The Coalition’s welfare plans in 2013-14 – Are the richest taking the biggest hit?

Now the dust has settled somewhat on George Osborne’s Autumn Statement, the precursor to the ‘main event’ on March 20th 2013, I thought I might offer you some welfare and benefits related New Year respite, in the form of some brief analysis of the oft used Coalition idiom that the ‘rich are taking the brunt’ in terms of the spending cuts and tax increases announced by the Government. Just how accurate is this assertion? Whilst this isn’t the place to attempt a full audit of the Coalition’s Welfare policy, a graph (see below), produced by HM Treasury was brought to my attention which looks at how each decile (or 10% of the population based on income) in the year 2013-14 will fare under the Governments tax and benefit spending plans.

Whilst on first sight the graph below might look a bit like some interesting flavour of Neapolitan ice cream (don’t try licking it, it doesn’t work), this intriguing graphic takes the cumulative effect (or in other words, the combined effect) of direct tax, indirect tax and tax and benefits income gains and losses for 2013-14 for different income deciles of the UK population in terms of net (after deductions) income. It therefore shows that for most groups there will be benefits and losses to their income, the benefits accruing to direct taxes and the losses to indirect tax and benefits.

The thing that is probably of most interest to us here is the black line, which averages out all the gains and losses or each decile of the population, thus revealing overall how much better or worse off each group will be in 2013/14.

The bottom decile of the population for instance will lose out by about 1.8% (approximately +1.1% direct taxes, -1.1% in indirect taxes and -1.8% in Tax Credit and Benefits) in terms of net income, with  losses gradually decreasing until the 9th decile, with the 10th decile bucking the trend somewhat and seeing the biggest percentage losses of all.

As such, whilst it may be true that those in the highest decile take the greatest hit, the handy black dotted line demonstrates that it’s hardly a uniform pattern. Those in the nest highest deciles actually end up losing less than many of those at the bottom. Hence, if we rank the deciles in terms of who actually loses out the most, after the highest decile (the 10th), a rather odd picture emerges. It is not those in the 9th, 8th, or even 7th deciles that are hit the next hardest, but some of the very poorest in the 2nd, 3rd and 4th.

What is more, due to this rather odd impact design, if we take the overall losses of 1-5 and compare them with those experienced by those in deciles 6-10 we see that in actual that, the average loss associated with deciles 1-5 is about 1.2% whilst in deciles 6-10, the loss is only approximately 0.3%, despite the relatively large loss of those in the highest decile. In addition, those in deciles 6, 7 and 8 will actually see a slight gain from Mr Osborne’s latest announcements.

So, returning to the analysis of the repeated statement of Mousier Osborne et al, ‘the rich are taking the biggest hit’ it appears to be the case that as with most things in Politics, a certain degree of creative interpretation (or ‘spin’) is in play. Hence, whilst the 10th and highest decile of the population does take the greatest hit, it is highly debatable as to whether those just below take a proportionately hit. Indeed, whilst it remains the case that those in the 9th decile receive significantly less of a cut than those in the poorest decile, George Osborne and the Coalition Government will continue to face questions about whether the rich really are paying their fair share.

Volunteer Mentors – A step forward in the Rehabilitation Revolution?

Chris GraylingAs the ‘rehabilitation revolution’ gathers pace, still heralded at the heart of the Government’s Criminal Justice strategy despite ministerial changes , one of the more eye-catching proposed policies mooted in recent days has been the plan to link every prisoner serving less than 12 months with a volunteer mentor on release.

Grayling said that the main aims of the mentors would be to help the released individuals find housing and training opportunities, two issues regularly cited by Criminal Justice academics and charities as major barriers on the path to ‘going straight.

So, what to make of this new idea? Whilst precise information regarding how this mentoring system would work in practice is still thin on the ground, I believe, whilst sounding good in theory and potentially being beneficial for both the released prisoner and the mentor, there are important questions to answer and address before any such scheme goes ahead. Yet, before we delve into the analysis, I thought it would be appropriate to hear from someone with experience as both mentor and mentee. Here’s Marvin Nuro, ex-prison turned mentor:

Having a mentor meant that when I got released I knew I had someone to talk to and tell how I felt. He was an ex-prisoner, so he has been through the system himself. He knows what it’s like and he knows the struggles.

