag is what we call this when applied to taxes. For example, the personal allowance should rise in step with average earnings.

That it hasn’t is how we’ve ended up with people working part time on minimum wage paying income tax.

Fully support you on benefits: hope you’ll say the same about taxes.

Except once earnings begin to rise above inflation – whatever measure used – the tories will change back to using inflation.

Naive.

Tim W @ 1

That it hasn’t is how we’ve ended up with people working part time on minimum wage paying income tax.>/blockquote>

Have we? How? What do you mean by ‘Part time’, ‘minimum wage’ and ‘income tax’?

How much does someone on:

£6.19
16 hours
£99.04 per week or £5150 a year pay income tax? Time to check your tax allowance figures again.

Now, if you had said VAT or even Council Tax you would have been spot on. Yet for some strange reason, nobody mentions regressive taxation when talking about ‘taking the poor out of tax’ in fact, if anything the major political Parties have nothing to say about the tax burden the poor have to pay. Income tax is the focus.

Tim, can you, representing the majority of the political class explain why ‘taking the poor out of tax’ is about the least burdensome tax the ‘poor’ have to endure?

Jim, I get the feeling that you’ve worked backwards to ensure that you come up with a figure in which the income of a part time minimum wage earner is below the limit.

You can still be classified as part time working 30hrs/week in which case you do start paying income tax.

However if we take a full time worker on minimum wage then they are definitely paying income tax. And all so that they can get it back in tax credits and other benefits.

“Except once earnings begin to rise above inflation – whatever measure used – the tories will change back to using inflation.”

Sure, but if the Tories will always go for whichever measure is lowest, then let’s go for the measure which is (a) better for people on low incomes, (b) links how much we spend to how much we pay, and (c) means that we have the fight with the Tories about what to link it to in the economically good times rather than the economically bad times (when there is more money around and hence it is an easier argument to beat them on).

Sure, but if the Tories will always go

Not just the Tories. Labour did it too back in the 70s.

Just as with the fiscal drag thing, it’s an all party approach.

“Now, if you had said VAT or even Council Tax you would have been spot on. Yet for some strange reason, nobody mentions regressive taxation when talking about ‘taking the poor out of tax’”

Well we do actually. That’s what zero rating and exempt from VAT is. Making a regressive tax less regressive by not charging it on things that make up a greater portion of poor peoples’ spending than rich peoples’ spending.

As to Council Tax, that already accounts for income. Value of house that you live in is a fair old approximation for income. And the bands mean that the poor pay less, living in smaller or less costly houses, as they do.

But back to the point I (and SBML) were making. How on earth can anyone justify the idea that income tax should be charged on minimum wage?

The whole point of min wage is that it is an amount that it would be immoral for someone to receive less than.

And why is it charged? Because of that fiscal drag. The Personal allowance has been raised in line with inflation (and not even that always, G. Brown didn’t raise it at all one year) not wages for decades now. That’s how the lower bound of the income tax has come down from median wages or so to less than minimum wage.

And it’s an outrage and should be stopped.

“Osborne’s underlying principle is the correct one: out-of-work benefits and in-work tax credits should move in line with some suitable measure of earnings not prices”

“a favourable principle, stated by a Conservative Chancellor, is an opportunity not to be missed”

Am I missing something? Osborne appears now to be endorsing the principle that benefits should not rise more quickly than earnings, but as far as I know he’s never endorsed the principle that they should not rise more slowly – i.e. that they should move in line with earnings.

SBDL @ 4

However if we take a full time worker on minimum wage then they are definitely paying income tax. And all so that they can get it back in tax credits and other benefits.

But not that much in income tax. If you are earning the NMW @ 30 hours a week, your Council Tax and VAT etc is likely dwarf anything you pay income tax. If you want to help that guy (or girl) with their tax bill, use the money you would to raise tax thresholds to exempt them from Council tax.

TW @ 6

Making a regressive tax less regressive by not charging it on things that make up a greater portion of poor peoples’ spending than rich peoples’ spending.

Try heating costs for one example. What porportion of a ‘poor persons’ income goes into heating their home and what is tax on that? There are few zero rated goods left. In fact, if anything, the Tories are attempting to widen the VAT take, hence the ‘pasty tax’
debacle.

And the bands mean that the poor pay less, living in smaller or less costly houses, as they do

Are you sure about that? Have you even got a fucking clue about this? My guess based on the above statement is that you do not.

Anyway, even if you do and you are correct, they still are expected to stump up a hefty percentage of their meagre income to this wicked tax.

And it’s an outrage and should be stopped.

Yes, I agree and when you publish your report on how reform Council tax to ‘take the poor out of tax’ we will stand shoulder to shoulder’.

@ SadButMadLad

“However if we take a full time worker on minimum wage then they are definitely paying income tax. And all so that they can get it back in tax credits and other benefits.”

