I see that the Conservatives had a little messaging problem at their conference over the issue of child benefits, when it was leaked to the press that all those earning over £44,000 would no longer be eligible for the benefit. Now this might have chimed well with their “the rich have broader shoulders” meme, but it turned out to be manna from heaven for BBC journalists. Inconveniently, for the Tory spinmeisters, this change came with the inconvenient illogicality that a two income household in which both earn £44,000 would continue to receive child benefit, while a household in which one goes out and earns £45,000 and one stays at home to look after the children, would lose it. Quite patently this is a ridiculous situation and I am sure that it will be corrected before the change becomes law. However it did highlight certain absurdities of the current tax and welfare system in the UK.
1) The first is how difficult it is to cut back existing state programs. Once an entitlement is in place, then it is very difficult for a politician to remove it without being cast as ‘nasty’. To remove child benefits, free milk or fuel subsidies for the retired means that you hate babies, old ladies and fluffy white lambs, and what politician looking for a quiet life wants to be labelled that way?
2) Secondly, why should someone who earns twice the average wage, receive a welfare benefit in the first place? A far better idea would be to include children as part of the calculation of support for those in poverty and then just let everybody else keep more of their own money by reducing taxes. Taking it from them and then giving a portion back as child benefit, is typical Big Government nanny-state interference. As though if they didn’t label it as, ‘for the kids’, then the plebs would spend it all on bingo, booze and burgers.
3) In the same way, it highlights how politicians bribe us with our own money. I know someone – ahem – who receives a winter fuel allowance. Now just as with child benefits, the majority of people who receive the fuel allowance don’t really need it. They are not going to freeze to death if they don’t get their fuel allowance. Indeed Neil O’Brien at Policy Exchange says that 82% of those who receive it are not in ‘fuel poverty’. Yet the fuel allowance perfectly illustrates the hypocrisy of the system. The government imposes higher taxes and costs on the energy companies as well as forcing on them the government’s green agenda by cap and trade and making them buy over-priced electricity from renewable energy sources. All these taxes and costs are then transferred onto the consumer through higher prices, from the heating bill to the price of the pensioner’s carrots because of increased transport costs. The government is in effect indirectly taxing the pensioner. It then blames the energy companies for the higher prices and earns political capital by giving a few quid back as the fuel allowance. A bit like the pick pocket who steals your wallet and then pretends to be a concerned member of the public by buying your bus fare home.
4) Another peculiarity of this story is who sets the arbitrary line at which earning £44,000 means that you need a handout from the state, and £45,000 means that you don’t. This again illustrates why the current system of progressive tax rates, allowances and benefits distorts earnings and the cost of labour because of high marginal rates of taxation. If you earn £43,000, then there is no point in working to get a further pay rise if it results in losing your child benefit and going on to a higher tax rate. It also makes it harder for companies to reward their workers for productive behaviour as the pay rise has to be big enough to compensate for higher taxes and loss of benefits. A far better system would be to create a means tested safety net which always makes it more beneficial to work(as seems to be the direction IDS is going in), then the first £10,000 is tax free and after that 20% no matter what you earn. The more you work, the more taxes you pay, but then you get more in your pocket and what’s more important, YOU get to decide what to do with your money, not Gordon Brown.
Yup that flat tax again!