Thinktank calls for 'negative income tax'

The Government could 'substantially simplify the welfare system' through the introduction of a 'negative income tax', according to the Institute of Economic Affairs (IEA).

In a new discussion paper, the rightwing thinktank endorses the general direction of Con-Lib welfare reforms and sets out proposals for radically developing the policies.

The document's most dramatic suggestion is the replacement of the benefit and tax credit systems with a ‘negative income tax’, which the IEA claims would ‘eliminate the high withdrawal rates that are a disincentive to work and which to a significant extent will remain under the universal credit proposals’.

The mooted new system would work by setting different allowances for different types of household, which would receive a tax credit were earnings fall below a set level.

The institute presented an example as an illustration: ‘If there were an allowance of £28,000 for every two-adult/two-children household, and a negative income tax with a rate of minus 33%, a family earning £18,000 would receive an additional £3,333, topping-up it disposable income to £21,333. The household would not pay income tax but would not receive tax credits either; the problem of fiscal churning would therefore be eliminated.’

‘Negative income tax’ would also serve to severely curtail what the IEA calls ‘middle-class benefits’: individuals on low incomes in need of support would receive it through a minus rate of tax, rather than through payments for child benefit, winter fuel, eye tests and so on.

The institute claimed its proposals ‘would substantially simplify the welfare system, putting in place better incentives to encourage work and discourage welfare dependency’.

The thinktank’s director general, Mark Littlewood, said work and pensions secretary Iain Duncan Smith had ‘rightly analysed the welfare problem… but even under [his] proposals, some people entering the workforce will face an effective tax rate of 65%. Is keeping just 35p in every pound of wages really enough of an incentive?

‘Introducing a negative income tax would simplify the benefits system even further, removing the hideously high withdrawal rates we currently have.’

Issue Extract

upldrelease.pdf

Categories: News , Iain Duncan Smith , IEA , Institute of Economic Affairs , Mark Littlewood