Opinion: tax and benefit reform to help tackle youth unemployment

In a two-part investigation, Joe Bourke looks at youth unemployment. Sunday’s part two will have details of policies designed to provide guaranteed employment for 16-24 year-olds. In part one, we discuss changes to the tax system that would make such policies affordable.

If the 2012 budget sees the personal allowance increased to £10,000 we will have achieved a key plank of the 2010 manifesto and provided some welcome relief to the squeeze on incomes that has come not least from the increase in VAT to 20%.

Whether the increase in the personal allowance is achieved in this budget or subsequently, we will soon need to turn our thoughts to more radical tax and benefit reform for the next general election. I outline here, what I believe could be a distinctive Liberal Democrat approach.

The first measure required would be to replace universal credit with a citizens income for all over 18’s, equivalent to the combined rate of tax and employee national insurance (32%) on an initial £10k personal allowance rising over-time to the equivalent of a full-time minimum wage. Taxpayers will pay tax at 32% on all earnings but receive an initial annual citizens income of £3200 per year by way of tax credit to offset the additional tax paid – equivalent to the current jobseekers allowance.

Taxpayers earning over £100k per annum would have the citizen’s income tax credit withdrawn in the same way as the personal allowance is withdrawn now. The citizens income benefit is unaffected by other earnings. Existing measures for housing benefit and non-universal credits would remain in place. Citizen’s income could replace child benefit or a lower rate of child income in place of child benefit could be considered.

The next step is combing income tax and national insurance into a single flat rate that is applied to all sources of income. Pensioners would receive the citizen’s income in place of the current pension credit and as compensation for basic rate pensioners paying a higher combined rate of income tax on their income. Many pensioners could see a net increase in their after-tax income.

Capital gains would be subject to indexation relief but otherwise taxed at the single flat rate. Corporation tax and inheritance tax would be set at the same flat rate. The effect of additional tax on SME employers can be alleviated, where appropriate, by reductions in the level of employer’s national insurance contributions levied.

The final step is to replace higher rate tax with an annual assessment on residential and commercial property broadly equivalent to the rates used for stamp duty on transfers of property title. The tax would not be avoided by holding property in a company or trust. SDLT rates currently in force for residential property are:

  • Up to £125,000 – Zero
  • Over £125,000 to £250,000 – 1%
  • Over £250,000 to £500,000 – 3%
  • Over £500,000 to £1 million – 4%
  • Over £1 million – 5%

The annual property tax should be levied in bands, so for example a couple jointly owning a £250k property (£125k each) would pay nil, a couple jointly owning a £500k property and with one partner earning over £47,500 would pay £1250 in place of higher rate tax. The levy would need to be subject to a maximum overall tax on

Gross income (before reliefs) for homeowners with residential property based on existing higher rate bands and rates up to £150,000 (no limit after £150k income), so as to avoid any additional burden on retirees and others with incomes below £35,000 and £150,000 respectively, who live in high value properties. A minimum tax level equivalent to the current non-dom levy of £50,000 would also be required for non-residents not taxable on their worldwide income in the UK.

The overall aim of these changes should be a small increase in total tax revenues to fund a continuing program of guaranteed work for 16-24 year olds and a more equitable distribution of the tax burden.

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

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  • Richard Dean 24th Feb '12 - 9:07pm

    A distinctive strategy is definitely needed. I like the name “citizen’s income” but have two main issues with your detailed suggestions.

    First, they’re too complicated. An electorate needs things to be simple, and candidates too, and tax offices, and the people who write software for tax purposes, and business planners, and NPV estimators, and many others. People need to be able to understand how they will be affected, and need to have the confidence to trust their assessment.. There is also the major risk that the net tax take after this will be quite different from what is estimated, potentially having huge effects on other plans. An incremental evolution would surely be better than a step change, giving scope for learning, limiting the impact of errors, and allowing mistakes to be corrected and damages to be repaired before the next increment? Something we might think about for the NHS too.

    Second, your title mentioned youth unemplyment, but your article did not. Youth unemployment needs to be addressed NOW, not in three years time.

    Hope these commens help. Citizens income does have a lot going for it, yes.

  • I am not sure how taxing people £3200 more in order to give them £3200 back helps anyone. This plan gets pretty much no-one off of benefits, and creates no pro-work incentives.
    It also gets rid of our distinctive policy that you get to keep the first £10,000 of income, tax free!!
    Note too that non-working spouses with affluent partners would gain. Is this a sensible use of scarce money?

  • Richard,

    Thanks for your helpful comments.

    A second follow on article on youth unemployment is scheduled for publication tomorrow (Sunday 26 Feb).

    On the point of simplicity, both the citizens income is a progression on the Universal credit ,itself a measure designed to simplify a very complex benefit system that befuddles claimants and advisers alike.

    Combining tax and national insurance is a measure promoted by the office for tax simplification. It would make life a lot easier for employers charged with the administration of PAYE schemes.

    On the property tax the complicating issue is ensuring fairness so that income poor, asset rich households are not unduly burdened. Perhaps a simpler way of putting this would be:
    Income 35K 150k = No cap.

