Phil Taylor: Untax the poor

Phil Taylor (blog) runs a small business in Hammersmith and is a councillor for the Northfield ward.

> Policy summary 

Untax the poor - pay no tax or NI until you earn £10K.

> Policy explanation

Right now the worst paid in our country, and typically the worst able or inclined to deal with the "system", have to deal with it twice.   They have to pay income tax and National Insurance at a stupidly low threshold of only £5,035 per annum, or barely £100 per week.  They then have to get snared in Gordon Brown's evil tax credit system to get some of their money back.  Not only does this waste the time and lower the quality of life of the low paid but thousands of bureaucrats have rubbish jobs in battery offices taking money off people and giving it back to them and dealing with all their problems.  The whole edifice is a waste of life.

The new adult rate for the minimum wage came into force last October.  £5.35 per hour.  Anyone working a 37.5 hour week on the minimum wage is earning £10,432.50 and paying £931.79 in income tax.  Our munificent chancellor will gives a single person over 25 years old £421.31 in Working Tax Credit, meaning they make a net payment of £510.48.  This represents a net rate of tax of 4.89%, a rate that is increasing steeply with fiscal drag (see table attached).

The Office of National Statistics' Annual Survey of Hours and Earnings (ASHE) for 2005 shows that average (mean) annual income for all workers in the UK are £23,400.  What they call the 25 percentile is £11,513. In other words 25% of their sample earned £11,513 or less.  This is the minimum wage territory.

By setting the tax and NI thresholds at around £10K we would take almost 25% of workers out of the tax system.  As a side effect we would increase incentives to get into work as the attraction of keeping your own money is great compared to getting benefits or taking on low paid work and having to claim means-tested benefits to make ends meet.

Lost revenue would be replaced by reducing or even eliminating GB's system of tax credits.  Savings in terms of cost of collecting tax and NI from itinerant, low paid workers would be significant both for the state but also employers.  If there were still a shortfall we should look at indirect taxes and new environmental taxes but untaxing the poor should be our priority.

> Political risks and opportunities  

Risks: Would be expensive in terms of short term lost revenue that would need to be replaced. Might look like LibDem policy but they only propose to remove lower rate of tax.

Opportunities: Strong message to the disenfranchised and the underclass that the ladder is being lowered down. Reinforces change message because it prioritises the lowest paid

> Questions for ConservativeHome readers

• Do you feel that it is right to exclude the poor from paying tax? 
• When should people start to make a contribution?
• Should we keep tax credits for children? 
• Should family life be recognised through allowances (for all) rather than tax credits (for the poor only)? 

> Costs

Working out the cost of this would be a job for the IFS rather than me! Clearly it would be costly but it could be argued, Laffer style, that additional incentives to work, increases in indirect taxes, corporation tax, etc would, over time give rise to a net increase in government revenues. Much of the cost, as I have said already, could be recovered by dismantling the tax credit system and not having to deal with the least capable in society.

Comments

[Mike A]

This is an old chestnut.

The poor pay virtually nothing in direct taxes - all in direct taxes. Look at the HMT document on it here:

http://www.statistics.gov.uk/articles/nojournal/taxesbenefits200405/Taxesbenefits200405.pdf

This would be contriving to spend money on a tax cut without (a) actually helping the poorest (who already pay no/little in direct tax) and (b) spending a lot on cuts without actually cutting any marginal rates.

For these reasons, the IFS have assessed it, and decided (in as diplomatic a way as they can) it would be a waste of money:

http://www.jrf.org.uk/bookshop/eBooks/1590-poverty-benefits-taxation.pdf

[Mike A]

A point so nice, I made it twice.

[Richard]

At the end of the day, a tax cut is a good thing. Providing this isn't paid for by tax rises elsewhere I'm all for it.

[Account Deleted]

The first law of Conservative economics is:

"People respond to incentives"

[Account Deleted]

The second law of Conservative economics is:

"People respond to incentives"

[Account Deleted]

The third law of Conservative economics is:

"People respond to incentives"

[Account Deleted]

So good I repeated it 3 times.

A tax cut of £500 a year if you are living on the minimum wage this is a not inconsiderable sum.

This is a useful incentive.

Secondly, removing the tax credit and replacing it with a simple tax cut would lessen the effects of our farcical tax system where people face a marginal tax of over 50% in many cases. (Indeed, many face marginal tax rates of 70% http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/03/11/cmian11.xml)

Lumping people together at the bottom ignores this marginal effect, because it does not look at what happens as people move from say, £6,000 a year to £7,000 within the bottom 10 or 20%.

This removal of stupidly high tax rates is a useful incentive.

Because people respond to incentives, this tax cut would to some extent fund itself. It would also help strengthen a culture of work. Having moved in less affluent circles than many at the IFS, I have to say from observation that the standard of living of many who don't work (or who do but lie about it) is as good as the standard of living for many at the bottom who do.

Many of those at the bottom of the system might also shift from non-employment to employment, particularly single parents who at present are especially penalised by the tax and benefit system if they go out to work.

Seeing as I would like (as most Conservatives would), a fundamental reappraisal of many of the benefits in our country, given a bloated £100 billion benefits system, it seems only right and proper that the poorest who DO the right thing should be more rewarded for it.

[Account Deleted]

Plus what on earth would Labour's reaction to this tax pledge be?

Can you even begin to imagine how much it might help splinter their vote?

[Mark Wadsworth]

1AM - re Labour's reaction. Frank Field suggested something vaguely along these lines eight years ago and was promptly sacked.

The extra good news about citizen's income/flat tax schemes is that you can sack a couple of hundred thousand benefit administrators.

