What follows is taken from pages 18 & 19 of the Executive Summary in Dynamic Benefits: Towards Welfare that works. This was the report of the Economic Dependency Working Group of the Centre for Social Justice, a Think Tank set up by Iain Duncan Smith whilst still in opposition. The report was published in 2009. I have been pressing for a Citizens’ Income for 40 years on two grounds: it allows society to stop doing jobs which harm the environment, and it is a basis for social justice. Dynamic Benefits is not concerned with environmental problems, and it does not mention the Citizens’ Income. Nevertheless the first part of the report states the case for a CI extremely lucidly. Most of Dynamic is a tortuous, though quite skilful attempt not to come to this conclusion.
But this must not be just a theoretical exercise. Once the public has grasped that means testing is a form of taxation, there is no reason why IDS’s workfare plans should survive any longer than the Poll Tax did. But not only does the anti-workfare movement need to put the Citizens’ Income principle at the centre of its strategy, but it should be recruiting support from other anti-government protesters. I was disappointed when I addressed a Socialist Party fringe group in October. The evening rally was addressed by Bob Crow, making many of the points in anti-workfare blogs. But they just think that capitalism must be smashed. They could be starting to expose this particularly nasty form of exploitation. So here it is, from the horse’s mouth:
Dynamic Benefits: towards Welfare that works
Benefit withdrawal rates
When a person who is on benefits earns more, the amount of benefit they receive, per week or per month, begins to decrease. This is known as benefit withdrawal. The benefit withdrawal rate shows how much benefit is lost per week for each extra £1 earned. Normally there is also an amount of earnings, called the earnings disregard, below which no benefits are withdrawn. Different benefits have different withdrawal rates, and some are on pre-tax and some on post-tax earnings. Different benefits can be withdrawn at the same time. • As a person enters work, they face withdrawal rates of 100% for Jobseeker’s Allowance (JSA) and Income Support (IS). • After a claimant has made the full transition from JSA into work, Housing Benefit and Council Tax Benefit are then withdrawn at a combined rate of 85% of after-tax earnings. For every £1 extra per week in gross earnings, 39p of tax credit is lost: its withdrawal rate is 39% of pre-tax earnings.
Benefit withdrawal makes overall system regressive
Low earners have much higher MTR than high earners
High benefit withdrawal rates create problems for low earners who wish to earn more by working longer hours, because they face high marginal tax rates. In recent years, the lowest income deciles have experienced the largest rises in marginal tax rates (MTRs). Nearly two million working people currently face MTRs of more than 60% – some even of more than 90%. Compare this to the MTR experienced by the highest earners in the UK – soon to be 51%. As a result of these benefit withdrawal rates, the participation tax rate faced by many making the transition from total benefit dependency into low paid work is 75% or higher. It is this participation tax rate (PTR) that has the biggest impact on decisions to enter work. For many carers, a low-hours job is all they can take on; and for others an entry-level job represents a stepping stone to higher-earning employment. Yet, virtually all initial efforts to work are penalised – and for those in low-earning jobs (60% of median wage or less) their PTR is almost always higher than the average for other European countries. Those who do move into work also face the immediate withdrawal of the attached ‘passported’ benefits, such as free school meals and prescriptions. For those who rely on them, the loss of these passported benefits can be more significant than the gain in income from the Working Tax Credit. The security of keeping what a claimant already has often trumps the potential gain from work.
Only 25% of benefit claimants, when polled, thought they would be better off from working. In contrast, 17% said working harder would make no difference; 19% were unsure; and disturbingly, 39% thought they would be worse off if they worked more.
The group that is most trapped by some of the highest PTRs comprises those adults under 25 without children: low earners in this group are not entitled to Working Tax Credit. Yet, those making up the growing NEET (not in education, employment or training) population are the people most in need of encouragement to work, not least because of the long-term repercussions of youth unemployment: the Prince’s Trust identified a long-term wage penalty of 10-15 per cent as a result of being NEET.
Marginal tax rate (MTR)
All taxpayers are familiar with the idea that higher tax rates create a disincentive to work harder. For benefit recipients, the withdrawal of benefits as earnings increase compounds the disincentive caused by taxation.
The effective marginal tax rate (MTR) faced by an individual in work measures the incentive to earn more. The MTR for those on higher wages, who do not receive benefits, is just their tax rate. However, for low earners it reflects not just the loss of income through taxation, but also the simultaneous, cumulative withdrawal of benefits that contributes to the MTR.
For example, if an individual is working and in receipt of Housing Benefit, then in earning an extra pound he not only loses 31p in tax, but has a further 45p of his weekly benefit income taken away. This leaves just 24p of any extra pound earned. The MTR is a huge 76%. For those also facing the withdrawal of tax credits. and Council Tax Benefit, it reaches 95.5%. Working harder produces negligible financial gains.
Economic dependency is reinforced by factors beyond work. Being part of a family, owning a home and having some savings are all protections against economic dependency. However, the current benefits system penalises these life choices, particularly for those with the lowest earnings.
[End of extract from Dynamic Benefits]