06 February 2010

Tax Allowances as Citizen's Dividend

Having discussed the Citizen's Dividend a few times, I find that some people are initially hostile to the idea of cash being paid straight out on a non-means tested basis. That got me thinking about alternative systems which might achieve the same thing, but in an easier to digest format, such as the negative income tax approach. One approach along those lines which I think could work would be non-wastable personal tax allowances.

For example, you could give everybody a £9000 personal tax-free allowance and increase income tax to, say, 33%, but for each pound of the allowance not used, the allowance holder would get a rebate equal to its cash value, which would be 33p, added to his or her pay packet. So, each month, employers would deduct a third from each employee's wages and then add £250; those earning less than £9,000 would get more from their allowance than they pay in tax, whereas those earning over £9,000 would be net tax payers.

In order to make it viable, minimum wage rules would have to be removed immediately, so that, at the very least, everybody would be able to go out and do an hour's work for a penny each month in order to get access to the £250 tax rebate. Get rid of unemployment benefits too and the job would be done.

Are there any stumbling blocks to that approach I need to consider?

1 comment:

Mark Wadsworth said...

Nope, you've missed nothing. What you allude to is e.g. Milton Friedman's "negative income tax".

But even better, give everybody a choice between
a) a £9k p.a. and no welfare, or
b) £60 a week in cash welfare and a PAYE code with no p.a., also known as a "BR tax code".

See e.g. UKIP's welfare policy.

If you want to have a 50% withdrawal rate, you give claimants a "K-code". if you want to appeal to right-wingers, you allow spouses a third option c) transfer their personal allowance to other spouse who is working.