Absurd

The Department for Work and Pensions has today released a report which strongly supports the principle of a flat tax and citizen’s basic income.

Well, it hasn’t done so explicitly. But its latest Tax Benefit Model Tables (big pdf) are the next best thing.

Here’s a question: Take a married couple with two children under 11 and pre-tax earnings of £200 a week. If they get a better job, raising their earnings to £300 a week, by how much does their net income rise?

£60? £50? £40?

Nope. £8.52.

Yes. £8.52. That’s a marginal deduction rate of 91.5 per cent.

The extra £100 this couple earns before taxes are swallowed up by higher income tax and National Insurance Contributions (£33); lower Working Tax Credits (£37) and less Housing Benefit (£19.50).

Higher earners face only slightly lower deduction rates. If a couple’s income rises from £500 to £600, they get to keep all of £23.45.

In the range £630-£710, the marginal tax rate drops to 23 per cent. But beyond then, it rises to 41 per cent.

Of course, things are different for different family types. But the fact remains. Marginal deduction rates for many people on lower earnings are horrifically high; 89.5 per cent for a single parent with one child earning less than £400 a week, for example.

For millions of people, it’s a bad idea to work harder.

Is this either economically efficient or a good thing for low earners?

Is this really the best tax system anyone can think of?

Comments

[Gorse Fox]

Methinks you miss the point. By keeping tax (and NI) as complicated as it is it never occurs to some people how they are being ripped off - so HMG wins. People are grateful for small movements in thresholds... without realising that the net benefit has probably been lost by some other tweak to the system. Flat Tax would make evrything horribly transparent... then what would the politicians do? Come on, get a grip, you don't think they would do anything that would expose them do you?

[dearieme]

The effective tax rates on the working poor are a bloody disgrace and if the only realistic way to lower them is to aim for a much lower fraction of GDP going to the government, then let's get on with it.

[Blimpish]

And to think, WFTC were supposed to get rid of all these high MRWs... The experience of recent history cautions against grand plans of reform, as ever.

[Ken]

It's the best system the Treasury could devise... most people don't understand any of this, and so believe the headline rates of tax, taking them to be more or less what they are paying. Newspapers are too lazy to explain the full horrors of the tax system. Meanwhile the pockets of the Treasury get lined further...

[Tim Worstall]

And if they spend the extra 8.52 on petrol then it’s what, 1,28?

[EU Serf]

That 8.52 will disappear when they are forced to by more expensive clothes because of the quotas.

How can anyone still claim that Gordon Brown is anything other than a disaster???

[Mark T]

how much would you have to earn to be better off than Abu Hamsa and his £1000k a week in benefits?

[dsquared]

You're looking at page 92 I presume which is for a private tenant. Local authority tenants on pages 86 and 90 do a lot better at this point on the curve and I would have thought that (ex London) this would be more normal for someone on £200 a week.

Also this isn't really an argument for a flat tax because what's driving the high marginal rate is the phase-out of Working Tax Credit and Council Tax Benefit. If you had a flat tax regime (and wished to leave families earning £200/wk no worse off), you would have to replace these tax credits by going back to Income Support or some other benefit and if this was means-tested, it would create similar regions of high marginal deductions rate. Any policy which guarantees a minimum income is by that token bound to create a region of very high marginal deductions rates.

[Gorse Fox]

Mark T. Gorse Fox hasn't done the sums, but would estimate the answer is about £70,000 p.a.

[Tim Worstall]

Dsquared. You’ve rather missed Chris’ point about the Citizen’s Basic Income. This is never withdrawn so there is no withdrawal rate.

[Blimpish]

Tim: there's always a withdrawal rate; it's just that it's the same as the tax rate with a CBI. (Distributive policy, remember, requires some money to be taken from some before can be given to some.)