Which is not as silly as it sounds, because the alternatives are:

1) Raising the tax threshold to £12,000ish for everyone regardless of income, which is obviously many times more expensive than targeting tax credits at a specific group (e.g. giving 100% of people a £1,000 tax cut costs five times as much as giving the 20% of people on the lowest incomes £1,000 in tax credits),

or

2) Making the tax system much more complex, so that earners on different levels of income and with different numbers of dependents have different tax allowances,

neither of which solves the problem of what to do about someone who pays little or no income tax but needs a lot of financial support. (If that minimum wage worker has a partner and two children to support, taking them out of income tax is still going to leave them without enough money to live on.)

Messing about with income tax rates and allowances only lets you reduce the *income* tax burden on a household – which for many low earners is nil, or only a few hundred pounds. Tax credits let you reduce the net *overall* tax burden on a household, including income tax, national insurance, VAT, fuel duty, etc. – perhaps by several thousand pounds.

“Yes, I agree and when you publish your report on how reform Council tax to ‘take the poor out of tax’ we will stand shoulder to shoulder’.”

No need for me to publish a report on it.

We already have a system that does that.

https://www.gov.uk/council-tax-benefit/overview

Excellent, so you’ll be supporting UKIP, the ASI and those Johnny Come Latelies, the Lib Dems, in arguing that the personal allowance should be raised to the full year full time minimum wage income then, yes?

“What porportion of a ‘poor persons’ income goes into heating their home and what is tax on that?”

Exactly why home energy is taxed at a lower preferential rate.

@ Don (5)

“let’s go for the measure which… means that we have the fight with the Tories about what to link it to in the economically good times rather than the economically bad times”

I don’t follow this at all. If we have that fight in the economically good times – e.g. when inflation’s at 2% and earnings are growing at 3% – we’ll lose, because it’ll be easy to present a link between earnings and benefits as a needless extravagance.

If anything, Labour should have tabled an amendment yesterday, in these economically bad times, calling for benefits to be linked permanently to earnings. That would have turned the tables on the Tories rather nicely, since they’ve been going out of their way to create the impression that there’s a long-term issue with benefits rising faster than earnings. So why not a permanent link rather than a temporary three-year arrangement? (Oh, how they would have squirmed.)

“No need for me to publish a report on it.

We already have a system that does that.”

Though n.b. this system is ending in April 2013 and being replaced by Son of the Poll Tax.

“If anything, Labour should have tabled an amendment yesterday, in these economically bad times, calling for benefits to be linked permanently to earnings.”

Yes, that’s what I meant. Get this principle established now, and get all the Tories on the record about what a good idea it is to quote against them next time the economy picks up.

“Fully support you on benefits: hope you’ll say the same about taxes.”

I shall give further consideration to the exact terms of this emerging Paskini/Worstall ‘Grand Bargain’, but in principle, yes to this.

Would you go for one off increases in the income tax rates in exchange for a long term deal on increasing thresholds with earnings? This Bargain will need extra revenue to cover the costs of cutting taxes for low paid workers (including no tax for minimum wage workers as well as other taxes as per Jim’s points) and putting up benefits.

May I suggest a compromise?

We don’t use average wages,or any measure of inflation. Instead we link benefits, personal allowance, pensions etc to MP salaries.

Good point. I hadn’t thought of this.

“Would you go for one off increases in the income tax rates in exchange for a long term deal on increasing thresholds with earnings? This Bargain will need extra revenue to cover the costs of cutting taxes for low paid workers”

I’d not only go for it we at the ASI have been suggesting it for some years now.

Have a whacking great personal allowance (£15 k say) and raise the basic rate of income tax to 33%.

Just fine with that, great, lovely.

It’s true, we do also go on to say that it should be a flat tax (which would still be progressive, given the personal allowance. Marginal tax rates would be static, but average rates would rise asymptotically to 33%) and we also suggest merging both NI into that 33%. Which I’ve absolutely no doubt you’d be against.

So the deal we’ve been shouting about won’t meet your desired standards.

But the basic idea. Let’s tax the poor not and raise taxes on those richer to compensate? Sure, sign up in a heartbeat.

You’ll find me whinging about some of the things you might try though. 45% is about the peak of the UK Laffer Curve for income tax (54, 55% if you merge NI). 25-30% appears to be about the peak for CGT. We already have the highest effective corporation tax rates in Europe (yes, I know, not the highest headline, but the highest effective).

So I will be pointing out that there’s not much more tax revenue you can get out of the population: even that in the long term current tax rates reduce future revenue.

But the basic idea, that in order to leave the poor tax free we should raise taxation on the richer? Sure. I’ve actually been arguing for years that we should have a system where *only* the rich pay tax.

Although you’d not like the side effect of that, which is some 50% of the government we have now (*the rich* are the top 10%. Top 10% of households get some £280 billion a year in total. Current govt costs some £500 billion a year. Can’t have as much govt as we do only taxing the rich, can we?)

