Those Welfare Reforms: Epic Fail (1)

Some of the blurb in the full 73 page document is most promising, because rolling most existing welfare payments into the the Universal Credit/Single Universal Taper scheme is a sizeable step towards a 'Citizen's Income'. For example, from page 55:

Establishing a single withdrawal rate, and eliminating the hours rules currently present in Working Tax Credit, has the potential to create a much more flexible labour market. Workers will be able to work the number of hours that most suits their needs and those of their employer, without being constrained by the structure of the benefits system. Employers will find that their workforces become more flexible and open to opportunities for progression.

For example, it will now be financially rewarding for a lone parent to work 15 hours per week, or 17 hours per week (both of which would not have been financially rewarded under the existing system which only recognised 16 hours per week);
and should more hours be available, the extra earnings will no longer face a Marginal Deduction Rate [MDR] of 96 per cent....

OK, they're focusing on lone parents. The MDR under the UC/SUT is explained on the previous page:

We expect the impacts on earnings incentives to be large. Universal Credit will improve earnings incentives for 700,000 current low earning workers. It increases their financial reward to work more hours or increase their wage rate, and as such
it creates a more flexible workforce.

The expected Universal Credit withdrawal rate of 65 per cent means that to all intents and purposes, the highest Marginal Deduction Rate 24 for low-earning workers would be reduced from around 96 per cent to 65 per cent for those earning below the personal tax threshold and to around 76 per cent for basic rate taxpayers*.

OK, 76% doesn't sound quite as bad as 96%, but that's a very misleading comparison. If we now flip to the last set of Tax Benefit Model Tables, Table 1.3a (Lone Parent with 2 children under 11, no child care costs) we see that the MDR is between 85% and 90% on earnings up to £180 a week, so it'd be a vast improvement for these lower earners BUT the MDR is then a flat 70%** all the way up to earnings of £520 a week (or £27,000 a year, far more than the median income - this figure would be even higher if the table included the 30-hour element).

I don't dispute that overall the UC/SUT will be an improvement, but as ever they are taking from the 'better off poor' to give to people further down, and anybody who thinks that 65% or 76% is the cost-minimising MDR needs his head examining (means testing is just like taxation, so the tax revenue maximising tax rate from the Laffer Curve must be the same as the MDR which minimises the cash cost of welfare payments).

* If you earn £100 and have £31 PAYE deducted, your net pay is £69, and they take away 65% of that in means testing = £45, so you end up with the princely sum of £24 extra in your pocket.

** UPDATE: SW in the comments reminds us that the MDR on basic rate taxpayers claiming Tax Credits is going to go up from 70% to 73%.