Reforming the benefit system

Dave Osler and Jackart are having an interesting discussion on the benefit system.

Osler makes the point that the government are hypocrites:

ON JOBSEEKER’S, shacked up with the girlf, splitting the rent but still claiming full whack housing benefit? You could be looking at custodial, mate. The Department of Work and Pensions website warns:

There are no exceptions. People who knowingly withhold information or deliberately fail to report a change in their circumstances are benefit thieves. It is not ‘playing the game’ – it is breaking the law!

Secretary of State at the DWP, shacked up with the girlf, splitting the rent but still claiming full whack second home allowance as an MP? If your name is James Purnell, such behaviour is ‘within the rules’, as the current euphemism has it. So there are exceptions after all.

I very much hope that hypocritical shit Purnell loses his seat at the next general election, along with all the other expense-fiddling bastards. Unfortunately he is unlikely to be prosecuted for fraud or go to prison.

Osler defends his own past benefit fraud:

My direct experiences came during a period of mass unemployment, presided over by a Conservative government who campaigned on the slogan ‘Labour isn’t working’ when one million people were on the dole, before going on to triple the joblessness count.

I genuinely looked for work and would have taken any reasonable offer of employment. But this was the last ‘worst recession since the war’, and as many unskilled youngsters found out, there were no legit jobs to be had. The only alternative was to sign on.

Supplementary benefit, as it was called, was supposedly enough to keep body and soul together, but didn’t run to such luxuries as halfway fashionable clothes or going to watch a decent gig. You can mount a philosophical argument that this is precisely the level at which supp ben should have been pitched, but no self-respecting teenager or twentysomething was going to see things like that. Not to be able to do what other young people do is, by definition, social exclusion of the worst kind.

The obvious solution was to take the occasional cash in hand number, an arrangement that seemed to suit everybody. Employers, some of them eminently respectable, got the work done on the cheap. Their employees got to pay the rent on their bedsit and thus avoided homelessness.

He’s right. Employers gained. Employees gained. The taxpayer was no worse off, because if the work wasn’t done, then the benefit claimant would still be getting the same amount of benefits. It’s absurd that an arrangement that benefits many and harms no-one should be illegal. It’s also bad for the economy.

Jackart broadly agrees with Osler:

Dave’s Part, not a website with whom I usually agree has a nice article up about benefit fraud. Like him, I find the current “benefit thieves: We’re closing in” advertising campaign abhorrent.

The problem is that the choice is claim benefits OR work. Clearly there needs to be some system that allows the hard up workless to take cash-in-hand work to supplement their income without losing benefits to the extent they become homeless, thus maintaining the habit of work and preventing total despondency leading to welfare dependency. Any means-tested benefits lead to problems with exceptionally high marginal tax rates as the benefit is withdrawn.

Unless the benefit is slowly withdrawn as people earn income.

The same is true of specific benefits like housing benefit.

Housing benefit kinda makes sense under the present system, bacause housing costs are (1) high, and (2) vary greatly across the country. But houses aren’t intrinsically expensive; the reason housing costs are high is mostly due to the planning system, which restricts housbuilding and forces people to pay vastly more for housing. If the economy was sensibly run, housing costs would be vastly less than they are now, and there would be no need for a separate housing benefit.

This is an artefact of an unduly complex system, with myriad benefits targeting behaviours and lifestyle choices with which Governments down the ages have sought to punish or reward.

Part of the reason governments punish or reward groups within society is to pander to the prejudices of voters. For example, part of the reason Labour put the top rate of income tax up to 50% was that many Labour voters are prejudiced against rich people, and pandering to their prejudices is an easy way to get votes. (It’s certainly easier than running the country well, something the government is apparently incapable of).

Similarly, many Tory-inclined voters are prejudiced against poor people, so when the Tories win the election, we can expect that they’ll tinker with the benefit system in order to punish poor people,  and therefore pander to the prejudices of their supporters.

The result of the system is the jobless and those otherwise dependent on the system are forced to negotiate a daunting bureaucracy of multiple agencies and securing multiple streams of benefit, which in practice becomes a full-time job.

Not only that, they have to go through the same rigmarole every time, so if someone is offered a temporary job, they might well decline to take it due to the hassle of coming off of benefits and back on them again.

So let’s go back to first principles.

1. Simplicity is a virtue

A virtue that most people seem sadly incapable of recognising.

