Monday, 19 October 2009

It's time we all had NITS

In my last post, which was a little while ago, I vented my spleen and rubbished Her Majesty's Tax Credits system. It seems nobody has a good word to say about the system as it stands, except perhaps that "it's better than nothing". The Lib Dems have suggested some ways to simplify the system and make it more flexible when it comes to changes in earnings, which I applaud. But, in my opinion, the system is fundamentally rubbish, and a more radical and imaginative solution is called for.

Enter NITS: Negative Income Tax System. The principle is simple, if a little unusual; we traditionally pay tax at a positive rate, and if we are in the 20% band, we owe 20% of those earnings to the revenue. There was (until recently) a 10% rate below this, and under this a tax-free allowance, which you could say was really a 0% tax band. Now imagine another band below this, for the people on the lowest incomes, a -20% band. These earnings would not only be exempt from tax, but would be due an additional 20% payment from the revenue. To put it another way, rather than paying a 20% tax debit on higher earnings, those on lower earnings would receive a 20% tax credit.

So, given that we have a tax system that, for most people, calculates and deducts tax from your pay before you ever see it, it should hardly be difficult to design into this system the ability to automatically supplement the pay of people on low incomes by applying a simple negative income tax formula. This in itself would be a massive improvement on the ridiculous situation we have now, where you must pay tax first through one system, then apply to claim it back through a second system. But, if we apply this principle slightly differently, then much more than tax reform becomes possible.

Instead of applying a negative tax rate per se, we set a guaranteed minimum income for every citizen in the country, for the sake of argument say £5000 a year. The revenue then simply credits this sum to everybody's tax account (either in one go, or perhaps in installments) for them to spend or save as they wish. This payment will still count as taxable earnings, though, so any further earnings will be added on top of it, until a certain threshold is crossed, and tax becomes payable.

Provided the tax bands and rates are properly set, we could then have a system where the lowest paid will be paying no tax, and have their income supplemented by a £5000 a year stipend. Those slightly better paid will be paying a little tax, but this will be offset by the initial £5k they have already received, so they will still be net beneficiaries of the system. Further up the scale, there will be a level where people are well paid enough so that the tax they pay entirely recovers the initial payment, above which they will become net contributors. And so the tax system continues to escalate as normal, and of course the very highest earners will be paying so much tax that it will dwarf a £5 grand payment. The government gets its tax income, and all the initial stipends paid by the revenue are claimed back automatically through tax, but only by those who can afford to pay it.

Now, you may have noticed two problems with this system: firstly that it sounds very expensive, and secondly that a guaranteed minimum income, applied in this way, would be payable to everyone, whether or not they are working. Well, hold your horses, because let me tell you that both of these seeming problems in fact add up to one massive advantage.

The truth is, we are already paying people who don't work, and the amounts are roughly equivalent to such a yearly stipend, except we do it through a massively bureaucratic and inefficient benefits system. The number of different benefits, allowances, pensions, grants and loans available from the state is now too many to count. All of these are administered separately, applied for separately, and have their own set of eligibility criteria (ie. being unemployed, old, disabled, having children etc.), which obviously costs an absolute fortune. However, when it comes down to it, only one criterion really matters, and it's the one they all have in common: being on a low income.

The beauty of a NITS system with a guaranteed minimum income, implemented in this way, is that you get not only a vastly simplified means of directly redistributive tax (as in tax credits), but the ability to dismantle the entire apparatus of assessing unemployment benefit, state pension, incapacity benefit, student loans, child allowance... the cost savings of rolling all these separately administered benefits into one straightforward mathematical equation would be simply astronomical. Nobody falls through the net, working is always be more financially rewarding than not, and all the money is automatically and fairly recouped through the tax system from those who can best afford to pay.

Now, tell me that prospect isn't exciting.