17. So Much for Subtlety

I think that the level of benefits need to be revisited anyway to enable people to live with dignity

The only way for people to live with dignity is to support themselves. Anyone who lives on the scraps of other people’s tables is a beggar and cannot, by definition, have any dignity.

Which is why we should not be paying benefits at all but some sort of Tax Credit for low paid workers.

If I’m sure of anything, SMFS, it’s two things: (1) a number of people live off the scraps of your table; (2) they’re all more dignified than you and have more dignity than you’ll ever have.

Best wishes,

Feodor.

@ Tim W

I’m confused. On the one hand, you say:

“the basic idea, that in order to leave the poor tax free we should raise taxation on the richer? Sure.”

On the other hand, your concrete proposal:

“Have a whacking great personal allowance (£15 k say) and raise the basic rate of income tax to 33%… it should be a flat tax”

- represents a substantial tax *cut* for the top 15% or so of earners. In fact it represents a tax cut for everyone outside a narrow just-above-average income bracket (c. 26-42k). In other words, it reduces the tax burden on high and low earners by squeezing those in the middle.

Of course, the picture gets a lot messier if you look at distributional effects across households. Some of the ‘poor’ winners in this scenario would be higher up the income distribution than some of the ‘rich’ losers. E.g. a household with two earners on 15k each would gain, while a household with one earner on 30k and one on 8k would lose; but if there were three children in the latter household and none in the former, the former would be far higher up the income distribution.

The whole thing just seems perverse. Like the Coalition’s policy of raising the personal allowance, it’s very inefficient insofar as the object of the exercise is to reduce the net tax burden on low income households (since it cuts taxes for many households outside that group and fails to cut taxes for many households within it but earning less than the current PA). But unlike the Coalition’s policy, it also fails to cut taxes across the board. Rather, it singles out an arbitrary group of earners on mid-to-high incomes to take on an arbitrary amount of the burden removed from low and high earners.

16. Tim Worstall

” We already have the highest effective corporation tax rates in Europe (yes, I know, not the highest headline, but the highest effective). ”

I suppose different organisations have their own way of measuring things. However, Timmy I doubt the UK has the highest effective CT rate in Europe. Oxford University Centre For Business Taxation, says the effective rate is 9th in the G20 and lowest of the big EU 4, Germany, France, Italy and UK. Maybe you are thinking about the effective marginal tax rate where the UK performs considerably worse. The EMTR affects investment decisions and everyone wants business investment to rise because that impacts employment and becomes income for workers. Seems to me that the UK has considerable scope by concentrating on the EMTR that companies face when making new business investment.

http://www.sbs.ox.ac.uk/centres/tax/Documents/reports/G20_Corporate_Tax_Ranking_2011.pdf

Re corporate tax rates, here:

http://www.adamsmith.org/blog/tax-spending/we-really-do-need-to-lower-uk-corporation-tax-rates-you-know-theyre-the-highest-in

Agreed they might be calculating in different ways.

GO.

We’re arguing several different things in different parts of the tax proposal. At the low end we’re simply stating that it’s ridiculous to be taxing the incomes of the poor. Immoral even. We shouldn’t be doing it.

There are also technical reasons: like the staggeringly high marginal tax and benefit withdrawal rates that are seen. For yes, we do say that high marginal rates on hte poor are just as much of a killer of attempts to increase incomes as high marginal rates on hte rich are. If not more in fact. OIur current system has several places where marginal rages are over 60%, some over 80%, and som absurdly of more than 100%. Millions face those above 60% rates for example: the numbers are in each budget.

This is clearly nonsense and has to be addressed.

At another part of the taxation system we’re arguing about something akin to hte Laffer Curve. But only akin. We’re not saying that a 33% top rate is current tax revenue maximising. Rather, that this is the growth optimising top rate. The one that will maxmise GDP growth over time.

“E.g. a household with two earners on 15k each would gain, while a household with one earner on 30k and one on 8k would lose;”

That is entirely true. It’s a side effect of the economic emancipation of women. We decided as a society (think the actual date was 1988 for some reason) that women are indeed fully equal to men. Their property is their property, their income is their income. Tax will be levied on an individual basis, not household. For women really are equal and are not merely an appendage of their husband nor household.

You can indeed argue that households should be taxed, not individuals. But to do so would be a rather retrograde step as far as that economic emancipation of women thing is concerned.

@ Tim W

“It’s a side effect of the economic emancipation of women. We decided as a society… Tax will be levied on an individual basis, not household.”

Yes, I understand that this is why the issue arises. However, it remains the case that when we talk about people being rich or poor, towards the bottom of the income distribution or towards the top, it’s households and not individuals we look at. Higher earners are not necessarily ‘better off’ than lower earners and hence in a position to make a higher net contribution to the tax system; it all depends on the earnings of their partner if they have one, and on the number of dependent children in their household.

