In his blog post in today’s Daily Telegraph Lord Tebbit asks, “Why won’t the two main parties do anything about the madness of taxing the poor?’.
“And I hate to say it, but only one party leader seems to have grasped that, if you construct a system where unskilled people are worse off by taking a job than by staying on welfare, they remain trapped in poverty – and that is Nick Clegg.
“It is madness to claim that people so poor that they need welfare payments are at the same time sufficiently well-off to pay income tax. The effect is that people at the bottom of the stack living on benefits who try to get back into work are hit by 20 per cent tax, 11 per cent National Insurance and benefit losses that can add up to almost 100 pence in the pound. It is all very well for the better-off to complain about the disincentive effect of losing 50 per cent of every extra pound they earn, but what about the poor devil at the bottom of the stack who loses 90 per cent?”
Fair taxes for all was the first step given by Nick Clegg in his four steps to a fairer Britain, launched on Monday. Under the Lib Dem plans, no-one will pay income tax on the first £10,000 they earn, meaning millions of low earners and pensioners will stop paying taxes altogether, while millions more will get hundreds of pounds back in their pockets.
Lord Tebbit concludes:
“It need not cost that much. There would be a huge saving in benefits if we got those people back into work. We could redeploy all those people shuffling paper and money around the tax and benefit system to some useful work. And it would be easy enough to lower the 40 per cent threshold so that better-off people did not benefit from the increase in the basic rate threshold – so why don’t “the party of the workers” or “the party which believes in incentives” say they’ll do it? Why leave it to the Lib Dems, who are not going to have the power to do it?”
Sounds like one good thing that might come out of a hung parliament, Lord T?
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33 Comments
I never thought in my lifetime I would see a lib dem blog quoting Norman tebbit in a positive light. I know you guys are floundering on 16%, but that really is desperate.
Anyway, I’ve come here to give credit to Clegg – not for his wholly uncosted and pie-in-the-sky election policies – but for his nailing of Brown at pmqs.
I am no fan of Clegg – at best he is a pious, flip-flopping windbag, at worst an ineffectual sixth form prefect – but today, for once, he got it right, and delivered his best ever pmqs.
You guys have still had it at the next GE, though!
Troll, sigh. Actual facts: 19% (as you posted the last time you were trolling here), and policies are costed.
Why does he hate to say it, if it’s true?
The fact is, & this is why I oppose the libertarians who support repealing minimum wage legislation, what low-paid workers don’t earn will only be claimed in means-tested benefits anyway, which are renowned for being byzantine in their complexity, & contain all kinds of perverse incentives.
Those who think means testing should be kept to a minimum will support some universal benefits, such as DLA paid to all disabled people, & various pensions & benefits to all old-timers, whatever their work or financial situation may be, rather than the tax credits system which we all know all about etc. etc. Otherwise they will just work & save less, & people such as married women whose husbands are the main breadwinners, or students who want beer money, or semi-retired people, or others who are not in dire need of cash won’t bother to work at all.
It is thus that I hail your policies.
Lord McNally should knock on Lord T’s door with a LD membership form post haste!
deluded, sigh. average is 18%, YouGov, the most accurate pollster, gives last poll of just 16%.
Like I said, I came here to give Calamity some praise – becuase he deserved it – doesn’t stop him being a flyweight. See, unlike you Andrew, I can take off my party coloured spectacles – your opinions are wholly subjective according to your personal and political prejudices.
Well done, Bert. How superior to us mere earthlings you truly are.
Tebbit supports Lib Dem policy. I’ll get me coat…. 😉
Just because we don’t agree with Norman Tebbit on everything doesn’t mean that we have to reject his support, especially when he’s giving it for the right reasons! He’s absolutely right about the scandal of confiscatory marginal tax rates on the poor, and he’s right that we have the best policy to reduce taxes on the poor (except possibly the Green’ Party’s Citizen’s Income (pdf)).
Raising the threshold to £10,000 certainly knocks the Tory policy of raising the inheritance tax threshold to £1 million into a three-cornered hat!