2. Marginal tax/withdrawal rates should not be punitive anywhere on the income scale, in practice this means 50%.

Economically there’s nothing special about 50%, but I think psychologically there is. So I agree.

3. The tax and benefit system should not be used to punish or reward lifestyle choices.

(Except insofar as those choices clearly and directly harm or benefit society. For example if my lifestyle involves beating people up I should be punished, and if my lifestyle involves making things people want, the market will reward me and the state shouldn’t prevent it from doing so. But I expect you implicitly agree.)

4. No marginal tax rate should be higher for lower earners than the bands above it.

Fair enough. This should also continue to be true when one takes into account tax avoidance schemes that rich people have more access to.

5. No-one should starve.

These guidelines are eminently sensible.

What we need is a system where people at the bottom of earners (£0.00 per year) recieve a subsistence from the Government. Any pound earned subsequently must mean at least 50p to the worker net of benefit withdrawal. If there is to be a minimum wage, and with a sensibly designed benefits system, there would not need to be one, it seems grotesque that people earning it pay any tax at all.

A minimum wage is a response to the sistuation where employers have more clout than employees in wage negotiations (so are most other labour laws). With the sort of scheme you have in mind, employees have security of income, so there is much less necessity for a minimum wage, and as you say it’s no longer really necessary.

Is it not better for the state to subsidise employment than unemployment?

Though I have often mentioned it, I am not wholly convinced by the citizen’s basic income. It strikes me as ludicrous to pay comfortably off people money when they don’t need it.

In practise I think your scheme amounts to pretty much the same thing as basic income.

I have come down instead on the side of a “negative income tax”, a variant of the flat-tax system. The Government guarantees you a subsistence income, say £6,000, which doesn’t depend on where and with whom you live, and the Government takes no interest in what you do with it, thereby discharging its responsibilities to see to it that no-one starves, increasing freedom and increasing self-reliance. I would include a universal child benefit, and some incapacity benefit for the genuinely disabled – perhaps by starting the basic income element at a higher rate depending on the level of disability.

Different disabled people have different disabilities, therefore it would make sense for them to be individually assessed based on their disabilities. If the basic rate of disability benefit — the amount that most disabled people got — was exactly the same as the subsistence income then there would be little incentive for people to game the system.

Obviously one can finess the numbers. Different Guaranteed minima and different witdrawal rates. It would be possible to have 0% withdrawal for the a tranche, perhaps around break-even, or at the bottom.

I would favour this, for the first £2000 a year someone earns. If someone is just earning such a small amount of money, e.g. through self-employment, taxing it would be administratively complex and would only raise a small amount of money.

In fact, I’d go further. I’d establish a legal category of microbusinesses, defined a those with revenue of less than £2000 a year (An entrepreneur would only be allowed to run one microbusiness, and it couldn’t put their total income in the tax-paying limit). No microbusiness would have to pay tax, and anything that it’s legal for people to do privately without money changing hands, it’d be legal for a microbusiness to do. This would encourage people on benefits and low incomes to become entrpreneurial — an extra 40 quid a week goes a long way. If a microbusiness started doing well, it would make sense for the owner to expand it and put it on a regular footing.

I have tried to include an estimate of Working Tax credit, but the calculation is fiendishly difficult to model. I cannot think of a system so fundamentally flawed as Gordon Brown’s greatest achievment, whose complexity leads to overpayment, which gets clawed back from the poorest families in the land. Why tax them only to hand some of it back to them by some absurdly complicated formula, which is not accessable to any auditor, cannot be checked by the system’s vicitms?

Is the formula for working tax credit not publicly available then?

Simplicity is a virtue of Flat-tax systems. This one is steeply progressive, which should please the left, but is fair and doesn’t substantially change the tax paid by the majority of people, but removes a large number from the tax-burden, and provides an income to the poorest, without the obscene disincentives to work. Clearly the ideal is to have corporate taxes covered by the same marginal rate, but at the 40-45% level this is not going to be possible, but could be an aspiration for a right-leaning government. It also means the marginal tax rate is roughly equivalent to the Government take as a share of GDP. If this system was stuck to, it would be difficult to hide a big expansion of the state like the recent Labour Government has.

So there we have it. The Very British Dude solution to the tax and benefit system. Are you listening, Dave [Cameron]?