Having someone can show a way to avoid stepping back into the old cycle of going back to committing crimes. It can be really tempting. When you come out there are two roads – the proper road, where you will struggle at first, or you can commit crimes. If you get away with crimes you can afford food and housing. If you don’t get away with it you’ll get those things supplied anyway because you’ll be in prison.

It definitely made a difference for me because I looked at my mentor’s life, saw how good it was and thought that if I took their advice my life could be similar.’

As Marvin attests, having someone to talk to who can relate to your own experience can be valuable thing, as well as knowing that hopefully come ‘rain or shine’ they’ll be a loyal and consistent friendly face. And it’s great to hear that on the face of it, Marvin’s experience was wholly positive, and that given the saddening rates of family breakdown associated with incarceration, having a stable and supportive presence could be of great benefit.

However, it takes more than a friendly face to help someone down the road of desistance. Indeed, given that the Government has previously acknowledged the valuable job probation services do in trying to help the prisoner with housing and job issues, to what extent will a volunteer mentor, who may not have any such professional expertise, be able to help out with these challenges? In other words, if professional help has been required in the past and present, why should it not be required now? Furthermore, given the complexity associated with these matters, to what extent will the volunteer, who will most likely have his or her own primary concerns (job, family etc.), be able to give the time required to help with such pressing concerns?

Indeed, as well as practical considerations, there are those that are relational too. Given what we already know about the rate of mental and emotional illness that currently goes undetected in the penal system, there are serious questions to be answered around appropriate personal boundaries and the extent to which the mentor, who may not have been exposed to such topic sbefore, might be able to help with these issues. There is also the very real possibility that due to these challenges, conflict may arise and at worst, harm to the mentor or the ex-prisoner. Thus, whilst these issues aren’t necessarily reasons not to go ahead with this policy initiative, the Ministry of Justice would do well to carefully consider these potential pitfalls and how best to help both the mentor and the ex-prisoner.

Hence, given that mentors may come into contact with ex-prisoners with a whole multitude of challenges to overcome on the road to desistance, the Government’s response to the extent to which these mentors will be expected to compliment, overlap or replace public, voluntary and third sector professionals will in my view be crucial in determining the success of this new policy. This potential response is made yet more intriguing by Chris Grayling’s recent comments that

The probation service does important work with difficult individuals – and I want to use that expertise as we transform our approach to rehabilitation.’

In this spirit, one sincerely hopes that mentors will not be viewed by Government as a revenue saving substitute for probation and other professional services who already provide a invaluable service in regard to those who have been recently released from prison. Moreover, although one might not need a qualification to be a valuable friend and someone to talk to, there are many questions still to answer regarding these mentors.  Although these questions  do not mean mentors cannot be a success in helping the ex-prisoner on their path to a life away from crime, it is imperative that their role is clearly defined and that there are clear frameworks in place to deal with the potential problems that could arise.

Introducing transferable allowances for married couples would be more progressive than taking people out of tax

86088157PM006_GEORGE_OSBORNSince Nick Clegg gave his recent speech about raising the threshold for paying income tax there has been heated and highly publicised political and social debate about how best to help poor families in the UK – culminating in last week’s Commons vote on the benefits cap.

The Deputy Prime Minister has for many months spoken of his firm commitment to what he called the “fundamental need for reform” of the UK tax system and the “rebalancing” that he says needs to take place. This intervention won him praise from within his own party and indeed from many outside it, including among economic commentators who share his concerns about the oppressive nature of the current tax regime and its failure to put work at its heart.

We all remember the outrage caused by David Cameron when he revealed that the current welfare system greets many people going into low paid work from benefits with a marginal tax rate of up to 96 per cent. He called this a “huge disincentive to work”- and endorsed plans to tackle a benefits system that was acutely trapping people on benefits.  It is in this context that we should see Clegg’s good intentions. But while his rhetoric might sound encouraging, the proposed policy solution fails to address the problems with our current tax system.

