My letter to the FT

I fired this off on Wednesday afternoon. It wasn't in yesterday's paper, and I doubt it will be in today's, so I'll post it here instead:
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Sir,

Referring to the Tories' welfare reform proposals (Big Talk on Welfare, 11 November 2009), you state: "It is, for example, a sound plan to allow people moving from benefit to work to keep more of what they earn and so not face very high marginal withdrawal rates. But doing this either by re-engineering tax credits or reducing the amount of tax paid by the poor is expensive."

I thoroughly agree that this is a "sound plan" but would like to challenge the notion that it would be "expensive".

It is helpful to remember that marginal benefit withdrawal rates currently range from seventy per cent (for Tax Credit claimants) all the way up to one hundred per cent (for recipients of 'key benefits' such as Income Support or Invalidity Benefit), and to look at income-related benefit withdrawal as a form of taxation on people with low incomes.

The Laffer Curve suggests that the revenue maximising income tax rate is far lower than seventy per cent, let alone one hundred per cent, and that, for sake of argument, fifty per cent is the income tax rate which maximises income tax revenues. By the same logic, if marginal benefit withdrawal rates were reduced to, say, fifty per cent, it is quite likely that the amount of basic welfare entitlement clawed back via this quasi-tax would increase and thus that the total cost of welfare to the taxpayer generally would go down.

I would like to add that the headline fifty-five per cent withdrawal rate recommended in Iain Duncan Smith's report is no such thing, as this would be fifty-five per cent of net income after tax. The total marginal withdrawal rate would actually be sixty nine per cent, not much of an improvement on the seventy per cent currently faced by recipients of Tax Credits.

Yours etc.
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PS, this letter is also for the attention of people who choose the option "Show people they can't get something for nothing" in this week's Fun Online Poll.