NEF’s Error – A Universal Income Is On Top Of The Tax Allowance, Not Instead

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The New Economics Foundation – usually known as not economics frankly – tells us that we should abolish the personal allowance for income tax and instead have a near £50 a week universal basic income. This isn’t the right way to be doing it at all – the point is to free the poor from high marginal tax rates, not to further trap them in that destitute state.

And I speak as one of the two that managed to get that personal allowance raised up to that £12,500 it soon will be. On exactly these simple grounds, that the poor shouldn’t be paying income tax at all. Because they’re poor, d’ye see?

Sure, we need to have government, even if not quite as much as we do have. Thus we need tax revenues to pay for it. But that tax should be, where it is derived from income, paid by the better off among us. As Adam Smith pointed out, people should be paying more than in proportion to their income. I would actually argue that income tax should only kick in at median income but agree that would require a smaller state than we’ve got now. Actually, that’s why I would propose it.

Still, that does mean that this suggestion fails at that first hurdle:

The tax-free personal allowance, which rises to £12,500 in April, should be scrapped and replaced with a flat payment of £48 a week for every adult, according to radical proposals welcomed by shadow chancellor John McDonnell. The proposal, from the New Economics Foundation thinktank, is for a £48.08 “weekly national allowance,” amounting to £2,500.16 a year from the state, paid to every adult over the age of 18 earning less than £125,000 a year. The cash would not replace benefits and would not depend on employment.

It’s a universal basic income. Excellent stuff therefore. But the error is to think that this should replace that personal allowance. Assume that they’re including NI in that no allowance thing – if they’re doing it for income tax then they probably will for NI. What that means is that anyone earning more than £50 a week is facing a 40% marginal tax rate (yes, 40%, employers’ NI is incident upon the workers’ wages).

Do we think that’s a just way to pay for diversity advisers? That someone on £50 a week gives up 40% of any income over that? No, we don’t, we think that’s an entirely unjust taxation system. Actually, it’s a really stercore taxation system.

The correct way to do this is to have a universal basic income – around the pension guarantee, £150 a week is about right – and then a substantial tax free allowance on top of that. Actually, the allowance should be a little more than we have now, say £15,000 a year. That plus the UBI would mean that only those on the median wage or above would be in the income tax system at all. Which is about where we should be if we are to be just and righteous about matters.

For yes, the richer should carry more of the burden of the State. And if that moral righteousness means we’ll have a smaller State then all to the good, eh?

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Oh Dear
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Oh Dear

No representation without taxation.

literate3
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literate3

The logical follow-on from that is that the number of votes each person has is proportional to the amount of tax he/she pays. Not going to catch on in any state that does more than levy taxation.

Oh Dear
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Oh Dear

Just making the point that if you don’t pay tax you’re more likely to vote for more benefits you don’t have to pay for.

literate3
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literate3

That’s called “greed” and is very common – as in Ed Millionaireband complaining in the HoC about the withdrawal of Child Benefit (intended to help poor mothers and children) from his mistress because she was paying higher rate tax and her Child Benefit was being subsidised by those on one-quarter of her income.

literate3
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literate3

UBI and/or an increase in Personal Allowance will result in higher tax rates for those of us well above median income, not in a smaller state. The screams of everyone who would lose anything are so deafening that the smallest reforms to shrink the state are quickly abandoned (in practice even if not in name).

timworstall
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timworstall

Ah, yes, but. We’re already at about the limit of the Laffer Curve on higher rate taxation. There’s no more to be got up there….

literate3
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literate3

I meant a higher basic rate (I never pay higher rate tax by means of pension contributions and Gift Aid to edge my taxable income below the threshhold). 30% is below the peak of the Laffer curve.

GR8M8S
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GR8M8S

The aggregate pot of British welfare as % of GDP, is comparable to the Nordics. The Nordics tax welfare benefits so on a net basis not much difference.

https://iea.org.uk/if-scandinavia-is-a-socialist-paradise-so-is-britain/

Jonathan Harston
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Jonathan Harston

On a tangential issue, I’d been pondering minimum wave vs income allowance for some years, then our host fleshed it out either here or at the old place (if the minimum wage is the absolute minimum that society deems people need to exist, why do we tax that absolute minimum?) Since then I’ve been pushing it and have got a small following (if you could call it that) who see the validity of the point. I think there’s mileage in pushing for any minimum wage to be tied to the income allowance. The problem it runs into is the “no… Read more »

Jonathan Harston
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Jonathan Harston

What they’re advocating is essentially going back to the old Job Seeker’s Allowance system that Universal Credit is replacing. Interesting, as that’s is their actual policy on unemployment benefits. When I was signing on I kept getting little bits of part-time work. Under JSA you kept £10 then lost everything else pound for pound. Which meant if I did up to two day’s work I only gained a tenner – No work, £72 dole. Two days work, 70 quid wages, lose £60 dole, total income £82, expenses due to leaving the house to go to work typically £10-£15, net position… Read more »

Andrew Carey
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Andrew Carey

I read the NEF report , well bits of it, so that other people don’t have to and it’s awful. The universal income proposed does feed in to the calculation of means-tested benefits. So if you’re on Universal Credit and Council Tax Support then you lose 83% of the extra income. If you’re a carer or disabled with a taxable income in the 12.5k to 18k range and claiming Universal Credit towards housing costs then you end up quite a bit worse off due to the withdrawal of benefits. The biggest winners are international students ( the qualification to claim… Read more »