Although the Deputy Prime Minister’s desire to take more people out of tax is driven by his desire to help struggling families within the “squeezed middle” – the main mechanism being promoted for doing this is lifting the personal income tax threshold to £10,000. So for the first £10,000 you earn you would pay no income tax. Whilst initially this might sound good, the reality is that this proposal is not progressive for families. Indeed, as a recent report for CARE indicates, it has a disproportionately positive benefit for richer members of our society in the top half of the income distribution.

An alternative policy of introducing a transferable tax allowance for married couples is, as the report demonstrates, genuinely progressive in its design, benefitting poorer families disproportionately in comparison to their better-off counterparts. In addition, a transferable tax allowance would begin to alter the balance in our system from one which is almost wholly based on the individual to one more sensitive to family responsibility.

Despite all the positive and progressive effects of the transferrable allowance, there has been no mention of this by the Liberal Democrats in the debate around this issue. Needless to say, there was also no discussion of this measure in Nick Clegg’s address last Thursday.

The truth is that ‘pound for pound’, money spent on providing transferable allowances for married couples is a far more progressive means – both in terms of recognising family responsibility and helping those in the lower half of the income distribution – of spending taxpayers’ money than investing it in increasing the personal income tax allowance.

Furthermore, if Mr Clegg and his party want a new tax and benefits system to have work at its heart then he’ll need to address the cripplingly high marginal effective tax rates (METR) present under the current system.  If the Liberal Democrats really want work to pay, then it is imperative that they analyse how much income a family is left with as they rise up the income scale and are subjected to tax increases and benefits cuts.

Indeed, despite another flagship Coalition policy, the Universal Credit, having a positive effect of lowering the METR for some families, many families will still be left facing METRs of 76%. So for every £1 earned whilst in work, families will see only 24p coming into the home: perhaps the Lib Dems should look at how this could be improved further.

All in all, given the individualism of our tax system, with its lack of sensitivity to family responsibility, and the simultaneous shortcomings of our welfare system, with its failure to adequately incentivise work, it was good to see Clegg trying to kick start the debate on reforming our broken tax system.

My hope is that this debate will ultimately encourage the development of a system that both properly provides for those in need and rewards work as well. Disappointingly, however, the Lib Dem flagship tax policy of increasing the personal income tax threshold would have the highly regressive effect of helping better off families disproportionately in comparison to poorer ones.

The progressive transferrable tax allowance on the other hand would do the opposite. It would also begin to reform our system in the right way, laying down the foundations toward move to a system that recognises not just individual income but also family responsibilities.

This article was originally published on ConservativeHome in February 2012 here.

You can follow me on Twitter at @davidpaulbinder.

Getting behind the facts – Marginal Effective Tax Rates (METRs), Child Poverty and Income Inequality

Much has been made by both the current and previous Government about how to tackle child poverty (note the much talked about child poverty targets for example). Broadly speaking there are two ways in which this can be done. Both methods predictably centre on increasing the post tax income of a family, the first being through making changes to the benefits and tax credits system and the second being through doing more to incentivise work. In focusing on the latter, CARE has pointed out for a number of years that the Marginal Effective Tax Rates faced by working families (particularly married couples with one earner) is an issue which must be addressed. Indeed, as the graph below shows, this issue is particularly pertinent in the UK, where the problem is particularly pronounced for the very poorest in society.  As such, in 2010 (the latest year for which data is available) UK households were on average facing METRs that were only beaten by Slovakia[1].

For the first time, this new research combines the average METR faced by four different families at 50% average wage; single people without dependants, one earner married couples with two children, lone parents with two children and married couples without dependants. Whilst there is obvious value in doing this, it is worth pointing out that due to differing size of the respective households, where each of these households lie in the income distribution would vary significantly.

