The real enemy is the civil service

I printed off the DWP publication on their proposals for a Universal Credit, and a lot of it is to be welcomed, such as this on page 8:

Currently, when combined with tax and National Insurance payments, the withdrawal of Tax Credits, Housing Benefit and Council Tax Benefit can lead to Marginal Deduction Rates which are nearly 96 per cent, much higher than the highest rate of Income Tax... The combined effect of benefit withdrawal rates and additional tax as earnings increase is called the Marginal Deduction Rate and has the same practical effect as a tax rate.

Correct! It is to all intents and purposes taxation.

1. Let's imagine the Kind Tooth Fairy (the DWP) insists of giving every citizen a bit of money so that they don't starve, and has no method of clawing any of it back again (a bit like Child Benefit or the basic state pension); and the Wicked Tooth Fairy (HM Revenue & Customs) has to collect as much money as it can by deducting it from people's wages.

2. If the Wicked Tooth Fairy knows about the Laffer Curve, he would know that the revenue maximising rate on lower earners is about 60%, which he could arbitrarily split up into 12.8% from the Employer and 47.2% from the employee, call it 50% from the employee for sake of argument, which the Wicked Tooth Fairy would then ask employers to deduct from people's wages and send straight to him.

3. So the cash-cost minimising MDR is, by and large, the same as the revenue-maximising tax rate on the Laffer Curve, which sure as heck ain't 80% or so*.

4. The civil servants have deliberately spiked the whole point of the scheme by having a MDR of 65% or 76% (which I looked at yesterday), but, despite having admitted on page 8 that means testing is to all intents and purposes the same as taxation (in other words could be deducted straight from people's wages, to the extent they have any), they write this in the Executive Summary:

For those in employment, Universal Credit will be calculated and delivered electronically, automatically adjusting credit payments according to monthly income reported through an upgraded version of the Pay As You Earn tax system (on which HM Revenue & Customs will be consulting shortly).

The system will be simpler and will respond more quickly to changes in earnings so that people will not face the same complexities as they do now, particularly at the end of a tax year. As a result people will be much clearer about their entitlements and the beneficial effects of increasing their earnings by taking on more hours or doing some overtime...

This would involve an IT development of moderate scale, which the Department for Work and Pensions and its suppliers are confident of handling within budget and timescale.

AAAAARGH!!

5. How is that in any way better, or cheaper or less prone to fraud and error than simply giving welfare claimants £64 a week (or whatever the amount will be) and a PAYE code with no personal allowance, which tells employers to deduct 50% income tax and no back chat? The regular payments don't need to 'respond to changes in earnings', the claimant knows that he has £64 a week coming in (or whatever) and knows that for every £1 he earns legitimately, he will keep half.

6. And do you know what? We already have PAYE codes like this, they are called K-codes, it's all routine stuff that any payroll lady can handle (in fact, it's the easiest PAYE code of all to deal with, even easier than a BR 'emergency code' as the 50% covers both income tax and Employee's National Insurance.)

* Once Employer's NIC has gone up to 13.8% and Employee's NIC to 12%, for every £113.80 the employer pays out, a worker on the Universal Credit would keep £23.80, i.e. £90 makes its way back to the government, which is a tax rate of 79%. It's even higher if you add the VAT on top of the wages.