My email to the DWP

Dear Mr Spiers

I note from an article in the Daily Mail on the Universal Credit/Single Unified Taper that "A withdrawal rate of between 60 and 65 per cent is being debated, according to sources."

Obviously, you are not allowed to tell me whether or not this is correct etc, but allow to me to point out (as I possibly did not emphasise enough in my original submission of early August)...

1. Means testing of benefits is exactly like taxing income, so we have to think about the Laffer Curve.

2. I believe that the revenue maximising tax rate on lower/median earners is about 60%.

3. Therefore the cash-cost minimising benefit withdrawal rate must also be about 60% of income.

4. Unless people earn very little indeed, their employment income is liable to Employer's NIC at a marginal 12.8% (or 13.8% next year) which we can round to 10% for the sake of this discussion. This is of course legally borne by the employer but economically it is borne by the employee - a 1% increase in the rate leads to a 1% fall in headline wages (all things being equal).

5. Therefore, the cash-cost minimising withdrawal rate after deducting the 10% Employer's NIC must be about 50%.

6. 50% is a very convenient figure, as the PAYE system is already geared up to deducting tax/Employee's NIC at a flat rate of 50% of cash salary (ignoring bands, personal allowances) under the K-code system.

7. So we could achieve a cash-cost minimising withdrawal rate of 60% overall AND obviate the need to have a separate system of means testing by paying people their Universal Credit and giving all adults in the claimant household a K-code for PAYE purposes - the benefit withdrawal would be dealt with via the PAYE system, more or less for free as far as the taxpayer is concerned and at minimal extra hassle for the payroll department.

I look forward to your response and remain


Mark Wadsworth
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UPDATE: from today's Evening Standard:

However, according to the Times, Mr Duncan Smith has now persuaded the Treasury to let him claim up front “a large chunk” of some £9 billion of potential savings (1). His new system would carry a guarantee that anyone taking a job would be better off than if they were on the dole, through being allowed to keep more of their benefits.

But over the summer it emerged that the senior Treasury official responsible for checking his calculations, Claire Lombardelli, did not believe his sums were credible. (2) The Chancellor has made clear the cost of benefits must fall, even if it means putting off major reforms on the grounds that they would be expensive to introduce (3). Cutting welfare is vital to his plan to cushion other departments from cuts. (4)

The Department for Work and Pensions said: “We are working closely with the Treasury... We are all agreed on the urgent need to reform the welfare system and help more people into work and off benefits.”(5)

1) Correct. The DWP have running costs, i.e. civil servants' salaries of £9 billion. That's our next port of call.

2) Well she would say that, wouldn't she? See (1).

3) That's a pretty twattish thing for a Chancellor to say: "I'm sorry darling, let's put off that roof repair that will cost a few hundred quid, even if it means that we'll get a bill of thousands of pounds later on, once all the woodwork is nice and rotten."

4) An inevitable knock on effect of reducing the marginal withdrawal rate is that more people will be working, so they'll be claiming less and/or paying more tax, so the overall cash cost goes down. At the same time, the incomes of low earners will go up. Win win. What's not to like? As to "cushioning other departments from cuts", I'm not sure that there'll be any departments left once my Bloggers Cabinet is finished.

5) Well they would say that, wouldn't they? See (1) and (2). Let's see how good they are at helping themselves into work once the whole welfare system runs itself.