Monday, 17 December 2012

Benefits and taxes

Fairness and effectiveness are often at odds in the distribution of benefits. There is always a tension between giving away too much and too little. If benefits are means tested, there will always be some people who desperately need them but don't claim them for a variety of reasons including the complexity of the process and the stigma. If you make a benefit universal, there is a lot less stigma attached, and it tends to be less complex, and so take up rises. Child benefit, for instance, in its various guises, has had near 100% take up, thereby insuring that it goes to everyone who really needs it, because of universal availability. The problem with that is that a good deal of our taxes then goes to supporting people who don't need the support.

You can deal with the problem to a certain extent by making benefits taxable. If you do that, you may need to increase the benefit to take into account the effect on lower earning tax paying households. It can be done, but the politics of turning a non-taxed benefit into a taxed one are fraught.

I wonder if another way of turning the circle into something like a square might be to apply a variable upper rate of tax. As it stands, in 2012-13 taxable income between £34371 and £150,000 is taxed at 40% and above £150,000 at 50%. Increasing those taxes across the board to recognise the benefits paid to high earners is generally seen as unpalatable, because it disincentivises earning and over-incentivises tax avoidance behaviour. Whether you agree with these or not (I don't agree with the first, I do agree with the second to an extent), they are so widely accepted on both the conservative and what passes for the progressive wing of the political elite that they are all but unchallengeable.

A variable upper rate would apply a higher rate of tax to small bands within the upper bands. Thus, for income between, say, £80,000 and £90,000 the rate could be 45% which would net an extra £500. People in that bracket, who probably think of their earnings as “modestly high” could be confident that when their earnings passed £90,000, the extra would revert to the 40% tax rate. There might be another band, say, between £120,000 and £130,000, netting another £500. And more at appropriate intervals further up the scale.

The idea is not to arrive at individual fairness in the sense that those who benefit pay it back. It is a sense of collective fairness in that those who earn large sums of money can be seen to redress the balance as a group for benefits received. The extra cost of a universal benefit is seen to be recouped, or at least partially recouped, by the variable tax. It seems such a simple idea that I am sure other people must have thought of it before and rapidly come up with reasons why it would not work, so if anyone can enlighten me, I would be grateful.

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