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23 November 2006 Blog Home : November 2006 : Permalink

Radical UK Financial Reform

The recent leftward swerve of the Nouveaux Conservatives means that, as various bloggers such as DK, Freebornjohn and Mr E note, we are in a position where no large UK party is for smallish government. There could, I suppose, be a reason for this - namely that the voters think they should get some dosh from the government. Fair enough, I suppose, if you think that the government is in the wealth distribution business and that seems to be what our chattering classes have taught the rest of us over the years.

However, as S&M reported over a year ago, the current benefit system tends to make for enormous marginal rates of tax which reduce the incentive to work harder and get payrises (oh and obviously it also increases the incentive to work on the black market a lot).

The Department for Work and Pensions has today released a report which strongly supports the principle of a flat tax and citizen’s basic income.

Well, it hasn’t done so explicitly. But its latest Tax Benefit Model Tables (big pdf) are the next best thing.

Here’s a question: Take a married couple with two children under 11 and pre-tax earnings of £200 a week. If they get a better job, raising their earnings to £300 a week, by how much does their net income rise?

£60? £50? £40?

Nope. £8.52.

Yes. £8.52. That’s a marginal deduction rate of 91.5 per cent.

The extra £100 this couple earns before taxes are swallowed up by higher income tax and National Insurance Contributions (£33); lower Working Tax Credits (£37) and less Housing Benefit (£19.50).

Mr S&M proposed solving this with a "Citizen's Basic Income" that replaces all benefits and is given to all people regardless of income. Tie this to a flat tax on all income (possibly with an allowance for the first few thousand quid of EARNED income) and and you wipe out most of the need for government bureaucrats in DWP and Inland Revenue and save loadsa money. He does the sums and figures out that £100/week is entirely affordable, but he stops at paying the kiddies which I think is a mistake.

If we include paying the kiddies there are roughly 60 million UK residents of which at least 1 million are non-UK citizens so the cost of the CBI would be roughly £300B (59M *£5200=£307B).

However on 2006 budget numbers for 2006/7 you would replace - at the very least:

£131.5B Social Security benefits
£15.6B Tax Credits
£53.4B Education budget
£7.8B DWP budget

When you look at closing a few other pointless ministries (Deputy PM, DTI, DEFRA ...) and firing most of the the Inland Revenue staff, you get another few billion, leaving perhaps $90B left.

The key to making up this shortfall would be to remove most or all VAT and other tax reliefs. If you removed all reliefs you would gain an additional £200B in revenue. But one might wish to keep (say) zero rated VAT on food and a few others here and there so a saving of £90B would be quite simple; £44B (nearly half) would come from simply removing the income tax personal allowance, the Working Tax Credit, the Child Tax Credit and Child Benefit, which since you are giving everyone £5200 including kids would seem pretty fair.

The key to giving the kids £100/week is that is also allows you to remove most of the education budget too. Ideally you do this by giving say £50 in voucher form to every child up to age 16 or still in education up to 21. £2550 per child in vouchers and 12M children 16 and under is £30B which is over half the education budget (and more than it was last year - the chancellor seems to have been very generous this year). There are about 2 million university students (+300k non UK ones) and I would guess another 2 million or so secondary school students aged over 16. This adds up another £10B at the same £2550/student and one could obviously increase the amount from university students. I'm sure one could do a few other things to retrieve the rest of the education budget shortfall. Firing many of the education bureaucrats would seem like a decent start.

Paying children has other benefits. You could make it clear that is the kid's money not the parent's by requiring the child to have a bank account for the dosh to be paid into, and then obviously, permit the parent to have access to it. Possibly after age 12 (say) the child has to be a co-signer or something so that the kids get experience managing money.

Now there are some other interesting benefits. You can remove the minimum wage legislation and a bunch of similar busybody employment rules. Then by limiting the payment to UK citizens you create an interesting incentive to hire UK citizens rather than imigrants - it would allow you to remove almost every work permit requirement because the foreigners would need to have an extra £5000 from somewhere to have an equivalent income. You also create an incentive to have children even among richer people and for people to stay in the UK, because us expats would (obviously) lose the income.

Once could also imagine the CBI ought to please the trades unions. After all one of the reasons why strikes get broken is that strikers run out of money. By receiving the CBI employees have far less incentive to settle with abusive employers if they strike AND they also find it easier to vote with their feet and quit the company. I imagine that the corporate fat cats might imagine that they could pay their exisiting workforce less but I suspect they might be surprised ....

Finally you utterly remove the negative incentive of the marginal tax rates mentioned above and make it fairly simple to move to a flatter tax system - the first step obviously being to merge the NI and Income taxes. And of course be removing a whole swathe of government employees you increase the available workforce for productive work. If done right you also make it less likely that people will want to risk a government job.

All in all it sounds like the kind of radical proposal that a Tory party could get behind. Pity the Nouveaux Conservatives won't.

Update: Part 2 doing the whole budget is now up

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