A new Resolution Foundation report today highlights how the present system of redistribution through taxation and welfare is inefficient and could be reformed.
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A new report today highlights how the present system of redistribution through taxation and welfare is inefficient and could be reformed to give more support to those on low and middle incomes.
The report, by the Resolution Foundation, argues politicians must “grasp the nettle” of tax reform if they are concerned about growth and redistribution, that simply making the current system more generous to those on low incomes “will not be sustainable in the long run” – the structures of welfare, VAT and council tax need reform.
Figure 1 of the report, “Fairer by design: efficient tax reform for those on low to middle incomes” (pdf), shows how the income of low to middle income households as a group is presently made up:
It indicates they receive about 15 per cent of their gross income (before tax) from benefits and tax credits, but lose about 20 per cent of their gross income through direct and indirect taxes.
The report says the tax-benefit system must do more to ensure work pays for groups who known to respond to incentives, and which will be important to rising living standards:
• For parents, cash benefits could be made more generous for younger children and less generous for school-age children when parents are more likely to want to work;
• For second earners, the new Universal Credit system could introduce a separate disregard for second earners, allowing them to keep more of the money they earn; and
• For older workers, National Insurance Contributions (NICs) could be reduced by either bringing forward the age at which people stop paying NICs to 55 or by or increasing the NICs threshold at this age, whilst potentially delaying the age at which Pension Credit becomes available.
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• OBR figures show a long term fiscal challenge that needs long term solutions 13 Jul 2012
• A US perspective on tax credits and the politics of reform 30 Jun 2012
• It is time to debate a new economy 17 Jun 2012
• Council tax benefit reforms will hit working-age adults in poverty 1 Jun 2012
Resolution Foundation chief executive Gavin Kelly said that, in the current climate, increases in living standards will have to come “overwhelmingly from employment rather than big increases in state support”, adding:
“Our tax-benefit system and public services will need to do far more to support work – whether for parents held back by lack of childcare or older workers who see little incentive to stay in work.”
While report author Paul Johnson, of the IFS, concluded:
“If politicians are serious about wanting both growth and redistribution they must face up to the need for reform and tackle elements of the tax system which have for too long been in the too difficult box.”
Meanwhile on VAT reform, they argue the current system of extensive zero and reduced rating of VAT (much more extensive than in other countries), is an “expensive and inefficient way of effecting redistribution”, and can be reformed over time “in ways which benefit low and middle income households”.
16 Responses to “Resolution Foundation: Tax and benefit system still not doing enough to make work pay”
liane gomersall
RT @leftfootfwd: Resolution Foundation: Tax and benefit system still not doing enough to make work pay http://t.co/KrdHcX60
JC
As I’m sure you know, NI is just a general tax. It has nothing to do with pensions, NHS etc any more. Why not make sure that people at this income level don’t pay NI and income tax. It’s about the same as the benefits they receive. If this were changed, then there would be an advantage in working more hours as there would be no benefit to be cut.
Shifting Grounds
RT @leftfootfwd: Resolution Foundation: Tax and benefit system still not doing enough to make work pay http://t.co/wJ5Lea87
Anonymous
The SAME as the benefits they receive? It’s a small fraction of the benefits.
Anonymous
I’m on benefits for being disabled and actually I’ve got to pay income tax, rent and council tax, and to be honest it’s hell of a lot, but I’m willing to pay it as I did when I worked.
The idea that the poorest should not pay NI and tax, well less maybe but everyone should pay something to keep the NHS going, and keep people who need benefits, then again I’m socialist.
I do not know the best way to make work pay of course is to up wages to a decent level, unlike Blair’s min wage