    As regards the campaign message, I would suggest something along the lines of the following:

    Liberal Democrats working for a fairer, more equal Britain:

    – Equal minimum income guarantee for all
    – Equal income tax rate for all
    – Fair property tax for higher earners
    – Equal opportunity job guarantee for under 25’s

  • Tim,

    thanks for your comments.

    If you are interested there is a lot of useful background info online at .

    Our 2010 manifesto commitment to raise the personal tax threshold to 10k was aimed at taking 4m taxpayers out of tax. However, wage earners will still pay employee national insurance at 12% on earnings over 5715. When we raised the personal allowance something like 1m low earners were taken out of tax but continued to have NI deducted from their wages. These 1m and those earning less than 7475 per year will not benefit from further increases in the personal allowance. The man on the street does make much of a distinction between whether we call deductions from wages tax or NI, they are all tax to him.

    The citizens income is paid to employees as a tax credit. Most employees and pensioners do not file tax returns they get a payslip and annual statement of earnings and tax. Under the citizens income scheme there will be no deductions on any earnings below 10k and those earning less than 10k will get a regular tax refund in their pay packets or private pension remittances.

    The citizens income replaces universal credit and child benefits. Universal credit itself replaces unemployment benefit and working tax credits. There will no longer be any issue of losing unemployment benefit as all citizens will have a minimum income of 64 per week as a safety net. They can engage in part-time, casual or full-time work as much as they like without losing their citizens income payment.

    The real issue with benefits is housing benefit costing over 21 billion per year. The majority of claimants are not unemployed but in low paid jobs. A large part of this benefit is a public subsidy to minimum wage employers that are not currently paying sufficient wages to their staff to allow them to meet basic food, clothing and shelter costs. A low minimum income guarantee will help in the ongoing effort to reduce this public subsidy and a property tax will help in keeping a lid on property prices while we wait for a return to more historically sustainable income/house price ratios.

    Our distinctive policy of no tax on the first 10k of income becomes yet more appealing as follows:

    – No tax or NI deductions on the first 10k of income.
    – Tax credit of up to 64 per week for those with incomes below 10k

    Non-working spouses with affluent partners are commonly allocated sufficient income (earnings or investment income) to utilize their personal allowance and basic rate tax band. Any decent accountant would recommend this. They also currently receive child benefit regardless of income. These avoidance opportunities and benefits would be reduced under the citizens scheme.

  • “Non-working spouses with affluent partners are commonly allocated sufficient income (earnings or investment income) to utilize their personal allowance and basic rate tax band. Any decent accountant would recommend this. They also currently receive child benefit regardless of income. These avoidance opportunities and benefits would be reduced under the citizens scheme.”

    This is not true if the main earner is under PAYE and the couple have no children. Few people have investment income of c. £10k that they can place in their wife’s name. So while I appreciate your answer, my point stands: giving money to non-working spouses with affluent partners is not a good use of taxpayers money.

  • Tim,

    having worked as a tax practitioner for many years, I can assure you that income and asset splitting among spouses to mitigate tax is a commonly used technique of tax planning. In the type of situation you mention, an affluent sole earner under PAYE, married with no children who has not built an investment portfolio, it is likely that their accumulated surplus wealth will be invested in residential property. The sole earner, if he has income over 100k, will have no citizens income himself and his wife’s 3200 of income will be covered many times over by his own contribution, of approaching 40% or so of his earnings, in income tax and property tax on their high value property. The personal choice to have no children should not obviate against the non-working spouses right to a minimum income guarantee. With so many married women now in the workforce, the numbers in this limited situation will be comparatively small.

    There will be winners and losers any time a tax or benefit change is made. It is the overall benefit that can be achieved in the majority of cases that should be the determining factor in assessing the merits of a change.

    Alleviation of child poverty, in the absence of child benefit, will continue to be effected through the means tested child tax credit.

  • Richard Dean 25th Feb '12 - 11:31pm

    Hi Joe, I find proposals are more believable if the proposers admit to uncertainties. Whatever proposals one person makes, the final result will be different, because other people will make changes on the way to implementation, so there is no way to be certain about costs and benefits at this early stage.

    I also disagree in your judgment about what should be the determining factor, not least because different people will have different definitions of what “benefit” means, and how much benefits different aspects of your plans have. Me, I would be quite happy with a 100% tax rate above 100k, if that would alleviate child poverty. Perhaps this is beacuse I earn less than that. Other people would not necessarily value alleviation quite so highly.

    But I still find your proposals interesting, I look forward to Part 2, and I hope you will also address the issue of youth unemployment NOW, not in 3 or 5 years time.

  • Richard,

    very valid points about uncertainty and the inevitability of substantial changes and cost reductions as any proposals are developed and implemented.

    I also, of course, take your point that what one Libdem sees as benefits or necessary compromises others will see as detrimental or inadvisable. Tax and benefit changes are always political in nature and invariably contentious, but that is why we explain our thought process on this forum , to garner feedback and comment from an informed polity as a means of testing the substance and credibility of ideas.

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