29 January 2015

A Green Citizen's Income.

There has been criticism of the Green proposals for a Citizen Income (CI). How will it be funded? Does it really help the poorest?

It's actually all very simple. What's complicated is the costly and inefficient welfare system it replaces.

The Green proposals are to implement a £72 a week payment to all adult citizens, and a lesser amount to children.

There have been claims (notably by Andrew Neil on the Daily Politics) that this will "cost" £280bn per year.

So first a quick sum. £72 x 52 weeks x 50m [adult population] equals £187bn

This is the approximate yearly amount of the adult part of the payment.

Then we have to deduct £72 x 11m (=£41bn). These are the pensioners already receiving more than the CI sum in state pension and pensioner credit. That leaves £146bn to find.

The children's part of a CI depends on the amount it is set at. But we already have a childrens Citizen's Income in Child Benefit (or we did before the coalition started to means test it). If we imagine the child rate is set at half the adult CI rate (£36 a week), that would cost approximately £12bn more than child benefit does currently. So that makes a total of £158bn for our CI.

A lot of money for sure, but well below Neil's inflated sum of £280bn.

So where is this £158bn coming from?

Actually Andrew Neil answered his own question.

The scrapping of the personal tax allowances alone raises around £100bn.

The Green plan is to merge the regressive National Insurance with Income tax to have more honest, progressive and transparent taxes on income. The richest do not pay the bulk of National Insurance, whose burden falls largely on low to middle income earners. The untaxed "rentier" income from capital and the scrapping of the NI ceiling for those earning over £42,000pa would raise many tens of billions more. Lets say £20bn for a conservative estimate. That leaves £38bn left to find for our CI.

To administrate our current £160bn welfare bill costs about £20bn a year. The current army of bureaucrats and means testers uses up over 10% of our welfare budget. To administrate the universal child benefit was 1%. 1% is the sort of figure needed to administrate a universal CI. So once again savings of tens of billions off the welfare it replaces.

A CI replaces completely jobseekers allowance (£3bn to 6bn) and Income Support (£4bn to £8bn) (depending on levels of unemployment).

So we are now down to between £4bn to £11bn left to find.

The Greens are proposing a 1% wealth tax on over £3m of assets. which they estimate will raise £40bn. Andrew Neil disputed this figure, citing the lower threshold (£800k) French wealth tax that only raises £4bn a year. I suppose it all depends on how forcefully such a tax is implemented and how much is allowed to be avoided through capital flight.

Finally, a Citizen's Income would replace the impossibly complex system of tax credits. Around 7 million households are entitled to Working Tax credits and Child Tax credits. Around 5 million claim them costing around £30bn-£35bn a year (Note: this brings the total raised to more than needed for the proposed CI).

Critics use tax credits to point out that a CI could actually penalise some lower earners currently claiming these credits. Though the higher than child benefit rate I propose for the children's CI would probably make sure families with children are always better off.

I think that the huge change in the personal allowance in the last few years from £6,500 to £10,500 has made calculating a more progressive level of CI more difficult. Coupled with the replacement of the tax credits system, it might mean that a more generous CI would need to be implemented than the one proposed by the Greens to ensure that absolutely every low earner is better off. This could be clawed back through higher rates of income taxes on higher earners.

But the impact of a CI remains sound.

A payment of £3,744pa is better than tax allowances that saves you less (approx. £3,000pa). Only the higher tax rate payers should lose out with higher rates when NI is merged with Income Tax.

And the real impact is on the financial incentive to work.

Tell the unemployed you can earn money AND keep your £72 a week payment and the financial incentive to work has been dramatically improved.

Green leader Natalie Bennett did the Citizen's Income a disservice with her poor level of detailed knowledge of this policy. She needs to do her homework and be much sharper in future interviews and debates.

5 comments:

  1. A couple of questions:
    Housing benefit sits outside of this I assume?
    Might there be a way for people to opt out of receiving CI eg receive a one off £1000 but forfeit the rest or does that generate admin costs.?I'm thinking of people whose relative wealth makes £72 pw insignificant but might take an altruistic cut in return for an incentive. Such people may not exist or are insignificant in number but as with universal child benefit it seems a waste to give it to those who barely notice it is there. But can see that complication = £

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  2. I think it is essential that it is universal. People can donate to charity or return it to government if they really don't want it.

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  3. The ideal is to include Housing Benefit in the long term, but variations locally make that difficult.

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  4. It is important for left wing movements in Britain to have sound economic proposals, and I am not sure that the Citizen's Income is one of them.

    CI has one possible major flaw, which I have not heard discussed. By definition, if CI a) does not make poorer people worse off, and b) is applied universally, then it will involve a considerable increase in taxation (it cannot simply replace the welfare bill, because large parts of the welfare bill would need to continue alongside CI, such as housing benefit).

    I would estimate that the number of workers who currently receive no benefits other than housing benefit and child benefit to be around 26 million, very approximately. The total additional cost of CI, would therefore be 26m workers x 52 weeks x £72 per week = £93.6 billion. I'll round down to £90 billion. If total tax take in the UK is £650 billion, then the tax increase to implement CI would be around 14% of total tax collected, or an increase of over 50% on income tax (which is currently £166.5 billion). And that is not including any additional citizens who receive benefits that might gain from CI (the Greens have categorically said that nobody receiving benefits would lose out).

    In effect, what CI will have done, is reduce the return from labour and capital income (whether by taxing labour directly or indirectly), without actually spending more public money where it is needed. This is problematic for two reasons:-

    a) Citizens will be less likely to vote for increases in taxes because the tax rate will already be high. Instead, CI will place downward pressure on future taxation policy, and lead towards cuts in more important public spending.

    b) The Government will have less maneuverability to further increase taxes on high incomes following CI, without risking the economy and the confidence of the electorate.

    As a separate point, the main argument for implementing CI is to remove the benefits trap, or the 'high marginal tax rates', as Beveridge described the problem. It cannot do this if housing benefit is still in place, as housing benefit is paid to most people in the 'benefits trap' situation, and it is a larger trap than any of the other benefits (it pays more per individual).

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  5. Taxing land values will bring down rents and therefore the housing benefit bill. I think there is huge scope for more taxation in the areas of land and financial speculation.

    You certainly are right that ANY increase in taxation is difficult to win public support for when our media is owned by plutocrats protecting "their' interests.

    And you are also right that a CI would struggle to achieve an aim to eliminate the welfare state. Health, Education and Housing will always probably need to be provided more directly than just a money transfer method like CI.

    My aim for a CI is a rebalancing of society, as much in terms of the power relationship as the financial aspect.

    And finally, you are probably right that this will cost more than the 250bn pounds freed up by replacing most welfare benefits and means testing bureaucracy. But in an economy of over 1.4 trillion quid and wealth ten times that, would we really rather leave the bulk of that to a very small minority who really can only spend it on more and more ostentatious things that don't even improve their happiness, let alone anyone else's?

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