Opinion: Time for the Party to propose the Citizen’s Income

The Centre Forum paper Taxing Decisions discusses the pros and cons of tax credits and tax allowances. The report reviews tax options for tackling the income and wealth disparities which have become a feature of British society in recent decades.

Reducing the level of inequality benefits everyone in society, rich and poor alike. I would argue that in an inclusive and more equal society, all citizens should pay tax on their income. Means tested benefits have not delivered for us. Child poverty, and unemployment are entrenched with the resulting societal breakdown. The way out of poverty is work. The best way to encourage work is to keep marginal tax levels at low rates and eliminate the benefits trap. The great majority of people want to work, not be dependent on benefits.

Liberal Democrat tax policy is supportive of merging tax and national insurance into a single unified tax (32% at present). The main obstacle has been the taxation of pensioners. Under the proposals advocated here,  the 50% of current pensioners with income below £10k would gain from the changes, the 50% of pensioners with income over £10k per year would pay a little more tax.

The introduction of a comprehensive Citizens income with two tiers for children and adults could be achieved as follows:

  1. Universal child tax credit – to replace Child Benefit and means tested child tax credit with a universal child tax credit (akin to the old child tax allowance). Withdrawal of the child tax credit would occur at the current levels for withdrawal of child benefit.  Universal child tax credit should be supplemented by a more generous childcare allowance for single working parents.
  1. Replacement of a £10k personal allowance, working tax credit, income support, JSA, ESA etc., with a Citizens’  Income tax credit equivalent to the 32% combined rate of basic tax and NI i.e. £61.50 per week or £3200 per year. Withdrawal of the Citizen’s Income would begin as now on incomes over £100k or lower. (A double withdrawal could, if thought necessary, occur for households with a single high earner and non-working spouse)

Pensioners would have a guaranteed income of £61.50 per week on top of the proposed contributory flat rate pension of £140 per week (£95 net of tax). This is paid for by elimination of the personal allowance, Winter Fuel Allowances, free TV licences and bus passes.

As we begin to think about how we can engage with voters in the next general election, increases in tax allowances which are eroded by inflation, vat increases and benefit withdrawals and which are paid for by dragging ever more taxpayers into higher rate bands won’t cut it. We will need solid economic growth and unadulterated redistributive measures  to put cash where it is needed, in the pockets of the least well off. Citizen’s Income is emancipatory: it allows people to make choices for themselves, not have them made for them by a bureaucratic state. Ultimately, what social liberalism is all about.

* Joe Bourke is an accountant and university lecturer, Chair of ALTER, and Chair of Hounslow Liberal Democrats.

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  • We definitely need to look at child benefits & tax credits (why do need both? free childcare should be the priority) and at the mess of old age benefits. However, after raising the personal allowance and introducing the universal credit, I can’t imagine us saying in 2015 that both should be scrapped. A few questions:

    1) What about employer’s national insurance? We may as well get rid of that too, for higher incomes but a basic rate of around 40%.

    2) Odd to call it a Universal child tax credit if it’s withdrawn for high incomes! Also, I think it’s important to ask whether it should be the same for each child or whether the first child should get less, or more. And the 12th child?

    3) Withdrawal of the income, as with the PA, is a terrible idea. It’s identical to a higher tax rate: if you want to do that, do it transparently. And there are of course psychological benefits to giving it to everyone (even if you increase their taxes to make up for it). Couldn’t the income be taxable (and slightly larger) so that higher earners would essentially get less?

  • Adam,

    Since writing the article, I have come across the CentreForum report Child benefit .The report concludes that “The best policy would be to merge child benefit into the current tax credit and future universal benefit system, with a threshold to ensure that only affluent households would lose some or all of their child benefit. We suggest that families with a household income of £45,000 or more should be
    unaffected, with child benefit withdrawal phased in from there.”

    The purpose of changing the personal allowance to a tax credit is so that the benefit of the increased allowance is greatest at the lower income deciles – and in particular for those who do not benefit from an increased allowance because their income falls below the threshold. This also obviates the need for a means tested universal credit.

    In the CentreReform report referenced in the original article, Howard Reed of Landman recommends a longer reform: Rebalancing the burden of direct tax away from low-to middle income families and towards high-earning families by combining a large increase in the personal allowance with a flat 40 per cent income tax rate across most of the rest of the income distribution.

    My view is that the Universal child tax credit should be an equal amount per child and would likely be around 50% of the adult citizens income.

    I would not disagree with your view that withdrawal of the personal allowance/tax credit is not optimal and that there are psychological benefits to giving it to everyone. We would, as you say, need to make up the revenue elsewhere.

  • jedibeefrix,

    “I approve of the apparent effect, the simplificiation of the tax and benefits system, even if I am as yet undecided on the measures themselves.”

