Could a “Citizen’s Income” address tax and welfare problems?

Here are a couple of current UK problems. Firstly, although the economy is recovering strongly, tax receipts aren’t. Secondly, flaws in the way the welfare system operates may be creating disincentives in the labour market. Could a radical proposal: streamlining the whole welfare system by paying everyone a ‘citizen’s income’ help?

The Guardian has some good coverage of this interesting suggestion. Firstly, they describe the problem of disappointing tax revenues. With more people in work, together with tills ringing in the high street, there should be a big improvement in the public finances as higher income tax and VAT receipts roll in. One explanation why this has not happened is because Britain has become a part-time economy, and one that has seen a vast increase in self-employment (which accounts for more than 80% of the net rise in employment since 2008). What’s more, older people are now topping up pensions by doing a few hours a week of part time work. This broad group of people may be earning less than the income tax threshold of £10,000.

So either the jobs that are being created are so low paid that they are not subject to either income tax or national insurance, or something else is going on. That something could be that people on benefits are doing some informal paid work but not declaring it to the taxman because they lose almost as much in benefits as they gain from working. And that the new army of self-employed are not declaring all they earn to the tax man. Maybe, maybe not. Discovering how much economic activity goes unrecorded because people hide it from the taxman is notoriously difficult. But it would help explain why consumer spending is rising more rapidly than wages, and why VAT receipts are growing slightly more strongly than income tax receipts.

What should the government response be? One option would be to employ more tax inspectors and launch a crackdown on evasion. That, though, would be difficult. The number of tax inspectors is small and low-level evasion is large. An alternative would be to encourage those working in the informal economy to join the formal economy. The barrier to that is a tax and benefits system that is hugely complex, means-tested and perhaps discourages those working less than full-time on low earnings from working longer hours.

That leads on to the radical suggestion: everybody would receive a citizen’s income. Under this scheme, waged and unwaged, children and adults, the working aged and pensioner, rich and poor alike would receive the same basic income financed by the phasing out of virtually every tax relief and allowance. It would be universal and hence avoid the stigma attached to benefits. Secondly, people taking a job or starting a business would have the security of knowing that they would still have their citizen’s income if the venture did not work out.

You can probably spot several problems with this idea! Some people might lose all incentive to work and just draw their citizen’s income. But big questions merit some radical suggestions…