Gordon Brown loves means testing, it discourages people from working so there are more unemployed, so he has an excuse to up the tax take on the rest of us and employ more benefit administrators and invent crappy job creation schemes and so on in a vicious circle until he succeeds in bringing the economy to its knees.

On this day, when nobody bothers working any more (100% tax rate) he can proudly trumpet that there is full equality in the UK. Or "Britain" as he likes to call it, which is a meaningless term.

[Yet Another Anon]

Many of those at the bottom of the system might also shift from non-employment to employment, particularly single parents who at present are especially penalised by the tax and benefit system if they go out to work.
As much as possible moving away from means tested benefit towards low level universal benefit and low interest loans for variable rate benefits would move away from penalising people for thrift, also though VAT is fairer than Income Tax because it falls both on those on benefits and those in work and in fact more universal forms of taxation not based on income are if anything fairer in many ways, but based on consumption, holding down and preferably reducing overall public spending while holding down national debt (repaying national debt can help by reducing debt interest in the longer term as well as increasing the ability to deal with a true emergency by not loading on debt during relatively good times) allowing for tax cuts that can encourage thrift.

[johnebgood]

Not only does low income affect tax credit but tax credit itself affects housing & council tax benefit so saving tax would release some from the poverty trap who actually face a tax of 80% on earnings which affect benefit, why work for nothing is the low income question?

[Jake]

An uncosted policy isn't a policy - it's just an aspiration.

Phil cannot just get away with saying, "Working out the cost of this would be a job for the IFS rather than me!" Our opponents won't let us and it sounds absurd.

[Mark Wadsworth]

Jake, see my post at 3.57.

A citizen's income/flat tax scheme has two variables. The CI rate and the flat tax rate. You can choose anything between CI of £nil and 20% flat tax or a CI of £100 per week and 45% flat tax. It is not difficult to work out fiscally neutral combinations.

[Opinicus]

@mark wadsworth
That is too simplistic in that even if you hypothecate a flat rate income tax to pay for a Citizens Wage it does not have to fund the whole cost. The key thing about the wage is to have it computed independently so that it can be shown to fund a very basic minimum quality of life so that you can live on it. Only then can you abolish all other benefits and save the spending on the DSS bureaucracy.
If the CW is about £75 pw and £100 for pensioners then that is 70% of 60m @3900 and 15% of 60m at 5200 which is 220bn. This is the gross cost of the DSS now but does not include housing benefit which would have to be re thought too. This is the gross cost and would be offset by tax on the working population and by the administrative savings of closing the DSS and privatising the Labour exchanges - as the state would have no further interest in policing unemployment - and by the new tax take from all the people who would take up low paid part time jobs to supplement their CW (currently many of whom are on the black) once the poverty trap was abolished and it was wothwhile to work again.

[Mark Wadsworth]

Jonathan, my thinking is also along those lines, but I have to simplify it a bit for purposes of posting!

Send me an email and I'll send you the two booklets I have drafted for the Citizen's Income Trust.

Housing/Council tax benefit are easily solved. Fix social rents as a single figure(rent plus council tax minus council tax benefit minus housing benefit) calculated at (say) 20% of earned income, OK, marginal withdrawal rate is then 53%, but that's still a lot better than 95.5%

[Alex Sacttergood]

Combining a smooth transition on wages and a smooth transition on welfare housing costs seems like a good idea. I have heard a few people argue its not worth their benefits to start work.

I always assumed the tax credits would take more to administer than a tax allowance and it seemed unfair to lumber the lower paid and possibly less skilled with completing the paperwork. Lets raise the minimum tax threshold to £10K and scrap tax credits.

Lets also limit benefits / tax credits to at maximum the average wage. Popular shows such as wife swap and newspaper articles have shown astounded viewers its possible to 'earn' £36,00 in benefits understandably many hard working people don't understand why this is possible.

Welfare housing costs should be at market rate and discounted on a sensible sliding scale. This precludes people staying in social housing when they earn enough to escape it.

I can recount tales of bedding and clothes being taken to council houses to prove dependants were still living there despite them having mortgages and being registered to vote at other houses. Why should one middle income couple subsidise another middle income couple in social housing that is significantly better than the roof over their own head?

[Andrew Morrison]

Brilliant idea. You see, when earning the minimum wage on 35 hours a week, people pay a marginal rate of income tax of 22% and national insurance at 11%. Gordon Brown and his socialist companions may not call NI a tax, but in the real world it's nothing but a tax.

So for the worst off in society, the marginal rate of tax is 33%. Earn £40,000 a year on the other hand and pay a marginal rate of 40% income tax and 1% NI. People campaign for a flat tax here in Britain, but 33% to 41% already is pretty flat. What we need is to strip out all these daft exceptions to the rule.

By cutting tax for the poor, we can scrap all the tax credits, and in turn slash the QUANGO army that administrate it. We earn efficiency savings, as well as offer a more effective solution. It's genius and I like it.

This should give spongers no reason to sit around all day moaping saying they cannot earn enough to live working legally. This is the carrot, so we need a stick too - such as time-limited unemployment benefits.

[Stewart Nairn]

Do you feel that it is right to exclude the poor from paying tax? No.

“No taxation without representation” OK, I would go with that. I would also suggest “No (interest in) representation without taxation”.

Is exclusion from taxation not a little patronising? May it not tend to exclude the poor from politics, to continue to disable them and bolster feelings of impotence and victimhood.

Perhaps for party political reasons it is advantageous to encourage and maintain political disinterest in the poor.

Personally I would get rid of all state benefits and tax everyone at the same rate. More people would work. Individuals, families and (real) communities would make non state provision for welfare, and administrate that provision, the tax burden would fall and all sorts of good things would happen.