    The key issue is a focus on work instead of means tested benefits to address poverty. Neither further increases in personal allowances or tax credits will adequately address this issue.

    A family of 2 adults and 2 children with household earnings of £30,000 could expect to receive a total of £9600 in citizens income and universal child tax credit; and pay £9600 in taxes – their net income would be £30k.

    The same family with neither adult working would receive £9600 in tax credits. They would pay tax at 32% on any earnings they make in the future – their marginal tax rate (exclusive of housing benefit and council tax relief) is always 32%. It should be a requirement that new applicants for social housing and housing benefit recipients be in full time employment to be eligible. Housing benefit could also be administered through the tax credit system, with a view to limiting the combined marginal deduction rate to a maximum of 50%. Such a policy would be aided by expansion of the work program to a job guarantee scheme.

    A family with earnings in excess of £100k would receive no citizens income or child tax credits, pay a basic rate of tax of 32%. The higher earner would pay a 42% higher rate on earnings up to £150k and a 47% higher rate on earnings over £150k.

  • Citizens income sounds a better system than the Universal Credit,

    would like the party to consider the practicalities of reforming UC into a citizens income

  • Paul Griffiths 11th Apr '12 - 6:10pm

    The title of this article is missing the word “again”. A form of CI was party policy until Conference voted to drop it in 1994 mainly, IIRC, on grounds of cost.

  • Gareth Jones 11th Apr '12 - 6:30pm

    How about going even further and replacing income tax with a graduated sales tax to fund a Universal minimum income?
    For discussion…

  • @Gareth, I think for a variety of reasons it would be far better to use a land value tax instead.

  • A £3200 citizen’s income would still mean (almost) everyone currently on means tested benefits would still be on them, as no-one without a decent additional income would be able to live on £3200 a year. So I don’t see the point of a £3200 CI – sorry.

  • Paul,

    the 1994 conference decision to drop Citizens Income was a controversial one as reported in The Independent at the time citizens income plan dropped.

    The Citizens Income Trust published an introductory booklet in 2007 outlining a revenue and cost neutral scheme based on 2006/2007 rates:
    citizens income .

    The CentreForum report ‘Taxing Decisions’ identifies 11.9 billion of additional revenues that can be raised based on Libdem policies such as restriction of higher rate pension relief, equalisation of capital gains tax with income tax etc.

    The Institute for Fiscal Studies has published a report on Child and Working-Age Poverty from 2010 to 2020. ‘In the short run, relative child poverty is forecast to remain broadly constant …, before rising slightly in 2013-14. Relative working-age adult poverty is forecast to rise slightly … before rising faster in 2013-14. Absolute child and working-age adult poverty are forecast to rise continuously, and by more than relative poverty, over this period.’ (p.1) This unusual combination is because ‘real median household income is forecast to be 7% lower in 2012-13 than it was in 2009-10, and to remain below its 2009-10 level until at least 2015-16.’ The report concludes that ‘there is almost no chance of eradicating child poverty … on current government policy.’ (p.3) Child and working age poverty .

    The Pensions Policy Institute has published a report: An assessment of the Government’s options for state pension reform. The report concludes that Steve Webb’s single tier state pension, ‘would dramatically reduce the number of pensioners reliant on means-tested benefits. The proportion of pensioner households eligible to claim Pension Credit could fall from 35% of pensioner households (4.4 million pensioners) in the current system to only 5% of pensioner households (0.8 million pensioners) by 2055. The reform would be broadly cost neutral to introduce.

    We need one big, costed and deliverable, policy going into the next election. We could do worse than taking the lead from Steve Webb’s pension reforms and go for a single tier Citizens Income.

  • Richard Dean 12th Apr '12 - 1:07am

    While tehse ideas might seem to make sense, I think there will be a big problem selling them to the electorate. And if good ideas can’t be sold, they can’t be implemented.

    First, the electorate know that the present problem is the financial crisis. This doesn’t look like something that is addressing that issue. Instead, it looks like someone wants to make everything neat and tidy which everyone in the real world knows is not what the real world is like.

    Second: “This is paid for by elimination of the personal allowance, Winter Fuel Allowances, free TV licences and bus passes.”. How many votes do you think this proposal will lose? No-one will believe they will be better off if you take these things away. Even if they will be. Every voter knows government takes with one hand what it gives in the other.

    Third “Citizen’s Income is emancipatory: it allows people to make choices for themselves, not have them made for them by a bureaucratic state.” But taxpayers pay for this, so they might actually prefer government to make the choices, because that gives some vestige of control over the amounts taxpayers have to stomp up.

    Fourth “We will need … unadulterated redistributive measures to put cash where it is needed, in the pockets of the least well off.” This will scare taxpayers – it looks like you are proposing to take more from them to give away to people they don’t necessarily have a lot of sympathy for.