The biggest problem is the right-to-buy of council houses meaning many fewer of them becoming available to re-let, meaning people who in the past would have had council housing now living in private rented accommodation with rent – several times what it would be for the equivalent council housing – now paid for by housing benefit.
Given that housing benefit gets withdrawn as pay increases, people in this situation have to earn a huge amount before it’s financially worth their while working. If they can’t earn enough to pay the private rent and have some left over, every extra bit they earn is just withdrawn in reduction of housing benefit.
Given that housing benefit gets withdrawn as pay increases, people in this situation have to earn a huge amount before it’s financially worth their while working. If they can’t earn enough to pay the private rent and have some left over, every extra bit they earn is just withdrawn in reduction of housing benefit.
Yes, housing benefit is one of the worst offenders. I think there should be a cap on withdrawal of benefits so that no one pays a marginal tax rate of more than 40-50%. For the long term, we should aim to replace as many benefits as possible with a (non-refundable) earned income tax credit.
A pal of mine who is on statutory sick pay, in a low-paid job when she works, pays £100 a rent a week & her benefit situation (she is a single mother with a young daughter) is such that she will only be £30 a week better off on resuming work. Admittedly this is complicated because SSP is a unique benefit but it still has people tearing their hair out.
It is means-testing that I am against. What sort of message does it send out that some old-timers (& this includes my grandparents, lifelong council tenants who do not have occupational pensions) get free this that & the other but if they happen to have a works pension, which they are very grateful for easing their lot in life, they have to fork out? Or you get worked over for having savings? Or this thing about having to have your national insurance paid, which makes people claim benefits they often don’t particularly need?
The welfare “reforms” I propose are quite modest. But surely it is best to do as this policy suggests, reduce indirect taxes, withdraw support for families with more than 3 children (they can pay for it themselves- but I do not support financial means testing), & so on? We could even dredge up this CBI as an idea.
As for housing policy. I am actually not anyone’s idea of an expert on it. But any way of providing affordable housing that is neither a scam nor shoving people into tiny & shoddily built boxes deserves a look.
http://www.guardian.co.uk/society/2010/jan/10/mps-attack-grotty-homes
These vague & ill thought out whingings about means-testing child benefit should also be stamped out. It is actually a big if, to me, whether it should exist at all. Because really, having children is a choice. But if we are having child support it should be for all children, apart from a possible withdrawal for very large families.
We can see the pernicious effect of working & child tax credits. It is a typical managerialist policy to have us all handing over as much as possible to the state & being grateful for what pocket money we are dished out, recycled via various admin types who will often concede in private that their jobs are a waste of time & they should be deployed on something useful.
Niklas, citizen’s income was Lib Dem policy until 1994, sadly abandoned because the costs of implementation. I think it was Lord Goodhart (apologies if I’m wrong who had worked out it would cost more than the NHS budget. I seem to recall a certain former Adrian Sanders passionately arguing for its retention.
I’m not sure to be pleased or worried by praise from Lord Tebbit.
Sorrry that should be former YL vice president ,Adrian Sanders…
I agree with both Nick Clegg and Lord Tebbit – it seems like common sense. Increase the income tax threshhold to £10,000 or so (probably should be £10,400) and raise VAT to 20%. Probably need to leave NI threshholds where they are so lower paid accumulate pension rights.
Or we could abandon the pretence that NI (in any actuarial sense) is a system of funding state pensions and admit it is simply a source of general tax revenue. Given that fact, I would be in favour of raising the NI and income tax thresholds by the same amount to avoid creating unnecessary complexity in the tax system and reduce the marginal tax rate faced by the low-paid by 31 percentage points.
Very good points Niklas. The problem is that if you reduce the withdrawal rate of tax credits or means-tested benefits you extend their reach further up the income scale – with the result that more people are tangled up in the system for longer and we have people with household income of £50K receiving tax credits. This increases the cost of the system (because it is less well targeted/selective) unless the generosity of the tax credits is drastically scaled back.
