“Imagine” that there was a reverse income tax…
…. that could efficiently replace welfare benefits, state pensions, offer student grants, eliminate poverty and provide a universal basic income.
It isn`t hard to do!
I have mentioned reverse income tax, or as Milton Friedman would say negative income tax, on many occasions to a variety of people who have shown varying levels of understanding and incredulity so I thought it may be useful to put it all together in an easy to read blog article.
The main advantage of a reverse tax is that it helps the poor in the most direct way and treats them as responsible adults rather than wards of the state. It gives people the incentive to help themselves, costs a lot less than the current welfare programme and is managed through H M Revenue ad Customs (HMRC) thus removing most of the cumbersome and wasteful welfare system. It also has the added advantage that it could be used as a grant to support higher education for everyone over the age of 18 and it can replace the state pension system allowing everyone to retire whenever they like and because it is only paid out if income is below a prescribed number it will be a very efficient and effective way of using State funds.
The perceived disadvantages are all short term and temporary. It will require a complete reorganisation of the current tax system and a lot of modelling to test different numbers. It will remove most of the special considerations for various groups under the current benefits system e.g. child benefits and worst/best of all it will cause a significant amount of unemployment in the Civil Service.
There is no science behind the numbers I have chosen to illustrate how it works with my main aim being to make it simple to understand bearing in mind how difficult it will be to force The Establishment to accept such a radical and beneficial change to the economy.
Suppose every person had a tax free allowance of £20,000 and they paid their first marginal rate of tax when they earnt £20.001. I have decided that each person needs a basic income of £9000 (it is just a coincidence that this equates with higher education student fees paid in the UK). A reverse income tax rate of 45% is placed on all income not earnt below £20,000. If you are over 18 and have no income the HMRC will provide you with 20,000 x 45p = £9000.
One of the main problems about the current tax/benefits system is that people can get caught in a poverty trap if they receive benefits greater than the tax allowance. In the past, in the UK, it was possible that a poor person could earn £1, lose £1 and pay the first marginal rate of tax say 20p. In effect the poorest would be paying an implied rate of tax of 120%. Under these circumstances we can sympathise with a person who wants to earn cash–in-hand that they will not declare to HMRC.
Reverse income tax removes this problem and many more. Suppose a person worked a part time job and earnt £10,000. They can now claim 10,000 x 45p = £4,500 and would receive £14,500 in total and so on. No one can ever be worse off by doing some work. In fact under this system we would all be less tolerant of anyone cheating the system, than we would if they were caught in the poverty trap by being taxed at 120%.
Do we now close down the whole welfare and State pension system? The answer is almost yes, but in any civilised society there should be special consideration given to those registered as physically and mentally unable to look after themselves both as adults and as children of parents who are in need of support.
Many economists have supported reverse or negative income tax over the years and this begs the question why have governments never introduced this system. The simple answer is too much resistance from those public servants who run the country and then would find themselves unemployed or downgraded in importance. Its introduction would require careful calculations and no doubt its implementation will produce a few hiccups on the way, but I have never come across anyone who has thought it a bad idea and could not see how it would improve the current tax and welfare system.
Arguably, in the UK, the introduction of Universal Credit was a nod in the right direction but it was kept sufficiently complicated to require an army of civil servants to manage it and as we have seen they seem to have made a mess of it. Let us hope that there are some government economists and doctoral students working on these numbers and doing their due diligence preparing for an imminent introduction of a Reverse Income Tax, although I do remember Friedman and I saying this very same thing forty or more years ago.
John Hearn 6/03/2020
No comments:
Post a Comment