For now however, it is important to put these findings into some sort of context. Based on these figures, the UK worker either entering work or increasing their working hours would only take home about 35 pence of every 1 pound earned due to  a reduction in received benefits and an increase in income tax and national insurance. Both the Government and anti-poverty campaigners need to think long and hard about how to effectively combine a system where work is both financially rewarding for the very poorest in society and where benefits are not stripped away so quickly as to make the prospect of work daunting.

Yet this isn’t quite the full story. What about when we add child poverty rates[2] and income inequality into the mix, how does this affect the overall picture? Correlation doesn’t always mean causation, and a lack of correlation doesn’t necessarily mean an absence of causation, but it is interesting to note that the countries with the lowest METRs do not necessarily have the lowest child poverty rates. Indeed, as the graph below shows, there appears to be little correlation between the two.

What are we to conclude then? That the METR has no impact on the child poverty rate of a nation whatsoever? Not exactly. As an intriguing 2006 Joseph Rowntree foundation report has pointed out, incentives to work may well have a bearing on reducing child poverty[3]. Furthermore, work done by the OECD tells us that efforts to boost work incentives for the poorest families would be particularly effective in the UK.[4] Yet both pieces of research mentioned above argue that other things as well as a METR faced by a particular group of the population also have a part to play in a nation’s child poverty rate – the benefits and tax credits system for example. Hence, it is arguably not sufficient for the Government to concentrate all their attention on the METRs faced by the poorest in society, although this is clearly a factor that needs to be addressed.

Interestingly, something that does have a greater (although by no means perfect) correlation with child poverty is income inequality[5] (expressed by the Gini coefficient).  See the graph below.[6]

So, where does this leave us? 

First, there will always have to be a trade off between work incentives and benefits, both of which must exist in some form in any national economy. The real dilemma comes in deciding where to draw this line. Second, although METRs are not the be all and end all in tackling child poverty, they certainly play a part and this is why the UK’s incredibly high METRs faced by those on very low incomes should concern policy makers. This goes hand in hand with the third and final big issue, namely that if the UK Government is serious about getting to grips with child poverty then it should investigate ways in which the gap between the richest and the poorest can be reduced.


[1] Based on calculations made from Taxing Wages, 2011, OECD, p.109-142 (see more here:http://www.oecd.org/document/34/0,3746,en_2649_34533_44993442_1_1_1_1,00.html)

[2] Defined in this instance as ‘the child poverty rate (the share of all children living in households with an equivalised disposable income of less than 50% of the median for the total population), the poverty rate of households with children (the share of the population in households with children with an equivalised income of less than 50% of the median) and the poverty rate for the total population (the share of all individuals with an equivalised income of less than 50% of the median).

Child poverty, Oct 2011, OECD (available here: http://www.oecd.org/dataoecd/52/43/41929552.pdf)

[3] The poverty trade-off, Oct 2006, The Joseph Rowntree Foundation, p.21 (available here:http://www.jrf.org.uk/sites/files/jrf/1590-poverty-benefits-taxation.pdf)

[4] What Works Best in Reducing Child Poverty: A Benefit or Work Strategy?, 2007, OECD, p.29 (available here:http://www.oecd.org/dataoecd/30/44/38227981.pdf)

[5] Income inequality in this instance is defined as the Gini coefficient. For ease of use, each country’s GI has been multiplied by 100 so as to make the below graph easier to read. Note that a score that is closer to 100 equates to a greater income inequality within a particular nation, whilst the opposite is true for a country nearer 0.

[6] The data used for Figure 3 can be accessed here:  www.oecd.org/else/social/inequality

Is poverty just about income?

In short, no, poverty is not just about income, but do read on! In much of today’s popular discourse, it is quite understandably assumed that the way to improve poverty rates is to improve the ‘take home’ (or post tax) incomes of those who are poorest, both in relative and absolute terms. Although under the previous administration poverty did fall between 1997-1998 and 2005-06, it began to rise again over the following three years[1] and, as a result, the much lauded child poverty targets were missed by some margin.[2]Taking this and the figures below into consideration, it is clear that any possible solution to reducing poverty in the UK will need to take into account a whole range of factors, just one of which income.

