Tax credits vs basic income

Here's a nice example of the agenda manipulation and limited vision that pollutes British politics. In trying to defend tax credits, Stephen Timms says:

The tax credit system has delivered three vital improvements: it has increased incentives to work; reduced the tax burden on low to middle income families; and helped to sharply reduce child poverty. Tax credits are benefiting six million families and around 10 million children and reaching far more low and moderate-income families than any previous system of income-related family support.

But the important question is not: are tax credits better than previous systems? It's: are tax credits the most effective possible way of helping the poor? In particular, are they better than a basic income?
It's certain that a basic income would be cheaper and more efficient to administer. And there's no reason in principle why it shouldn't be at least as good at reducing child benefit and the tax burden on poorer families.
So, the only issue is the impact on work incentives. Here, the argument's ambiguous. On the one hand, tax credits are better. This is because a basic income would be paid whether you work or not, so it wouldn't raise the gap between in-work income and out-of-work income. But tax credits do just this.
However, the withdrawal of tax credits as income rises means that millions of families face enormous marginal tax rates - of over 80%. This reduces incentives to work harder or better. A basic income could easily improve on this.
You know my opinion. But that's not the point. The point is that the question of the relative merits of basic income versus tax credits should be raised.
But the MSM, like our politicians, lacks the imagination to do so.

Comments

[Phil]

There's also the fact that the tax credits system is a bureaucratic monstrosity from top to bottom. Thanks to PAYE, most people in this country don't even complete a tax return - then along comes this system which requires us to account in detail for our *future* income. It's probably inevitable if you're going to start funnelling benefits through the tax system - which seems to me like a good reason not to do it.

My suspicion is that low takeup rates have been built into Treasury cost estimates - so the blessed unarguable simplicity of BI actually counts against it. But maybe that's too conspiracist.

[The Pedant-General]

Phil,

I don't think it is conspiracist in the slightest: the take up rates at the top end will get progressively worse: there becomes less and less incentive for the ordinary punter to fill out the forms for very little gain.

The problem is trickier than this:
- Take up rates of Tax Credits at the top end will be lower, so this is outgoing cash deferred. Easy-peasy
- By contrast, the benefit (to the taxpayer) of the CBI is that it is incredibly simple to administer and so Gordo ought to be able to sack lots of people. THAT is the problem: it is politically difficult to get the full economic benefits for the Taxpayer.

PG

[James]

Tax credits are complete mess. In the case of child tax credits the Inland Revenue already have all the information required apart from who the two people are who have had the child; so why make us fill in what amounts to a tax return? It seems very cowardly for the government to make us go through all of this because they won't make the case for increasing income tax even at the higher rate in order to fund higher child benefit and/or a citizen's basic income.

[Andy]

What about a sliding tax credit. Say that the government will give you ($30,000 - income)/2 ? So someone earning $10k gets a $10k tax credit for a total of $20k, while someone earning $20k gets a $5k tax credit for a total of $25k. You still face an effective 50% marginal tax bracket, I suppose, but one could adjust the denominator above, and it's certainly better than a cutoff at a certain point.

[Phil at work]

PG - my suspicions were about low takeup at the low end. I'm not talking about the demand-suppressing effect of being well off (if there is such an effect - in my experience people who already have plenty aren't at all averse to getting a bit extra if the opportunity arises) but the deterrent effect of having to fill in a kind of anticipatory tax return, which is likely to weigh disproportionately on the people who actually need the money.

[The Pedant-General]

Apologies Phil: my comment came across as a bit harsh.

You are right on the general point re future tax returns in general and you also have a point re form filling for the real lost-and-confused lot at the very bottom of the pile.

I just thought "conspiracy" was possible a bit too strong.

(and my final politically difficult bit about the benefits of CBI as opposed to tax credits still stands...)

PG