Call for Negative Income Tax as Alternative to Tax Credits
The Government should replace tax credits and other means tested benefits with a Negative Income Tax payment that is gradually withdrawn as people's earnings increase, a new report by a think tank has suggested.
The Government should replace tax credits and other means tested benefits with a Negative Income Tax payment that is gradually withdrawn as people's earnings increase, a new report by a think tank has suggested.
The individualised Negative Income Tax payment should take the place of most major welfare payments such as tax credits, Jobseeker's Allowance and Universal Credit, providing a minimum income guarantee for people and be tapered away as incomes rise through work, the paper from the Adam Smith Institute argued.
The report entitled Free Market Welfare: The Case For A Negative Income Tax makes the case for scrapping the Department for Work and Pensions through the changes to save up to £6.1 billion in administrative costs.
It stated: Globalisation has lowered the market value of many workers' skills to the point that the clearing price for some labour cannot provide a growing proportion of the UK population with an income that meets the popular definition of minimum living standards.''
It added that the current stopgap solutions'' on welfare policy arecostly, ineffective and overly complex leaving many people stuck in poverty traps and financial insecurity''.
Referring to the current tax credit debate, it goes on: Recent proposed changes to the tax credit and minimum wage systems will only exacerbate the problems facing low-productivity workers.''
The report said the NIT payment scheme would be structured so a claimant was always better off working more hours or earning more market income''.
Such a system the report argued merely streamlines and simplifies'' the existing system, though being paid to individuals not households,set at a level which provides a basic floor standard of living'' and withdrawn at a rate which provides clear work incentives''.
Report author Michael Story said: The UK's current welfare system was built after the Second World War for a fundamentally different labour market, and it shows. It's time to rethink the whole benefits structure, with emphasis on radical simplification, to give the UK workforce a steady footing for the new challenges of the 21st Century.
In-work poverty is the key problem facing Britons and its prevalence and importance will only increase. We cannot tackle it with our current tools: Universal Credit is complicated, incredibly costly to administer, and still not fully operational, and minimum wages can only go so high before they start to create unemployment. The solution is a simple, single payment, that still provides an incentive to work. The Negative Income Tax is an idea with a long, impressive pedigree and its time has come.''
Sam Bowman, deputy director of the Adam Smith Institute added: The Government shouldn't cut tax credits, it should reform them. Topping up the wages of low-paid workers is the best way to improve their standard of living. It makes labour markets more flexible and does not cause involuntary unemployment, as minimum wages do. But the current welfare system is not fit for purpose: it is complex, outdated and wasteful.
A Negative Income Tax that replaced most benefits and tax credits would radically simplify the welfare state and guarantee that everybody is better off in work. This was the promise of the Universal Credit but, as the report shows, the UC's incrementalist approach has not delivered. We need a wholesale replacement of the existing system, and this report gives a compelling model of how to do it.''