This is a partly-baked idea, based on reform of the Personal Tax Allowance. It would allow people to take the allowance in cash rather than by setting it against their liability for tax. The current allowance of £11500 is worth £2300 (that is, 20% of the allowance) to everyone who pays income tax. If it was possible to convert it to a cash payment, it could benefit many more people.
In round numbers, there are about 65 million people in the United Kingdom. 30 million (24 million people of working age, 6 million pensioners) of them get the personal tax allowance. For most of these taxpayers, tax and allowances are calculated at source, so the benefit is invisible. The cost to the Treasury is something in the region of £70 billion.
If 30 million people receive the allowance, 35 million don’t. 15 million of them are 19 or under, so there are roughly 20 million adults (both pensioners and people of working age) who don’t currently get the benefit of the Personal Tax Allowance. The proposal is simple: to make it possible for those people to elect to receive the equivalent cash value of the allowance (that is, £2300 pa, just under £200 per month).
The idea may be off the wall, but it’s not outlandish: it asks for nothing better than what is already received by the other 60% of the adult population. The only net beneficiaries would be people with incomes lower than the tax threshold. About 6 million of them are people over 65 on lower pensions, 7 million are adults of working age receiving benefits, and the remaining 7 million are either people on low pay or non-workers. There is no obstacle to people in work receiving the same option – there would be no net cost, apart from the mechanical administration of the payment – but there is no financial advantage for people who are already in receipt of secure incomes to make the switch.
The basic model should be easy to operate. A tax year runs roughly from April to March. Records of tax allowances are already kept for everyone with a National Insurance number. People who wanted to convert their tax allowance into a cash payment would need to make their election in good time before the tax year – the obvious deadline is the time of the submission of tax returns by the end of January. A person who made that election would then have a tax allowance for the forthcoming year of zero. No further administrative test is necessary.
Many Basic Income schemes have suggested that the Personal Tax Allowance should simply be abolished. I think it’s important that there should be a choice, for three reasons. First, PAYE works, and it works for millions of people. Getting rid of it would complicate people’s lives and breed resentment; it would also more than double the administrative burden. Second, there are some people, especially self-employed workers, for whom a zero tax allowance would be difficult to manage or live with. Third, choice matters in its own right. If the choice proved popular among workers, it could pave the way for other, more ambitious schemes; we can cross that bridge if we come to it.
This scheme could all get more complicated, but it’s important to avoid that. Changing back and forth between PAYE and cash payment, week by week or month by month, would be complicated and could be error-prone. Disregarding the payment in means-tested benefits would be inequitable, because if the benefit is allocated continuously for at least a tax year, some people would have the payment and others wouldn’t; and if it’s not allocated continuously, there would have to be a complex set of mechanisms to cope. People who owe back tax typically get an adjustment in their tax allowance; if people do not have a full personal tax allowance they should not be eligible.
In principle this scheme could cost up to £46 billion (20 million times £2300), but there are reasons why it wouldn’t. First, anyone who is currently getting more than the tax threshold in the course of a year already receives the equivalent benefit. Most people would remain on PAYE – the main reason for electing for a change would be to secure a more stable income. Most people who become unemployed pass through unemployment: about half the people who drop out of the PAYE system return within six months. They will typically keep their tax allowance in PAYE. So not everyone who receives benefits will be getting a converted allowance. Second, those who earn but are below the tax threshold already receive part of the equivalent benefit. Third, most important, the cash payment will have to be offset against benefits for about half the relevant population – that is, pensioners and adults of working age on means-tested benefits. I’m not going to pretend that the interactions with benefits are straightforward – far too many pensioners who are entitled to Pension Credit don’t actually get it – but it should all mean that the net cost is likely to be in the region of half the maximum, something over £20 billion. That’s still not cheap, but it’s both practical and much less expensive than many alternative proposals that have been canvassed.
This is a proposal, then, for a relatively small, limited benefit that would be unconditional and easy to administer. It would mainly work in favour of people who are not well protected in the current system: people on unstable incomes, students, people who are not receiving benefits, people with home responsibilities. The argument for a scheme like this is that it would make a difference, not that it would answer every problem. It would not settle the problems of the benefits system, and it is not big enough to make any very large difference to poverty. However, money from one source can be mixed together with money from other sources, and a small benefit like this would make sense alongside other benefits. It would offer a limited but stable source of supplementary income to many people on insecure incomes, and it would offer some support to people who currently have none. What set me off on this week was a challenge made by Kathy Mohan to Theresa May in the street: “I can’t live on £100 a month”. She’s right; she can’t. We need to make sure that part of the benefits system, at least, is stable, secure, guaranteed and permanent.
The cost is the main reservation. It’s much less than the cost of many Basic Income schemes, and it’s better targeted – getting money to just the people that Basic Incomes are supposed to reach, and doing it without making any of them worse off. But there is always an opportunity cost. I’ve not run the figures, but I suspect putting the same money into Child Benefit would have a much greater impact on poverty than this proposal, which offers more to pensioners with moderate incomes, students and women with home responsibility. On the other hand, it probably compares favorably in distributive terms to current proposals for supporting university students and FE, which will cost over £14bn, but have other arguments running for them. It’s all a question of priorities. Nor is this the only half-baked scheme I’ve canvassed on this blog. Think of this as the glimmer of an idea, rather than a personal recommendation.
I also have to admit to a certain apprehension about putting potentially dangerous ideas into the public domain. One of my first supervisors, Della Nevitt, once scribbled a back of an envelope calculation in the Ministry for Housing and Local Government and it mushroomed into the Rate Rebate, Rent Rebate and Housing Benefit schemes, the last one in its day described as the greatest administrative fiasco in the history of the welfare state. I need to think more about this, and it’s possible that other people can see a lurking catastrophe in the idea I’ve not thought about yet. I’d be grateful for comments.