On the other hand if you have a rapid withdrawl rate you create these nightmarish marginal deduction rates, worsening the unemployment and poverty traps.
In any social security system there is a three-way trade-off between cost, generosity and disincentive marginal rate effects. If you have a universal basic income it’s hard to see how the cost isn’t prohibitive, unless the level is set at or below subsistence levels. In many ways it is an attractive model, potentially massively reducing bureaucracy and ‘churn’ – but I have yet to see a specific model that would deliver the objectives we usually want from a social security system at an acceptable cost.
Finding a solution to the benefit withdrawal issue that doesn’t create at least many problems as it solves has eluded successive British governments. I think we need to look at how other countries do it and see if we can’t learn from them.
One thing that definitely does help from every conceivable point of view is raising the income tax threshold, so two cheers for that policy. The problem is it costs north of £16bn and we will be straining at the limits of taxation elsewhere to raise that kind of money, let alone the extra revenue needed to help pay down the deficit.
The children most likely to be in poverty are those in households with 3+ kids. So cutting benefits to those with kids would result in a lot more child poverty.
The problem with having a max marg. benefit withdrawal rate is that it takes so long to withdraw benefits that you end up paying them to people who are manifestly not poor, as a result of the taper. That is expensive, as well as creating middle class welfare.
Cutting housing costs is not difficult. All we have to do is allow more houses to be built. If the increase in supply is smaller than the increase in demand, prices increase. That is the story post-1997. See the Barker Review. If you want to know the most liberal, most democratic way to increase the supply of housing, click here: http://www.centreforum.org/publications/in-my-back-yard.html . If private rents were lower (say, 40%), fewer people would need housing benefit, and it would be easier to withdraw it in a non-incentive destroying way from people who did.
Yes, but why do people have large families they can’t provide for in the first place? The contraceptive pill is widely available in this day & age.
Given the policy helps people on low incomes, I will support it.
However … many people on low incomes do not pay tax, and so will not benefit.
If you really wanted to help people on low incomes, you could for example increase benefits. An expensive policy, yes. But there is a price to be paid in cutting taxes as well, especially at a time when our credit rating may be downgraded as well, making the cost of borrowing higher and putting on more pressure to increase taxes.
Not only that, people on low incomes are more reliant on public services. Public services are likely to be cut anyway, but cutting taxes will make the cuts even worse.
So the question is; how good is our policy at reducing poverty, or do we just prefer policies that make good spin? To answer that question I would be interested to see the research that has been done into this.
Amazingly, the evil Darth Tebbit has understood the principle precisely, and is supporting a very good Lib Dem policy for exactly the right reasons. I assume normal service will be restored shortly…
@Geoffrey Payne
The trouble with asking about every policy on incomes “Ah, but does it help those on the lowest incomes?” is that invariably you come back to increasing means-tested benefits, as you suggest. The chief downside of this is not the cost, but the resulting horrible disincentive effects. The underlying assumption seems to be that people just are poor, that nothing will change their level of pre-tax income, so we should concentrate on altering the post-tax/benefit distribution. I certainly hope that’s wrong, and I’m pretty sure it is. What this policy aims to do is help those on benefits or very low incomes by making it actually worth their while to get work/more hours, rather than making them better off in their current situation.
Of course, some people will point out that there’s a recession and rising unemployment, and they’re right. But the fact is that even in a recession people move in and out of work and behaviour is affected by incentives; and it makes no sense to reject a policy intended to effect a long-term change in behaviour incentives on the basis that the current economic situation will reduce its effectiveness in the (relative) short term.
Certainly any policies, whether on tax or public spending, must always be subject to affordability and never more so than now when bond yields are rising and we face at least the risk of a credit rating downgrade. If the UK government has to pay a lot more of a premium on its debt then there will have to be spending cuts and tax rises of a magnitude much greater and more immediate than those so far envisaged (Ireland, Greece anyone?), so clearly we must avoid that scenario if at all possible.
