We can see several problems: poverty traps, complexity of administration, opportunity for fraud, and more, that surround the present system of benefits.
As an attempt to solve these problems, look at the first graph. It represents for an individual how we might expect their net benefit or taxation to vary against their income. The graph shows an ideal system with a line starting at the left from the point representing their benefit if they were completely without earnings, and then crossing the diagonal at the point where they shift to net taxation.
It is important to see that the graph represents the desired net effect on an individual. The amounts of and algorithms for tax paid and benefit received would depend on how this aim was implemented.
There is no scale on this graph. This is quite deliberate. The graph can represent a family of possible tax/benefit structures depending on the political outlook of the administrating government. At the extremes we would on one side have a graph with zero benefit and tax (it would simply be the diagonal), and on the other side have a flat graph. These extremes are not, as far as I know, represented within Parliament, but I would expect the "right" to argue for lower benefit and tax and the "left" to argue for higher values.
What I would not expect is an argument that the effect of the current system, with its reversals and disincentives, is - in its results - superior or fair.
There could be many ways to achieve the smooth (and I would say just) result of the graph. The most elegant (and the furthest from existing practice) would be to pay every individual the amount of the benefit for the point of destitution and then to apply income tax to all their income. And that is exactly what I believe should be done.
I emphasize that this payment represents all benefits, child allowance, unemployment, pensions, invalidity (call this the "personal benefit"), educational grants; and also that there are no tax allowances.
Of course the same result could perhaps be achieved (as I think the government is intending) by a slew of means tests and complex tax breaks. I suspect that it's not fully possible, and that a serious attempt to approximate it will cost a substantial fraction of the social security budget. In current practice we get something like the second graph with its poverty traps.
I will stress the advantages; I am sure there would be no lack of people to suggest any disadvantages if the system were to be proposed seriously. First there would be a complete removal of means testing. Personal benefit would be paid to (or on behalf of, for children or the severely incapacitated) each person in the population, and be determined by age, medical condition and engagement in training or education. Fraud would much more difficult. If the tax rate were constant for all (or all but the very rich), then tax collection would much be easier, a payroll tax would suffice for most of it (and in any case the absence of allowances would make assessment simpler). The debate between parties over tax would largely be a question of the placement of two points on a linear graph - the benefit level and the cross-over point. And the question of a minimum wage would be far less critical since it would always pay to earn something, no matter how little.
In fact at the moment we hear a great deal of noise about "targetting" benefits where they are most needed". I think the best response to this would to be ask politicians to sketch the graph of the result they intend, and to ask them how they will achieve it - although I cannot imagine any politician being prepared to answer anything so specific. But in an ideal world I would expect to be able to draw something like the third chart showing the difference between the aims of (moderate) parties of left and right. Extreme parties would probably propose pathological versions of the graphs. The far right would build in poverty traps deliberately, or even worsen the condition of the completely destitute; the far left would confiscate the wealth of the rich, attempting to make their condition worse than the relatively affluent.
One objection (call it the "right wing" objection), by those who combine a certain high-mindedness with innumeracy, is that the affluent, the rich, and the very rich will be paid money by the state which is in some sense unmerited. Presumably such people do not object to the results of a simple scheme - or perhaps they do. It cannot be denied that at some point the benefit will be so small in proportion to the wealth or income of an individual as to make it a trivial matter whether it is collected or not, but this is just to say that there is an enormous difference in affluence. And in any case the rich will be paying considerable sums in taxation (and would no doubt argue for the graph to be steepened and the benefit to be minimised).
Then there is the "left wing" objection, that we should not tax the poor. And this completely overlooks the universality of the benefit, and that it will under this scheme always pay to work. It is the collusion of these two objections that has culminated in the present appalling morass.
I said tax all income. One area to which I would not extend this is gifts. Currently we tax the donor of a gift, making complex arrangements for inheritance. This seems to me to be immoral; why attack the instinct of generosity? On the other hand taxing the recipient of a gift from someone who has already paid tax is a double penalty. We should allow and encourage capital to be freely transferred.
The graphs I have presented are lines. It has been suggested that the proposal could be refined using curves so that, presumably, the tax would become more progressive. I'm not persuaded by this. One motive for the proposal is simplicity of implementation. Linearity means that the tax on any group, family if you like, cannot depend on how income is divided.
I think that progressive taxation, if that is the aim, is best achieved by higher rates of direct taxation and lower rates of indirect taxation - since indirect taxation cannot be progressive. It can also be argued that direct taxation is less inflationary.
If a tax on the very rich is thought desirable, then there are various options. Two, which I throw in, although they are not parts of this proposal as such, are:
As I said, the proposal is not original, but it is not the policy of any party as far as I know - there are indeed proposals for a "citizen's wage" but I do not think the idea is to make this a single benefit or that tax allowances are to be removed as the, crucial, second part of the proposal demands. Indeed everything points to benefits evolving in the opposite direction, with more means testing, and taxation getting more indirect and less progressive.
More recently, we see proposals for a "flat tax". I'm not sure to what extent those who propose this would also accept the other two parts of my scheme: taxation of all income, and the removal of means testing of benefits. The test would be to ask the politicians for the graphs of the intended and probable results of their proposals.
John Bennett 19-09-2005