Welfare shouldn't be complicated

Every year, Parliament passes a bill called The Social Security Benefits Uprating Order. This bill is likely one of the most consequential acts of Parliament for millions of people on low and medium incomes across the country- but if you’d like to read it, you’ll have to sit down: like it is every year, the latest one is over fifty pages long.

The bill directs government departments to increase around 250 different benefit parameters: numbers like the Universal Credit child allowance or the Pension Credit Minimum Guarantee level. Each of these parameters is one element of our intricately-designed tax-benefit system, and the burden of this complexity falls directly on the poorest in society: either through the questions they are forced to answer to qualify for support, or in the now unimaginably complex task that financial planning becomes for them.

A counter-argument jumps up: but we need all these details to account for individuals’ complex needs. But this seems at odds with our attitude to the people we do know. Imagine your neighbour fell into a period of financial difficulty: how many questions would you need to ask them before you could say how much state support they ought to be getting? If it’d take any time less than 45 minutes: congratulations, you’re faster than the DWP.

Things don’t actually have to be like this. The number of calculations we need to force claimants and their benefit administrators to make is almost certainly far less than the hundreds we currently do. The nation didn’t take well to the notion of extra compulsory maths, deriding it as overly paternalistic: why force such a burden on welfare claimants?

Deeply woven into the current system are hundreds of mechanisms by which we treat some claimants differently than others: for example, whether a person’s financial difficulty began before Universal Credit’s introduction or after, or their hourly wage, might drastically change their entitlement. If benefits should be based on need or deservingness, what relevance is this? Of course, this isn't necessarily true of all the questions the DWP asks: disadvantages like disability are still important and should still entail higher support.

Moving welfare along the axis of simplicity but preserving its generosity shifts us toward programs that might look more like a negative income tax (NIT). This is a very broadly-defined concept with a simple proposition: income tax should start below zero, representing a transfer from the government to the taxpayer.

Governments have implemented NIT-style policies to varying degrees: refundable credits in the US can prompt a payment from the IRS to the taxpayer, but only for the slightly-poor and not the very-poor. (1)

Here’s an example: we could guarantee each adult £60 and each child £100 per week by replacing Universal Credit and phasing out a benefit at 35% for every marginal pound, without adding to the budget deficit. PolicyEngine estimates that this reform could give an extra £400 to the average household in the lowest income decile, and lift around 1.2 million children out of poverty. (2)

No model is certain, of course. This impact relies on the negative income tax payments reaching everyone, an assumption which is not unreasonable: programs which pay first and ask questions later have far higher take-up rates than those which ask first and pay later. (3) Child Benefit shows the sheer efficiency of the pay first, ask questions later (and don’t ask too many) approach to welfare, with the highest take-up rate of any benefit by far.

The notion of equal treatment is seen almost nowhere in the tax-benefit code, but this kind of reform would move us closer to treating low-income people more equally with each other. It does however leave untouched a different dividing line in our treatment of people: the inequality of work incentives between people on benefits and everyone else.

Negative income taxes still have the same problem as every other type of benefit that phases down to zero: beneficiaries are forced to pay far higher marginal tax rates than anyone else. People on Universal Credit pay an average of 56p back to the state for every marginal pound they earn, compared to the average of 35p for non-claimants. The phase-out in the above NIT reform is lower, but functionally does the same thing.

When it comes to work incentives, the negative income tax diverges from a policy often described in the same breath: a universal basic income, which provides an unconditional equal cash payment to every person. While a NIT and UBI might sound like the same thing, a UBI doesn’t include any kind of clawback, forcing policymakers to fund it from reforms to general taxation- reforms that would affect everyone, without separating into beneficiaries and non-beneficiaries. UBI doesn’t even have to directly tax labour: we could fund it with fees on carbon emissions or land rents.

This kind of radical egalitarianism necessitates equal treatment of an entire population, and only a few governments have had the courage to implement it: progressive havens like Idaho (4) and Alaska. These states combined the values of equality and fairness with its most practical implementation: if we share those values, so should we.

  1. Refundable credits like the Earned Income Tax Credit and the Child Tax Credit only benefit filers with earnings.

  2. Absolute poverty (under the government definition) is defined as living with income below 40% of the 2011 median household income, adjusted for inflation and before housing costs.

  3. For example, Child Benefit’s pre-HITC takeup rate was around 96%. In the same year, means-tested benefits ranged between 55% and 88%.

  4. The grocery tax credit is an unconditional cash payment with no income requirements, funded out of general tax revenues- the definition of a universal basic income.

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It would have been much simpler to do this at the beginning

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We have beaten absolute poverty in the UK