That’s why I’m concerned about how this will be financed – whether we could realistically cover the cost through tax rises elsewhere and, if so, whether any extra revenue shouldn’t be earmarked for deficit reduction instead.
But as soon as it did become affordable, raising the personal tax thresholds is an excellent idea and the simplest way of helping the low-paid.
Geoffrey, clearly you are right that tax cuts only help those who pay taxes – although in the UK this means anyone earning more than about £6K, so it would help the vast majority of people in work. (I think full-time minimum wage earnings work out at about £11-12K per year.)
This is the most progressive type of tax cut, better and less gimmicky than introducing a new lower rate band like the 10p rate for example. And while most taxpayers benefit from it (everyone earning less than £100K in the party’s formulation, because of the clawback of the personal allowance above that level), it’s worth proportionally the most to the low-paid: the biggest gainers in terms of the extra percentage of income kept are those earning £10K, after which the percentage gain slowly tapers off.
Most importantly, by reducing marginal tax rates at low levels of income by 20p, it would substantially alleviate the unemployment and poverty traps: ie make it pay for the unemployed to move into work, those in part-time work to work full-time, or the lowest-paid to move up the earnings ladder without having their extra income cancelled out.
Obviously you’re right that the simplest way of directing money to non-taxpayers would be to increase benefits. But there is a wealth of evidence that the best way to help able-bodied adults improve their living standards is to help them find a job, not pay more benefits.
Increasing means-tested benefits would actually worsen the perverse incentives created by the social security system that we’ve been talking about above – since it would reduce the advantage of taking paid work, and for someone working part-time on low pay, would worsen the problem of punitive withdrawal rates when they moved into better paid work.
Tim Leunig’s plan for planning auctions is superficially attractive, and I’ve wondered about similar ideas before. But I’ve come across what looks like a pretty solid demolition job here:
http://www.landvaluetax.org/theory/not-in-my-back-yard.html
Fundamentally, I question the general assumption that housing demand is a given, which supply either meets (->lower prices) or fails to (-> higher prices). This is an assumption, by the way, that plays into the hands of the anti-immigrant narrative: “We wouldn’t need more houses if we stopped letting more people into the country.” I suspect that demand is more elastic than this suggests: that increasing the supply of housing results in a non-trivial increase in demand, thereby pushing up prices again, and feeding the need for dual incomes, ever higher incomes, and an ever higher proportion of income being spent on housing.
Does the answer perhaps lie somewhere in the murk of LVT and genuinely social housing?
Tim Leunig
Cutting housing costs is not difficult. All we have to do is allow more houses to be built.
It won’t work if wealth inequality is such that when more houses are built they are snapped up as second homes, or just as a convenient way of storing wealth rather than buying shares or bonds or putting it in a high interest account.
Exactly Malcolm – you put the same point better and more concisely. The changes any tax/benefit system can make are limited compared to equipping people (through education, training, a well functioning market economy that creates jobs etc) to improve their pre-tax earnings, but at least we can stop *disincentivising* work as much as we do now by reducing the marginal rate on the low-paid.
If you subsidise something, you get more of it; and if you tax it, you get less. That’s the key point on incentives.
The problem is that our tax and benefit systems now create serious disincentives to work at both ends of the income scale. The top marginal tax rate for the highest paid will soon be 52% for employees (50% income tax plus 2% employee NI), or 58% of wage costs (once you factor in employers’ NI, which reduces wages). The disincentive effect at the bottom of the income distribution is even worse due to benefit withdrawal, with large numbers of people facing marginal deduction rates of over 60%, many over 70% and in a few cases more than 90%.
The changes any tax/benefit system can make are limited compared to equipping people (through education, training, a well functioning market economy that creates jobs etc) to improve their pre-tax earnings
Can everyone be so equipped?
Aren’t there always going to be people who aren’t very good at much?
In a well functioning market economy, aren’t employers going to find it better to bring in more talented people from abroad than employ local people at the bottom end of the ability range? Might employers not suppose that rather than pay taxes to educate local people, they could leave it to other countries to educate people at the expense of whoever it is pays tax in those other countries, and lobby for a free market approach to immigration so it’s win-win for employers and the immigrants, lose for the low ability locals?
