How ‘Dynamic Benefits’ explains why IDS resigned

The graph at the top, which apparently baffles everyone, is all you need to bring the BI mainstream. It reveals the Universal Credit as a scrounger oriented answer. The Basic Income will transform the situation. The graph is for a single person, but there are similar graphs in ‘Dynamic Benefits’ , (Sept 2009), Iain Duncan Smith’s own literature, for various family situations. The facts are basically unchanged. A similar, up to date graph appears in the RSA report on the Basic Income, dated 16th December 2015.

Ignore the colours. They are just the details of how the poverty trap/scroungers charter is made up (same thing, depends on your mind set). Concentrate on the black line at the top. The ‘Marginal tax rate’ is the amount you lose in tax or withdrawal of means tested benefits (exactly the same effect) for each extra £ earned. Draw a vertical line at, say £12,000 pa. You lose 70p from every £ through  withdrawn benefits. Draw another line at £30k – you only lose 30p.

The ‘Participation tax rate’ is the total you lose out of the total earned. To show this you look at the total coloured from the entire rectangle. You only keep the white bit at the top. Now compare £12k with £30k pa.

Now let’s graft on the Universal Credit (UC) and the Basic Income. Somebody more technically able than me can probably do this. The UC graciously allows former scroungers, sorry benefit claimants, to retain 35% of their benefits. So on the graph, you draw a horizontal line at 65% up to the point where all means tested benefits are withdrawn. This is better than now, but not much. It would still be necessary to use the whole apparatus of benefit sanctions. Bear in mind that this assumes the UC is actually functioning. The news item on the latest damning Public Accounts committee Report on the UC (3rd Feb) states that 4 years after launch, 200,000 out of 4,500,000 who should qualify for the UC are actually receiving it, and the projected full rollout – not until May 2021 looks decidedly mythical.

The Basic income would simply draw a straight horizontal line across all income levels. Figures?? Even at a flat tax rate it would have to be whatever was necessary to shift the tax or tax equivalent so that all incomes shared it equally. Martin Wolf, Chief Economics Commentator on the Financial times once told me it would have to be at least 60% if housing costs were included. So what? Former ‘scroungers’ are paying more than that now, and would continue to do so with the benefit of UC!

All the clap trap about why the Basic Income is unaffordable, would make people lazy, or would not work for whatever reason,  is demolished by this graph. All the Basic, Citizens’ Income does is put everybody on the same playing field. Oh, and by the way, it makes work pay. The real reason Iain Duncan Smith resigned is because he has failed to do this, and the UC was never going to work.

 

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2 responses to “How ‘Dynamic Benefits’ explains why IDS resigned

  1. Thanks, Clive. “The Basic income would simply draw a straight horizontal line across all income levels. Figures? Even at a flat tax rate it would have to be whatever was necessary to shift the tax or tax equivalent so that all incomes shared it equally.”

    Question1. Please could you provide an example with actual figures to make the proposal more concrete and less abstract? Based on the research into the “modest but adequate budget” and minimum income standard for households (admittedly this is for pensioners, not working age people) at http://www.york.ac.uk/res/fbu/documents/ageconcernmodad2002.pdf, I’d suggest £10k a year or £200 a week or £870 a month as the basic income.

    Question2. What would that mean in terms of income tax rates?

    Question3. How would a “flat tax rate” achieve this, considering that those on £10k pa would be paying, eg, 60%, just like those on £100k pa or £1m pa?

    Question4. I have never understood how BI can work without means-testing if it is to cover housing costs. Rents vary enormously from region to region and as for owner-occupiers, some people own their homes outright and others have mortgages that, again, vary enormously. So, when you say “… [income tax] would have to be at least 60% if housing costs were included. So what? Former ‘scroungers’ are paying more than that now, and would continue to do so with the benefit of UC!” – your statement misses the means-testing point that only some UC claimants (i.e. mainly those currently on HB) get any help with housing costs. The ones who don’t have housing costs don’t get any help with housing costs but, under BI, they’d get the same as those who need help with housing costs that vary widely. Again, please could you provide an example with actual figures to make the proposal more concrete and less abstract? Maybe based on someone renting in London and someone renting in Glasgow, and ditto for home-owners with mortgages in both cities.

    Finally, I do agree with you that the real reason Iain Duncan Smith resigned is because he has failed to make work pay and UC was hardly likely to be effective in doing so.

    • Q 1. No. However, some years ago at a Green Party fringe, (circa 2008) we were shown some figures by someone who worked with Holly Sutherland. It needs that kind of computer power, wwith detailed demographic information. I will elaborate in reply to Q4 on my ‘first bid weekly sum of £175pw for an individual.
      Q 2. As I say Martin Wolf said 60%. I’m afraid I am not techno savvy enough to do links here, but Richard Murphy and someone else (Richard Hill?))have done a BI scheme which included housing costs where the tax rate was 60% above £150K pa
      Q 3. ‘The Skeptical Economist’ Jonathan Aldred, Earthscan 2009 p.97:
      “Summing up, optimal tax theory implies that constant OR FALLING [my emphasis] marginal rates of income tax as income rises, coupled with a significant Citizens’ Income, offer the best trade off between efficiency and fairness. This summarises several closely argued pages.
      Q 4. I am in a different school of thought from the Citizens’ Income Trust and the Green Party, who think it is easier to introduce the principle by not touching housing costs with a barge pole. They might be right, but I would rather show just how huge the poverty trap really is. My ‘first bid’ is a national Basic Income of £175pw, arrived at as follows: Jobseekers allowance £75pw; Give everyone c.£25 per week and scrap the £10K tax break, which is no use to the unemployed, but is worth more than JSA to the top rate taxpayers; The remaining £75 is housing costs. In Leeds, the grottiest 1 bed flat is at least £125pw. However, although no one is forced to do anything, any two individuals who can stand the sight of each other are suddenly £12pw in pocket if they share a flat. Landlords are no longer in control. This is why I keep saying market forces become fair, once persuasion not force is the rule. Housing Benefit could be scrapped for anywhere with rents at Leeds levels or less. For the rest of the country, I adopt the CIT/GP approach. Remember, everybody who gets a large BI also pays more than it is worth to them in extra tax, if they are above average income.
      As I say, this is a first bid answer to a difficult question. I am looking for improvements rather than brickbats.

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