The problems with the present benefits system are obvious. And the solution is relatively obvious too; I came to the same conclusion as Jackart over 20 years ago. Labour have been in power for 12 years, and we can assume that if they had wanted to reform the system they’d have do so by now. And before that, the Tories were in for 18 years, and they didn’t reform the system either. So it’s reasonable to assume that neither of the big parties have any interest in reforming the system and running the country competently. Why bother, when it’s just as easy to get votes by pandering to voters’ prejudices, something both Labservative parties are good at?

UPDATE: One of the reasons the benefit system is expensive is that housing is expensive. But housing isn’t naturally expensive, it only is so because government policies make it so, and I argue here that this is partly because of corrupt politicians and the corrupt parliamentary expenses system.

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10 Responses to Reforming the benefit system

  1. Here via Jackart, excellent write up. Except for the bit about microbusinesses, why shouldn’t they be obliged to pay the same tax as everybody else? The fact that a lot will evade the tax is neither here nor there as the potential revenues are trivial.

    • cabalamat says:

      Except for the bit about microbusinesses, why shouldn’t they be obliged to pay the same tax as everybody else?

      Be cause everyone would get a personal tax allowanvce of £2000 that they wouldn’t have to pay tax on. This would apply to income earned as an employee, and also income that an entrepreneur earns as a microbusiness (A microentrepreneur?).

      So for tax purposes a microbusiness would be treated the same as being an employee; the first 2 grand is tax-free.

      The fact that a lot will evade the tax is neither here nor there as the potential revenues are trivial.

      If the potential revenue is trivial (and it is), it would probably cost more to collect it than would be collected, which is the sort of utterly pointless bureaucracy we need to get rid of. Making these sorts of small businesses legal instead of illegal serves a number of purposes:

      1. it’s an activity that doesn’t harm society, therefore shouldn’t be illegal.

      2. having laws that are widely disobeyed diminishes respect for the law in general

      3. if it is illegal the law has to be enforced, which costs money

      4. if microbusinesses are legal, they can have a presence on the Internet and grow their business that way; it’s likely that some microbusinesses would grow to full size businesses employing several people.

      • C, sure, but why £2,000 and not £1,000 or £5,000? What about a cliff edge problem, when somebody goes from £1,999 to £2,001?

        It is easy for banks to deduct flat rate tax from interest, it is easy for employers to deduct flat rate from wages, and dividends are paid out after tax anyway. For the self-employed with small profits, there is a huge grey area anyway – are you a hobby gardener who sells off a few surplus apples? Did you help friends or relatives move home or redecorate and they ‘saw you right’ with a few quid? Did you babysit for a friend in exchange for them picking up yours from school?

        I agree that taxing incomes is somewhat counter-productive, but there’s no moral difference between small businesses and big businesses, it’s all good stuff. The only thing that there is any moral argument for taxing is land values, monopolies and activities with specific external costs (like fuel duty to pay for roads and so on).

        • cabalamat says:

          £2,000 was a number that just came into my head — it could just as wrell be another number in principle.

          I don’t think the cliff-edge problem is one that can be got round. Larger businesses have to have bureaucracy and paperwork, e.g. to pay income tax.

          For the self-employed with small profits, there is a huge grey area anyway – are you a hobby gardener who sells off a few surplus apples? Did you help friends or relatives move home or redecorate and they ’saw you right’ with a few quid? Did you babysit for a friend in exchange for them picking up yours from school?

          Yes, and I want to remove the grey area. At the moment, as you say, loads of people do favours for their friends and are repaid, and some of that is technically illegal. I want to make it definitely legal. This mewans that microbusinesses would be allowed to publicise themsleves, e.g. on the Internet, without fear of the authorities dropping a ton of bricks onto them.

          but there’s no moral difference between small businesses and big businesses

          I agree. But there are practical differences: the smaller a business the less red tape it can reasonably be asked to put up with.

          The only thing that there is any moral argument for taxing is land values

          I’m a bit of a Georgist too. Though having said that, I’m not particularly swayed by arguments from morality — arguments from practicality carry more weight for me.

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  3. Pat says:

    It occurs to me that if the government were serious about encouraging stable relationships it would dump all the provisions that reduce pensions and benefits for couples and just give an individual allowance- since two can live more cheaply together it would provide an incentive to stay together, rather than the present incentive to split up- or cheat. A lot simpler to administer too.

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