How a negative income tax could both be pro-business and pro-welfare in the UK?

How a negative income tax could both be pro-business and pro-welfare in the UK?

Tax reform and a universal basic income are both topics that have garnered more and more interest in recent times. President Trump’s controversial budget has major changes to the US tax code. Whilst his Democratic opponent, Hillary Clinton even suggested that she would ran on a platform offering a universal basic income. One proposed policy position which would combine ideas from both these political foes, is the negative income tax.

A negative income tax was first proposed by a female British politician Juliet Rhys-Williams, as an alternative to the famed Beveridge Report and as a way to deal with the crippling poverty and social issues the United Kingdom faced after World War 2.  But it was later popularized by the neoliberal economist Milton Friedman. In 1969 President Richard Nixon was close to passing a form of negative income tax, in a continuation of his predecessor -Lyndon B. Johnson’s infamous war on poverty. Nixon later changed his mind and his ambitious new policy to take on poverty was later dropped.

I am going to show you how a negative income tax would work with a flat rate of income tax at 30% and a single income tax credit of £6000. Whether an individual would earn a supplementary income or be a taxpayer depends on the difference between the income tax credit of £6000 and their taxable income, which would be 30% of their income in my scenario. So an individual who is earning £15,000 pre-NIT would have a taxable income of £4500, however when you take into account the £6000 income tax credit they would instead be net recipients of £1500 a year along with their £15,000 income. Under my plans an individual would only begin to be paying direct taxes when they are on incomes above £20,000 a year or £1666.67 a month.

I support a flat rate of income tax at 30% because this would mean a more equitable income tax system and universal policies also tend to have a larger amount of support from the public than means-tested/differentiated policies. But when balanced with the £6000 Income Tax credit that everybody would receive then the effective tax rate for those on higher incomes would be larger than those on lower incomes. An individual who earns £30,000 a year under my plan would have a taxable income of £9000, but once the £6000 Income Tax credit is taken into account they would instead pay £3000 a year in Income Tax and have an effective tax rate of 10%. An individual who earns an income of £100,000 would have a taxable income of £30,000, but with their Income Tax credit take into consideration they will pay £24,000 a year in Income Tax and will have an effective tax rate of 24%. So in my Negative Income Tax plan, flat rate of Income Tax at 30% coupled with an Income Tax credit of £6000, would still in effect act as a Progressive tax system since those on higher incomes would still have a larger effective tax rate, as there Income Tax Credit will tend to be far smaller compared to their taxable income and so the wealthier would still shoulder a larger burden.

This is slightly different to the current UK tax system where individuals have an income tax free personal allowance of £11,500 and the income above this amount would be subjected to differing income tax rates. Currently there is also a very low national insurance threshold which can be reached as low as £486 a month. Also under a negative income tax there would be a single income tax credit and you can do away with all the other deductions and benefits that overly bloat the system.

One of the benefits of a negative income tax is that it offers a basic income and it gradually reduces the amount of money an individual receives from the state and as a way to gradually increase taxation, so as to avoid a welfare trap. Where individuals would avoid working longer hours because they would be hit by high marginal tax rates. Another benefit of a negative income tax is that it would allow for HM Revenue and Customs (the UK’s tax collection authority) and the Department for Work and Pensions (the UK’s welfare agency) to merge and this would save money. A negative income tax could also greatly reduce the complicated benefit system and save time it takes for low income individuals to claim a whole collection of benefits, with the Adam Smith institute estimating departmental savings of £6 Billion. Also with a negative income tax it may also be possible to abolish the minimum wage, which when increased can often have perverse incentive whereby firms may cut an individual’s hours or lay workers off.  

However I would personally recommend that the UK should also significantly change the tax code, so that multiple taxes are incorporated into a negative income tax, I would merge the dividends tax, national insurance and capital gains tax into the negative income. I would also like remove loopholes that lead to both tax avoidance. I would also suggest that the UK should also fully remove physical currency, so that we can crack down on tax evasion. In the UK it is currently estimated by the IFS that 1 in 3 returns under report income, with this figure rising to 2 in 3 returns carried out by individuals who are self-employed. Although removing physical currency should be done in a controlled manner so as to minimise potential harm to individuals. I also think that in conjunction with simplifying the tax code and fully digitising the currency the UK should carry out return free filing, as a way to save time for individuals and businesses, as well as removing the Pay as you Earn tax system, this is where employers deduct Income Tax deductions from your pay before you are paid. This policy was even considered by the Conservatives in 2010. So under my planned changes there would instead be a Pay as you Go Income Tax system which would affect all individuals this is used in Australia for businesses. HMRC would calculate your taxable income by calculating the money that is paid into your account and finding 35% of that income, this is also known as return free filing, and the difference from your taxable income and the Income Tax Credit and HMRC would then deduct money automatically or pay a supplementary income to an individual, with the removal of physical currency HMRC would be able to make a more accurate assessment of an individual’s income. Return free filing and a Pay as you Go tax system could reduce the time and effort both individuals and businesses spend on complying with tax legislation, which PWC currently says takes around 110 hours and the AAT says that tax compliance costs £10 Billion. HMRC has currently been trialling return free filing or what has been come to be known as a simple assessment form.

A negative income tax should in my opinion be a part and parcel of a comprehensive package to help create a more prosperous and generally wealthier population. There are also needs to be a range of policies that help to bring down the ever increasing cost of living. I would also like to see a greater level of house building to take on the rising house prices and rents that do not keep up with real incomes. This can be encouraged through loosening planning permission rules, loosening the green belt, levying a land value tax and getting housing associations and local authorities to build larger number of houses. The UK should also attempt to reduce the cost of energy by allowing more developments in fracking to be made, in the United States developments in fracking have considerably reduced the energy prices for average consumers as well as creating more than 1 million jobs. The UK could also reduce the ‘green levies’ on energy that can mean even with falling wholesale price of oil and gas we can see energy prices increase.