Firstly I don’t think we should so easily accept that opportunity in our society today is remotely adequate, given the shamefully poor education system and the pernicious effects of welfare dependency leading to inter-generational poverty. I don’t accept that poverty of aspirations, which keeps many able but underprivileged people from achieving their potential in life.
But suppose you’re right. I would certainly agree that the talents and skills that are in demand in a market economy are unevenly distributed, and some people might never have them to earn sufficient for a decent standard of living, even given greater opportunities. That’s why we need Churchill’s welfare floor/safety net – to provide a minimum standard of living for all citizens, to protect those unable to work, to compensate the victims of economic change – as well as the ladder of opportunity. I would not dispute that.
I fail to see why this refutes (a) the wealth of evidence that it’s better for those who can work, even in unskilled or low-paid jobs, to do so rather than languish on benefits; and (b) the way the tax and benefit systems currently operate penalises those who try to better their position.
(By the way, I would not claim, as some conservatives do but as liberals like Hayek emphatically don’t, that market rewards reflect merit in any moral sense. And even if inherited wealth and differences in educational opportunity could both be abolished, there will still be no inherent moral value attaching to the resulting distribution of income and wealth. Indeed it is one of the advantages of a market economy that someone’s livelihood does not depend on other people’s evaluation of his merit; it is enough that he can be able to perform some work or sell a service for which there is a demand. The pursuit of an income distribution based on moral worth or desert is a dangerous delusion.)
Finally, you’re right that – like globalisation of capital flows – immigration creates losers as well as winners, although on a global scale it’s not a zero sum game otherwise we’d never have any economic progress. Pulling up the drawbridge is no solution however, and certainly not one a liberal should support.
@David Cox: in the Green Party document they say the Citizen’s Income could be as low as Jobseeker’s Allowance, which is not that much money. Though I agree that the expense would involve higher marginal tax rates (although not higher than they are currently with the withdrawal of means-tested benefits taken into account). Cost is one reason why I think we should start out with an earned income tax credit instead, which would increase the reward from getting a job to make up for loss of benefits. In America a similar (though refundable) credit has worked well in reducing poverty: http://en.wikipedia.org/wiki/Earned_Income_Tax_Credit
Alex Sabine
Finally, you’re right that – like globalisation of capital flows – immigration creates losers as well as winners, although on a global scale it’s not a zero sum game otherwise we’d never have any economic progress. Pulling up the drawbridge is no solution however, and certainly not one a liberal should support.
I am trying carefully to mention these things because no-one else ever seems to. Discussion get shut down early because no-one wants to be accused of being “racist”. Unfortunately, the result is that valid lines which need to be considered – doesn’t mean they are the only lines that need to be considered – only get put into public debate by people who really are racist, and who thereby win support from people who aren’t really racist but are hurt by the political elite who despise poor white working class people more than they despise anyone else.
I agree with you on that Matthew. More open and rational debate – about the downside as well as the advantages of immigration – and with less ritual name-calling all round would be very welcome.
For instance I am in favour of the free movement of labour as well as of capital. However some of the economic arguments that are advanced for immigration are absurdly reductionist, eg that it adds to our GDP (of course it does, since an economy with more people in it will produce more output – what matters is GDP per head and quality of life).
Unbelievable. 30 comments to date, and not one has yet acknowledged what it is that truly motivates Lord Tebbit. He isn’t actually shy in telling us. To find the direct quote, “There would be a huge saving in benefits if we got those people back into work.”
Persecuting “benefit scroungers”, and telling the undeserving poor to “get on your bike”, has been Lord Tebbit’s main ambition in life. And we’re going to applaud?
The real evil of Tebbitry, mind you, is not that it’s inhumane. It’s that it’s a cruel deception to pretend that it can actually work. It is not an achievable aim, or at least, not unless we are prepared to starve our own population in order to force people into seeking jobs. Perhaps Tebbit would really do that, if he had the option. I’m sure Clegg would not.
