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Mirabile dictu – Polly Toynbee at least asks the right question

Summary:
Polly Toynbee does manage to ask the correct question here. Although as is her wont she manages not to grasp the underlying point. Concerning Universal Credit and the taper rate - that combination of national insurance, income tax, benefits withdrawals - that affect welfare recipients as their incomes rise:For every extra pound they earn, 63p is deducted: what if the rich paid 63% in income tax?If we tried to charge the rich that then we’d gain less in tax revenue. For that is well over the Laffer Curve peak, as is well known. But what is less well known is that we’ve no evidence whatsoever to tell us that this peak applies only to the rich. We can hypothesise that the confluence of the income and substitution effects will have a different shape to the curve for the poor but we’ve no real

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Polly Toynbee does manage to ask the correct question here. Although as is her wont she manages not to grasp the underlying point. Concerning Universal Credit and the taper rate - that combination of national insurance, income tax, benefits withdrawals - that affect welfare recipients as their incomes rise:

For every extra pound they earn, 63p is deducted: what if the rich paid 63% in income tax?

If we tried to charge the rich that then we’d gain less in tax revenue. For that is well over the Laffer Curve peak, as is well known. But what is less well known is that we’ve no evidence whatsoever to tell us that this peak applies only to the rich. We can hypothesise that the confluence of the income and substitution effects will have a different shape to the curve for the poor but we’ve no real empirical evidence that there is anything different.

That is, yes, that taper rate is too high. We’d all very much prefer it to be lower. Which can be done in a number of ways, all of them politically difficult. We can lower the tax rate upon those working poor. Our own favoured policy of a significantly higher - one that has more than doubled as a result of our suggestions already - personal allowance would help. So would a significant raise, as we’ve suggested, in the national insurance threshold. Benefits could be lower, more measly. Or they could be paid ever further up the income scale, thus reducing the rate they are withdrawn as incomes rise.

We, obviously, prefer the idea of just taking less tax off the poor in the first place. Others will prefer other solutions. But we do agree that that 63% rate is too high, making it lower is a good idea and something we should do.

So, yes, good question Polly. But then to fail the larger question. What was the rate under the old system? We know because Budget speeches used to contain a specific litany on this point. We would be told the number of benefits claimants who faced such taper rates - benefits withdrawal and tax impositions - of over 60%, over 80% and over 100%. Roughly, and from memory, the numbers would be several millions, several hundreds of thousands and several tens of thousands.

That is, Universal Credit may well not be perfect. Little that government ever does is going to be. But it is better than the system that went before. And it is so by design. One of the very points of the new system is to have that just the one calculation with a lower taper rate so that we reduce the disincentives to work to gain higher income.

Sure, 63% is too high. But it’s better than over 100%, isn’t it. As with Maggie’s first budget with Howe - 60% is too high as a top income tax rate but it’s better than 83%.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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