Department for Work & Pensions

Rich people's benefits

Can we nail a fallacy that is becoming received wisdom, regarding the uncompensated withdrawal of child benefit payments to higher earners, as proposed under the UK government's Comprehensive Spending Review?

The rhetoric claims that it is unfair to tax the poor in order to pay benefits to the rich. This ignores the reality that our web of taxes and benefits cannot be treated individually in their effect on people's incomes. What matters in practice is the net position of each individual or household, after all benefits have been received and taxes have been paid.

Someone paying £20,000/year of tax and receiving £2,000/year of benefits is not a beneficiary of the state or of lower-earning taxpayers. They are a massive net contributor, whose effective tax rate is marginally reduced by the effect of the benefits. This is the sort of situation that all those whose child benefits have been withdrawn find themselves in. They are being pinged for increasing amounts of tax. Child benefit was one way that the impact of those increased taxes on families with children (who generally struggle more to make ends meet than families without children) was somewhat mitigated.

There are major problems with the marginal effective tax rates (i.e. how much of each extra pound is surrendered in tax or withdrawn benefits) on low earners, which are often higher than the marginal rates on mid-earners, and are a massive disincentive to find more work. Ian Duncan-Smith's proposals will hopefully ameliorate this poverty trap.

But in no reasonable sense is someone on £15,000 paying taxes so that someone on £45,000 can receive benefits. The marginal rates should not be confused with the net effective tax rates (i.e. the ratio of the net cost or benefit of welfare payments and tax impositions to earned income), which generally increase as one goes up the income scale. Someone on £15,000 is very likely receiving more in benefits from the state than they pay in taxes, giving them a negative effective tax rate. Someone on £45,000 is almost certainly paying much more in taxes than they receive in benefit, even before the proposed change to the child benefit rules.

The untapered withdrawal of child benefit from anyone in the higher-rate tax brackets creates a rare case where the marginal rate of effective tax is over 100% and disposable income after accounting for taxes and benefits actually falls as earnings increase. People will of course respond to this perverse incentive by trying to work round it in the usual ways.

If someone uses this rhetoric about poor people's taxes paying for rich people's benefits, you know they are bullshitting you: knaves or fools as usual. If they want to defend the policy with any degree of intellectual integrity, they should make the case why parents earning over £45,000 should be paying an even higher effective tax-rate than they were before the change was proposed, given the 40% and new 50% rates of income tax, National Insurance, and limited number of reliefs from these burdens. They would be wrong to make this case, but at least they could do it with integrity.

Does work work?

Lord McKenzie of Luton, Parliamentary Under-Secretary (Lords) at the Department for Work and Pensions, today "called on the expertise of businesses, government and charities to discuss and agree what constitutes 'good work'." As he explained, "we need to figure out exactly what 'good work' is, so that we can ensure workplaces are happy, healthy and productive".

Here we go again. To Labour, everything is standardisable and reducible to the average or the lowest common denominator, and then enforceable by government mandate. In their eyes, my idea of what constitutes "good work" must be the same as yours, which must be the same as everyone else's. All they need to do is work out what this standard of "good work" consists of, and then insist that all jobs conform with this standard.

Why cannot I decide whether a job is acceptable to me, and accept or refuse employment offers accordingly? If the quality of my job disappoints, why can I not be left to decide whether it is sufficiently disappointing that I should look for a new job? If I can find nothing better than my existing job, am I better off having my unsatisfactory job regulated away (assuming my standards of satisfaction conform with the average), or putting up with something less than perfect until something better comes along? Why does government need to intervene in this area? My terms of employment are a matter for me and my employer alone.

"A grateful electorate rather than free-thinking citizens"

Official government figures showed that more than seven million households are getting most of their income from government handouts. That is one in three households across Britain who is now dependent on the state for at least half its income. How on earth has this culture of dependency come about?

Gordon Brown (and successive governments before New Labour) have orchestrated a society that feels that relying on handouts is the better option compared with the reality of getting back in to work. The benefits system is now so generous you can not blame many people for “playing” the system. While the government might like to think that it is giving a leg up to those living in relative poverty in this country, it is actually keeping them there as it is the better and easier option for them.

The Official Opposition, opposing what exactly?

Tory MP Philip Hammond, shadow work and pension’s secretary, hit out yesterday at the Government's failure to help people who lost their life savings when company schemes went bust. Mr Hammond said the Financial Assistance Scheme (FAS) set up by the Government 18 months ago has made partial payments to only 871 people out of 125,000 whose company pensions collapsed.

Since when was it the Government’s job to bail out people who have invested in to private pension funds? If I invest in a private company and it goes bust I don’t expect the government to hand back my cash and say better luck next time. So, why should individuals be guaranteed their money back when the company scheme they chose to invest in goes bust?

Benefit chaos

The Department for Work and Pensions (DWP) has admitted that two of the government's three targets for reducing billions of pounds of fraud and error in the benefits system have been missed. For example, the housing benefit's rate of overpayment is up 13 per cent since 2002 with customer and official error accounting for the great bulk of the losses.

The huge number of fraud and error is caused by the complex benefit system which Gordon has created over the years.