The premise that the radical Right are making is that, if you take someone who is currently £2 a week better off on benefits than in minimum-wage work, and you stop charging him / her the (tiny) amount of tax to which he is currently liable – say £5 a week – then he will immediately act like a rational economic being, and race off to seek a lousy minimum-wage job. Rubbish. Actually, if he can survive while lounging around on a sofa most of the week, he is likely to be supremely uninterested in racing off to the freezing potato fields of Lincolnshire to earn a few quid more by slaving away for a gangmaster. He will happily leave that to the immigrants, and so would most of us middle-class professionals, if we faced the same options. He would seek such work if Tebbit cut his benefits below starvation levels, but not otherwise. Of course, he might not then find any work in time to survive, but the radical Right might not be bothered by that.
Clegg’s redistributive policy, as Geoffrey Payne points out, can be supported for humanitarian reasons. As a means of getting people off benefits and into work, it will only have the most minuscule effect. In reality, Tebbit knows that. By posing (incredibly) as the liberal’s friend, he is making his preparations and adopting his camouflage for the next steps he would like Cameron to pursue. “A huge saving in benefits”.
While we’re about it, let’s examine the BNP’s oh-so-reasonable analysis of much the same issue, with a little racism stirred in on top. It goes broadly like this: “Why don’t we get the millions of benefit wasters out of the pubs, off the sofas, and into the jobs. Then we wouldn’t need all these Polish plumbers!”
Well, the trap that the BNP are laying for liberals here is that, in order to refute this bogus argument, we shall have to state some uncomfortable truths which arev not very PC. These are, that we do have in our society a large number of people who are either inadequate, or lazy, or feckless, or unlucky, or all of these things. They would never be able to do the plumber’s job, which is why we do need the Poles.
New Labour have experimented endlessly with mildly coercive measures to get people off benefits, with very limited success. We have mostly sat back and sneered, while avoiding being too specific as to what we would do instead. Then suddenly we have twigged that our redistributive tax policy – in itself a perfectly defensible idea – can also be sold to the public as a brilliant means of achieving what the BNP are asking for, i.e. the elimination of the benefit waster. Humbug. It won’t achieve that in a month of Sundays.
Wishful thinking, and why our party is drowning in it, part three. This idea that it’s dead easy to avoid the “poverty trap”, that is, a high marginal effective tax rate (taking benefit withdrawal into account) at just above the poverty line. All we have to do is decree it, and paradise is in our grasp.
Now to be fair, posters such as Tim Leunig and Alex Sabine have rightly acknowledged that it isn’t that simple. To be a bit less sympathetic (and maybe a litle less fair!), it seems to me that they have taken the attitude that it is a demanding technical challenge, worthy of the best economic brains, and that we can achieve this utopia if we put our minds to it. I don’t agree. I think it’s like trying to get a football out of a large spherical tank by pushing it uphill with a pencil.
You start by extending benefits upwards to higher income levels, so as to reduce the marginal effective tax rate. Then you find that this costs too much, and all the other lobbyists for worthy causes (education, health, etc) are screaming blue murder that you aren’t spending your money on what they want. So you cut the level of benefit for everyone. Then you find that at the bottom end of society, people are now at risk of starving. So you bring back a targeted benefit for the poorest only. Hey presto, you’re back where you started from, with a high marginal effective tax rate. As you always will be, no matter what the mental octane level of your economic advisor!
Get over it, is my advice. So Ok, we don’t have a solution to the “poverty trap”. Nobody has a solution to the poverty trap. There is no solution to the poverty trap. Let’s move on!
And is the poverty trap so terrible? No! It is not the so-called “poverty trap”, and the economic disincentive against swapping benefits for work, that primarily keeps people off work and on benefits. It is either because (in the 1980s) there are just no more jobs to be had, or (in the 2000s) because the jobs which are going are even less pleasant than doing nothing in fairly squalid conditions. If we fuss about the “poverty trap”, we are attacking a non-problem, and neglecting the real problems.