Universal Credit: Elephant Delivers Mouse

Traditionally, the rich and the Right argue that, to make the rich work harder, you need to pay them more while, to make the poor work harder, you need to pay them less.  In terms of income tax, this means that the parties of the rich, the Tories here and the Republicans in the US, always favour income tax cuts for the wealthy. The top rate of income tax in the UK today is 45% for incomes over £150,000, down from 55% last year. It has fallen massively over the decades since the Second World War and was at 90% up to the 1970s, when the standard joke in the Torygraph was of a business executive being asked, “Who do you work for?” and replying, “Well, actually, I work for the government.”

So we have a tax system where, traditionally, the rich get taxed less (to encourage them to work harder) and the poor get taxed more (to balance the books because the rich aren't paying enough). Sometimes this is taken to extremes, as in the Ancien Regime in France, where the ruling classes, the Noblesse and the Clergy, paid no tax, and the peasants and the rest, the Tiers Etat, paid all the tax. The result was the French Revolution of 1789.

Back to the present day and along comes Iain Duncan Smith with Dynamic Benefits, the 2009 report of his think tank, www.centreforsocialjustice.org.uk. He has had the revelation that means-testing is income tax by another name and vice-versa. The term “marginal deduction rates” covers both ends of the spectrum.  He has realised that having a system of marginal deduction rates of 95% for the poorest is not giving them the incentive they need to work harder after all.  It would be different if we had no welfare state, of course, but given the largesse of the state handouts to skivers and shirkers that the poor man has been saddled with, he has had to come up with another idea. His brainwave is to tax the poor less as they work more by introducing a new benefit, Universal Credit, to replace six means-tested benefits and tax credits and to "make work pay".

Dynamic Benefits actually proposed a marginal deduction rate of 55% on earnings. Unfortunately, by the time the proposal got passed into law by the Welfare Reform Act of 2012, it had gone up to 65%.  Now, with the abolition of council tax benefit and its replacement by localised council tax reduction schemes, the marginal deduction rate has gone up another notch to 81%.  According to government guidance, Localising support forcouncil tax: Taking work incentives into account (paragraph 4.46),  "anyone finding work will have a total of 81 pence in the pound taken from earnings above universal credits limits, assuming a 20 pence in the pound taper applies where someone is claiming council tax support." (The 20% taper is the one in the government's default scheme.)  So, according to the government assumption, the poorest will be working for 19 pence in the pound. 

The new system is expected to cost £2 billion to set up, according to the DWP’s Universal Credit:  welfare that works, Chapter 7 at page 51. The sorry saga of moving from a bad old system with marginal deduction rates of 95% to a bright new one with marginal deduction rates of 81%, at a cost of £2 billion, is one of Elephant Delivers Mouse.

Note: I’m a welfare benefits adviser at Disability Rights UK (but writing here in personal capacity), where I teach courses about Universal Credit.