    My feeling is that these ideas are something that an electorate could accept if times are good and if a great deal more trust in government has built up than exists at present. For 2015, I think they will lose us votes.

  • Gareth Jones,

    There is a lot to agree with in David Pidsley’s commentary. I think, however, the proposal lacks political credence. The idea of introducing an individual minimum income guarantee of 12,000 per year; and replacing income tax with what is commonly viewed as a more regressive sales tax, while ambitious in its aims, would be a difficult proposition to put to a skeptical public.

  • A citizen’s income has huge potential in a society without full employment. Apart from its simplicity, it could give people so much power over their own lives, and incentivize greater economic activity and encourage voluntary work.

    On a practical political level, it is distinctively Liberal, philosophically and historically. It used to be talked of quite a lot but was too alternative to be acceptable to a “grown up” party. It is a bit radical: it would mean paying people for doing “nothing” and the concept of giving money to people and then taking it away in tax is even more “silly” than AV, so a bit of a tough fight against the vested interests and the inertia of the status quo.

    There are some questions and logical conclusions that could cause concern. For example, how to confidently set the rate and should it and whether it should extend to housing costs. And perhaps employers’ NI could have an expanded role in compensating the system for providing employees at a lower hourly rate.

    (I’m not sure about an intrinsic need to remove the universal and wider benefits of free travel and TV for pensioners to allow a citizen’s income.)

  • Adam,

    The concept of a distribution of Land Value Tax as a gift of nature lies well with the philosophical concept of a ‘Citizens Income’ and could potentially enhance the work incentives embedded in the tax and benefit system. We have not yet been able to develop specific proposals around which there is a broad consensus, other than the Mansion tax proposals.

    My own view is that we should focus, initially at least, on replacing higher rate income tax (approx 60 billion) with a graduated tax on higher value residential property that is not assessed on existing basic rate taxpayers.

  • Tim,

    I assume (based on your paper child benefit you would be broadly in agreement with merging child benefit with child tax credit.

    The adult citizens income approximates to the current level of JSA/Income support and presumably the coming Universal Credit. Excluding passported benefits, the principal additional means tested benefit is housing benefit, which I would also propose to deliver by way of a negative tax credit in such a way that the marginal deduction rate did not exceed 50% and work was not disincentivised.

    Universal benefits v means tested benefits are both a political decision and an economic one. The decision is influenced by the Liberal and economic philosophical arguments that you find most persuasive. The good society of Keynes and the Universal child benefits of the Beveridge welfare state or the more Libertarian approach of Hayek, who seemed to consider unemployment insurance, state pensions and a national health service, as misguided state interference in the workings of a free market.

  • Richard,

    “While these ideas might seem to make sense, I think there will be a big problem selling them to the electorate. And if good ideas can’t be sold, they can’t be implemented.”

    I was initially concerned about this issue, but having floated this idea with a good number of friends, family and acquaintances (of all political persuasions) over the past couple of years, I have found a great deal of receptiveness and dare I say even enthusiasm for the idea.

    At least 50% of pensioners will gain. While 50% f pensioners will be paying a little more in tax. There has been a lot of debate about the granny tax recently, so I would agree it has to very clearly communicated well in advance – as a cost neutral measure benefitting lower income pensioners.

  • Al,

    good points. I feel with the introduction of a single tier state pension and universal credit the ground is now laid for a Citizens Income.

    The decision about pensioners free travel and TV is as much or more so a political one as a necessary cost reduction issue. I think the removal of these benefits, assuming that is judged appropriate, is best achieved when additional cash is being made available to lower income pensioners.

  • It’s a fair point, Liz.

    The withdrawal of credits at higher levels of income is a drawback to universality, but probably a necessary trade-off to stay within the current budgeted spending envelope for benefits.

    When Milton Friedman proposed such a scheme, he called it ‘negative income tax’. Others have referred to such schemes as ‘Minimum Income Guarantee’ or ‘Basic Income.’

    Friedman’s policy prescriptions were shaped by his desire to minimize both bureaucracy and adverse economic incentives – in particular to eliminate the disincentive to working that arises when benefits are withdrawn to rapidly from lower earners. These proposals have that same principle aim together with the social cohesion that comes with broadly universal welfare provision.

  • There are some good ideas here. One of the key benefits of this type of approach is that it differentiates us from both the Conservatives and Labour at the same time. One approach that may be worth looking at is the citizens dividend scheme in Alaska. A citizens dividend implies a sharing of commonly owned assets where as a citizens income may appear like a gift from the state if it is at a fixed lev el.

    A point that may be worth considering is the effect on crime. In Alaska if you commit a crime you lose the dividend. The data shows that certain types of crime fell following the introduction of the dividend in 1982. The types of crime that fell were mainly property theft. A citizens dividend could increase cohesion within society as all share in natural wealth.

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