7.3.10

Further Thoughts on Benefits & A Living Wage

The Rational Anarchist writes the following comment to this post.

Sorry - this may be a bit of a necro-post but I stumbled across this post and thought it warranted a reply:

I think the problem is that £15k of tax free income is worth different amounts to different people.

Someone with no earnings may as well get rid of it, so will sell it for as much as they can get.

Someone earning enough to put them in the 20% tax band would probably see it as worth (£15k x 0.2 = ) £3k.

Someone earning enough to be in the 40% tax band would see it as being worth £6k, and someone in the 50% tax band would value it at £7.5k.

So the people with the most reason to buy it would be those with the most income. Of course, if they paid £7.5k for the allowance, they'd be no better off - so allowing 10% or so for time and admin, they'd probably pay around £6.7k. This is enough that everyone else would have reason to sell it to them - even those paying 40% tax only value the allowance at £6k.

Assuming that everyone did the most efficient thing, everyone who paid less than 50% tax would sell their allowance to 50% tax-payers. This would have a net effect of reducing the top rate of tax to 45% instead of 50% and gain everyone else about £5.5k.

Now, bear in mind that the money to fund this has to come from somewhere, and that it wouldn't be all that easy to keep track of where all those allowances are - so the cost of administering this would not be small. Why not just give everyone £6.7k CBI, abolish the tax free allowance, abolish employees NI and set a flat tax rate of 41%? Everyone would be better off than they are now and it would cost a lot less to administer...


These are all good points and I feel it is worth addressing them as completely as possible so will try to answer them on a point by point basis.

I think the problem is that £15k of tax free income is worth different amounts to different people.

The short response to this is yes, 15k is worth different amounts to different peoples; he even illustrates various scenarious as to what it is potentially worth to different peoples.

Someone with no earnings may as well get rid of it, so will sell it for as much as they can get.

Again yes, this is kinda the point; as a farmer would take his grain to market and try to fetch the best price so too would someone hawking their unused tax credit.

Someone earning enough to put them in the 20% tax band would probably see it as worth (£15k x 0.2 = ) £3k.

Someone earning enough to be in the 40% tax band would see it as being worth £6k, and someone in the 50% tax band would value it at £7.5k.


I disagree on both counts; the person who can marshall a £15k tax credit sees it as worth £15k, primarily because that's wot it's worth.

However, to purchase that tax break, yes; that assigns a value to it based on a mutually agreed price between the buyer and seller which determines it's worth which must be mutually beneficial to both parties, otherwise why they agree to it?

So the people with the most reason to buy it would be those with the most income

Quite, this is the point; if a transaction doesn't benefit involved parties what's the point?

The net value to the buyer can this be deduced to:

[gross additional tax allowance] = [value of tax credit] - [cost to buy]


Which, at least in my scenario, is variable; it would be inadvisable to fix the exchange cost for reasons I will get to.

Assuming that everyone did the most efficient thing, everyone who paid less than 50% tax would sell their allowance to 50% tax-payers.

For the owner of the tax credit it is worth a fixed £15k; they can earn £15k before any tax applies (irrespective of what the tax system; regressive, progressive, fixed etc...)

To someone earning more money they have to buy the credit at an agreed cost with it's owner; unless they were mad this would be an amount less than or equal to (e.g. If a spouse wanted to give up work why not give the allowance to their partner to enable more take home pay?) that voucher, e.g. You earn £30k before tax, you pay £9k for a further £15k tax credit so you pay no tax but have spent £9k to earn that privelege: 15-9= £6k.

Now, bear in mind that the money to fund this has to come from somewhere,..

Um yes- the buyer of the tax credit.

and that it wouldn't be all that easy to keep track of where all those allowances are...

And yet HMRC manage to perform just this type of action for the millions of taxpayers an on billions of transactions of every kind.

so the cost of administering this would not be small.

Ok: to whom? HMRC already operate a massive administrative operation to collect revenues and track allowances and tax codes; why not have fewer taxes (I.e. Fewer tax codes) and a more robust tracker of tradeable allowances?how many bodies has the government set up to monitor interactions between people? It can be done.

Why not just give everyone £6.7k CBI, abolish the tax free allowance, abolish employees NI and set a flat tax rate of 41%? Everyone would be better off than they are now and it would cost a lot less to administer...

Right to understand why I think it is a bad idea we need to look at what my idea's main purpose is.

First the problems:

1: As a libertarian ultimately I don't believe we should have an involuntary system of benefits; the present system illustrates that such safety nets invariably become hammocks for the idle. The welfare state should be abolished.

2: Were we to abolish the welfare state today in all likelihood it would generate just as many problems as it would set out to fix, e.g. Starving homeless in the streets smashing shop windows for food, beer and whatever they felt like.


A solution therefore has to

1.provide people with the resources to survive, and hopefully, thrive.

2. integrate with the present system, eventually replacing it.

3. be itself easy to wind down to the abolition of state welfare.

4. encourage free action and put the control in the hands of the individuals these decisions ultimately affect.


The CBI may achieve the points 1 and 2 above, and possibly 3, but in terms of removing the claw-like grip of the state is a crushing and resounding no on point 4, by far the most important.

The CBI presumes one type of behaviour, to ensure people have the minimum required to survive, whilst ultimately negating the long term tools which will ensure individuals ability to thrive; how many thousands are taken with menaces currently to pay for a system riddled with corruption? My scheme removes the immeadiate incentive of cold hard cash while making any attempt to cheat the system open to the auditing powers of the taxman. Heck, who earning the sort of money you'd need to benefit from acquiring loads of tax credits would have the time to cheat the system? Why not work with an outsourced administrative/accounting company specialising in acquiring tax credits in bulk (for a small fee), maximising the rate of return or even taking a more ethical view and guaranteeing a fair return to the tax credit holders (not all wealth is monetary after all)?

You would see stay at home mums able to contribute in more than just logistical returns to their house.

Pensioners comfortably off could gift their tax credit to their struggling children to help them; less well off pensioners could do likewise to help the family support them.

We could make university a near self-sustaining private enterprise for students, able to hawk their credits in exchange for stipends/accomodation/tuition fees etc., relieving the costs and allowing them to focus on their studies, making us all richer.

By far my favourite hypothesis outcome would be for the burgeoning drudgery that are sink estates; it would become very clear to these sellers of tax credits that their diminishing commoditised returns would be better marshalled through work or cooperation on an individual level (e.g. housewives staying at home); responsibilities would be realised and effort made to rebuild communities- until then the companies benefitting from lower taxation through the buying of tax credits would be able to blossom, grow and provide the jobs eventually needed, all in an organic manner; likewise multinationals would seek out Britain HQs for it's potential lower tax take.

The real benefit though is versatility; the list of ideas are endless in how it could be best marshalled- all at the individuals level and choice, encouraging the freedoms we want, not the shackles we don't.

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