So when you talk about taxing poorer people less and richer people more, that’s not really what you mean. You mean taxing lower earners less and higher earners more – regardless of where those people sit on the income distribution. Which is not the same thing at all. Many of the people you single out for tax cuts are richer than many of the people you single out for tax rises, because their household incomes are higher and/or their households include fewer dependent children.

“You can indeed argue that households should be taxed, not individuals. But to do so would be a rather retrograde step…”

And I wouldn’t make that argument. However, it’s dishonest to suggest that the income tax system can be structured *both* so as to tax people as individuals *and* so as to distinguish ‘richer’ people (people higher up the income distribution) from ‘poorer’ people (people lower down the income distribution).

If we want to tax people as individuals but also to ensure that richer people face a higher net tax burden than poorer people, we’re going to have to use things like benefits and tax credits to achieve that.

SMFS: “Anyone who lives on the scraps of other people’s tables is a beggar and cannot, by definition, have any dignity.”

Erm, so what do you propose doing instead? Throw them in jail when they tried illegal methods of feeding themselves, like breaking into rubbish dumps to scavenge as they do in most countries without benefits? Kill them through starvation?

All sounds terribly undignified to me.

Tim @ 10

Exactly why home energy is taxed at a lower preferential rate.

It doesn’t matter what the ‘rate’ is the fact is that poor people are paying tax on this and a whole range of other things including council tax is, by your own words:

The whole point of min wage is that it is an amount that it would be immoral for someone to receive less than.

So, you will shortly be publishing your plans to stop the ‘immorality’ of people on the minimum wages being forced to pay council tax? No? Why not Tim? What, apart from the obvious, is so special about the couple of quid of income tax the minimum waged pay compared to the hundreds of pounds a year Council tax removes from their meagre wage packet?

Excellent, so you’ll be supporting UKIP

I would never support those strutting little Englanders under any circumstances, but as for the Lib Dems, stupid gullable people who thing raising VAT constitutes ‘taking the poor out of tax’. Would n’t piss on your average Lib Demmer if he was on fire.

25. So Much for Subtlety

18. Feodor

If I’m sure of anything, SMFS, it’s two things: (1) a number of people live off the scraps of your table; (2) they’re all more dignified than you and have more dignity than you’ll ever have.

Good for you Feodor. But wishing it doesn’t make it true. And it isn’t. You can see the life style of people on benefits simply proves my point – they know they have nothing to be proud of and that no one respects them. That is why they tend to live like they do.

23. jungle

Erm, so what do you propose doing instead? Throw them in jail when they tried illegal methods of feeding themselves, like breaking into rubbish dumps to scavenge as they do in most countries without benefits? Kill them through starvation? All sounds terribly undignified to me.

No, I propose a system of tax credits that will supplement their income up to a decent level. Not as good as actually making money yourself but better than nothing.

Meanwhile Georgia (in the US) has all but ended cash benefits – they are only paying out to some 4,000 people now. No one is starving. No one is dying in the street. No one is breaking into garbage bins that I know of. Now admittedly the poor still get food stamps, but it is an indication of how little people actually need welfare.

I’m impressed that TW is still pushing the utterly fictitious Laffer Curve malarkey. Wasn’t that basically proven hogwash with the post-Reagan/S&L financial crisis?

“utterly fictitious Laffer Curve”

It’s a mathematical truism I’m afraid. Not fictitious at all.

“post-Reagan/S&L financial crisis?”

S&L crisis started in 1979, Reagan took office in 81. So it’s the “pre-Reagan” crisis.

And quite what the bankruptcy of building societies has to do with the revenue from changes in tax rates I’m really not sure.

@27

It’s a mathematical truism I’m afraid. Not fictitious at all.

And this opinion is based on which peer-reviewed scientific papers? Sorry, but the Laffer Curve never was anything more than a pseudoscientific theory to perpetuate supply-side economics – the biggest fraud committed against a populace in living memory.

And while Reagan was elected in 1981, it was the deregulation policies (along with the 1986 Tax Reform Act)of his administration that accelerated the crisis far beyond what would have been possible prior.

You cannot argue these points without going against historical record.

Academic papers re Laffer Curve?

http://elsa.berkeley.edu/~saez/diamond-saezJEP11opttax.pdf

Try that one. One of the authors has a Nobel. Both are on the left. As you can see, the argument is about where the peak is, not about whether one exists or not.

They argue that the peak is some 75% (from memory) if there are no allowances. No ability to leave the tax jurisdiction, no possibility of income switching etc.

If you can do those things then perhaps 54%. But that’s total taxation paid upon income: including employer paid taxes like NI.

Funny – in that paper I can find no reference to the Laffer Curve whatsoever.


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