Free Market Welfare: The case for a Negative Income Tax

The government should replace tax credits, Jobseeker’s Allowance, the Universal Credit, and most other major welfare payments with a single Negative Income Tax, according to a new report from the Adam Smith Institute, Free Market Welfare: The case for a Negative Income Tax. This Negative Income Tax (NIT) would act as a minimum income guarantee for all British citizens and be tapered away as people’s earnings rise through work. Britain’s existing welfare programmes are costly to administer, complicated to navigate, and designed for a postwar-style labour market that no longer exists, the paper argues.

Under a Negative Income Tax, if a citizen earns nothing then the automatic NIT payment will be their entire income. As the individual earns more through work, the payment is gradually withdrawn until the citizen begins paying tax. The payment scheme is structured so that the claimant is always better off working more hours or taking higher wages than in their current position. These payments would be automatic for workers within the PAYE system.

The report says that the biggest welfare challenge future governments are likely to face is chronic in-work poverty, as globalisation and technological change lead to lower productivity and pay growth for some bottom and middle earners. This means that Britain’s current welfare system is outmoded and must be restructured to support low-wage workers throughout sustained periods of low-paid work, not just when they are out of employment altogether.

Systems like tax credits and the Universal Credit aim towards this goal, but are still too complex. Instead of a complicated web of different payments, the government should make just one, the report’s author Michael Story argues. Recipients would decide themselves how to spend their benefit, and as they earn more in wages, the benefit would be withdrawn at a rate that guarantees work always pays.

A simpler welfare mechanism like the Negative Income Tax could be integrated into the tax system, allowing the government to shut down the Department for Work and Pensions, take many of its 34,000 staff off the payrolls and save up to £6bn in administration costs.

To read the full press release, click here.