The Problem
At a time of difficult financial decisions, when tax cuts may be hard to achieve and benefit levels hard to maintain, the relationship between tax payers and the state becomes crucial. This relationship is more than the product of the amount people pay and the amount they receive, it is defined instead by a wide range of factors, including fairness, integrity, clarity and a sense of ownership.
At present, our tax and benefits system is based on two principles, proportional taxation and means tested benefits. Together these are seen as offering the best value for money to everybody, nobody pays more than they can afford nor receives more than they need. However, the cost of such principles is severe.
It is true that proportional taxation may save the worst off from paying tax. However, it also prevents them from contributing to what they can to society. Meanwhile, those who contribute most are often prevented by means testing from receiving any form of assistance, no matter what their needs may be. Those who have saved are expected to do so without state help, thus encouraging irresponsible behaviour, whilst those at the bottom, face an impenetrable wall of tax rises and benefit cuts that together make work simply unaffordable, because of combined tax increases and benefit reductions running to 70% or more of their earnings.
A complicated tax system also discourages honesty. All special rules may help some, but end up being special loopholes that others can take advantage of, whilst a complicated benefits system often prevents the neediest from claiming all they are entitle to, whilst allowing the unscrupulous to play the system for financial gain. The result of this is a vast faceless bureaucracy that often appears to make arbitrary decisions about entitlement and to help the unprincipled more than the unfortunate.
The complexity of the tax and benefits system also rewards government spin ahead of policy substance. Why work hard to solve a problem when one can announce yet another special rule, exemption or allowance? Discussions of what measures the government has taken to help the worst off or hinder the best off cloud discussion of the real substantive issues that lie behind them, growing economic inequality, declining social mobility and a state that is spending far more than it raises in tax, year upon year, generation upon generation.
Finally, and most importantly, our tax and benefits system erodes people's sense of ownership and responsibility for the state and what it does. People become easily segregated into contributors and consumers, with both parties excluded from playing a full role in the financial life of their society. If I come from a community where most people are on benefits and few pay tax, how can I feel part of a productive community, except as a consumer of other people's money and services? Meanwhile if, despite having paid tax for years, I am unlikely to receive any help in my old age, or for my children, it is natural that I should come to resent the work of the state and to seek to exclude myself from it, through tax avoidance, withdrawal of support for social policies or even emigration to a lower tax state.
Undoubtedly, the countries that have done most to rectify these vices have also tended to be big taxers and spenders, like the Nordic countries, where most people pay a considerable amount of their income to the state and receive a wide range of benefits in return. Despite the problems with such a big state, these countries have managed to combine both remarkably high tax rates with high levels of support for taxation. However, a tax system that displays the virtues of fairness, integrity, clarity and community need not also be immune from temperance.
By combining a flat tax paid by all and universal benefits received by all or solely on the basis of need, a system could easily be devised that would allow almost everybody to benefit in some way, without excessive levels of tax. A
citizens income that would at least make hunger and the worst forms of suffering a thing of the past, and could be coupled with small additional pensions for the old, sick, disabled or parents of young children. Not only would such a system remove unfair anomalies and make abuse much harder to commit, but it would also produce a clear and simple progress from overall benefit recipient to overall tax payer, which most people would pass along at least once during their lives, and that would help form a
one nation tax system that all can take ownership of, and that will encourage responsibility and acceptance in these straitened times.
Two costed examples
The following two examples are based on figures for the 2008 – 2009 financial year. One of them preserves current rates of social security spending, but lowers the effective tax rate for most people and lifts more out of paying any tax at all. The other uses a higher flat tax to preserve current effective rates, but as a result is able to offer considerably more generous benefits to many disadvantaged people. In the short run both offer opportunities to raise tax or cut benefits in away that would be both fair and make a considerable contribution to paying off the national deficit.
In 2008, government receipts from income tax and national insurance totalled £245 billion, whilst social security spending and tax credits cost the government £170 billion. The adult population at this time stood at almost 50 million; however I shall assume that at least 4% of this figure is made up of ‘non-citizens' such as migrant workers, which I take to be a conservative estimate. The total national table income in 2008 was £798 billion.
Assuming that 80% of social security spending is redistributed in the form of a citizen's income, whilst 20% is distributed as an additional pension to everybody currently in receipt of benefits for old age, disability or parenthood, these figures would equate to a flat tax set at 30.6 per cent and a citizens income of £54.50 per week, rising to £90.22 for those with the greatest need. This would provide an income to all only slightly lower then that currently offered through Job Seekers Allowance, Income Support and Employment and Support Allowance (£60.50) and a pension equivalent to that already offered by the state for people over 65 for all those who qualify. However, as the following chart shows, these benefits are offered along side an effective tax cut for the majority of people. The citizen's income will ensure that nobody earning less than £10,000 will be a net tax payer, although all will contribute according to their means, whilst anybody earning above this rate will be assured a smooth and simple rise in their effective tax rate, levelling out at a rate far below that currently paid by the highest tax payers.
On the other hand if, instead of a tax cut, a citizen's income was used to increase benefit levels it could be even more effective. If the flat tax rate where increased to 40%, consistent with the current higher rate for income tax, the additional £74.5 billion this would raise could be used to fund a citizen's income of £78.45 per week and a combined weekly income and pension of £129.85. In 2008 this would have provided all those who qualify with a guaranteed income exceeding that offered by pension credit (£124.05), both elements of disability living allowance at the higher rate (£113.75) or the combined benefits accruing to a family with two dependent children (£119.64). On the other hand, the chart shows that a citizen's income functioning in this way would not require any significant rise in net taxes. Indeed it would lift everybody earning below £10,000 from paying tax and would tax those earning £20,000 at less than 20% of their income, without the additional burden of National Insurance.
These figures do not take into account other possible benefits, such as lower tax avoidance, reduced productivity amongst the lowest earners, lower costs in administering and enforcing the tax and social security systems. It also does not take into account the possibility of utilising the system to boost charitable giving, through encouraging well off people to donate their income to charity and increasing the number of people who can add gift aid to their donations.