By John Moss, a Conservative activist in London who contested Hackney South & Shoreditch in 2005. Here he responds to the points made here yesterday by Andrew Lilico.
There is an old idea called negative income tax, which, if coupled with part of the idea Andrew is promoting, makes something which starts to look a lot like IDS's Universal Credit.
Basically, you "needs test" a household and establish a figure for the annual income they "need" in order to feed, clothe and house themselves. You then pay them this figure if they have no income, but if they do, you pay them a percentage (negative tax) of the difference between what they earn and a notional figure, which is a multiple of the "need" figure.
IDS wants to make it worthwhile for people to work, so, he wants to allow people to start earning without losing their benefits, then withdraw them at a flat rate. So, if you take the example of a family of five and impose Osborne's maximum benefit cap of £26,000pa, the mathematical exercise results in an "allowance" of £43,333, with a "disregard" of 10% of that before you start losing benefits. The actual maths produces a withdrawal rate of two thirds, near enough to the 65% figure mooted by IDS.
That would mean the family could boost their income by working and earning up to £4,333, after that they would lose two thirds of every £1 earned until they got to £43,333. This is not a dissimilar level to the point we have set for the end of child tax credits, so there is some logic in this sort of set up.
If you build up the "allowance" from first housing need, say, £12,000 for rent, £1,500 for Council Tax and £1,500 for utilities; then personal needs, say, £5,000 per adult, with the second adult's allowance halved to reflect they are living together, plus £2,000 per child, again halved for each subsequent child, you get to the £26,000 figure. Households with fewer children or with none would get lower allowances, because their "needs" would be less. A couple with no children for example would get an allowance of £7,500, plus housing needs, which based on the new Housing Benefit caps would be a maximum of £13,000pa. The total of £20,500 between two is very close to the target figure of £10,000 for the Personal Allowance for income tax.
However, it also involves moving to a system of household taxation, not personal taxation, which is a whole other question. We have sort of moved there with Tax Credits and the transferrable tax allowance for married couples would move us further that way. This system would obviate the need for that as it would automatically pool two adults allowances in the same household.
One of Nigel Lawson’s major claims to fame was moving away from household taxation and treating particularly women as individuals for tax purposes. It is an interesting question as to whether we want to reverse that?