The figures above are compelling in that they show the UK to be comparatively generous with regard to the treatment of low earner households by the tax system.[3] These family types have a negative tax burden which means, in effect, that they receive more in benefits and tax credits than they pay in income tax and national insurance. This is primarily due to how the tax credit system (soon to be overhauled by the new Universal Credit) operates. It is interesting to note that households on the same proportionate income (50% of the average wage)[4]in some other developed countries do not enjoy such generous tax rates, although in many nations they are still below zero.

Herein lies the rub: despite the generosity of the UK tax credit system, child poverty has continued to rear its ugly head, both domestically over the past 10 years, and internationally (see graph below).[5] In other words, some other OECD nations, despite having tax and benefits systems which are relatively less generous, achieve significantly lower poverty rates. As the table below shows,[6] of the 20 countries with lower child poverty rates[7]than the UK, only three have more generous tax arrangements for one earner and lone parent two child households at this wage level. By way of explanation, the table below gives one rank for child poverty and one for tax burden. The higher the tax burden rank, the more negative the tax burden is for families on 50% average wage. With regard to child poverty, the higher the rank, the lower the poverty rate.

Why might this be the case? There are many reasons why poverty remains a significant issue for the UK, many of which need to be addressed: housing, education, tax and welfare to name but a few.

Let’s take a brief look at tax and welfare. The Joseph Rowntree Foundation (JRF), in their excellent and comprehensive publication, Monitoring Poverty and Social Exclusion 2011, note that being in poverty is not just about income and that household size matters too.[8] Thus, whilst the UK might be relatively generous with regard to tax and welfare, it is by no means the end of the story. The report confirms that increases in tax credits – particularly in 2008 and 2009 – have resulted in many families needing tax credits in order to avoid poverty.[9] Here we have a key problem: what happens when tax credits are withdrawn? The evidence available shows us that the high withdrawal rates of both tax credits and the Universal Credit will adversely affect work incentives for many people, not to mention the actual take home income for many households.

Don’t take it from me though, below is an excerpt from the aforementioned JRF report:

‘One factor influencing in-work poverty that is the direct responsibility of the DWP is the ‘taper’ on benefits. The combination of income tax, National Insurance and the benefit taper means that someone in work and getting tax credits faces an effective tax rate on any extra earnings of 73 per cent, way above the so-called ‘top’ rate of 50 per cent. With such a rate, extra work brings scant reward: someone in this situation on the minimum wage has to put in six hours overtime in order to make themselves £10 better off overall. Universal Credit is going to make this worse, putting the rate up to 76 per cent. Until 2010, the rate was ‘only’ 69 per cent.’[10]

So, how do we deal with this issue? I believe the solution lies in reducing the taper on the soon to be introduced Universal Credit. The Coalition will say that this is too expensive but I question this. If the Government can spare billions for other tax and welfare measures, such as increasing the personal income tax threshold (which is not a progressive measure that will help the poorest in society)[11]then why shouldn’t it commit to reducing the Universal Credit taper? By doing this, the Coalition would make significant inroads toward tackling the high withdrawal rates that are present with the current Universal Credit plans, meaning that those entering the workplace or increasing their hours are not threatened with losing their benefit. As a result, work can actually begin to be rewarding, lifting many households out of poverty.


[1] Joyce et al, Poverty and Inequality in UK: 2010, Institute for fiscal studies & Joseph Rowntree Foundation, May 2010, p.35 and figure 4.1a

[2] These targets being to half child poverty by 2010 and to end it by 2020, seehttp://www.jrf.org.uk/work/workarea/child-poverty

[3] Based on calculations made from Taxing Wages, 2011, OECD, p.109-142 (see more here:http://www.oecd.org/document/34/0,3746,en_2649_34533_44993442_1_1_1_1,00.html)

[4] Average wage is defined as the average full time male and female adult earnings, OECD, Taxing Wages 2010-11, May 2010, p.555.

[5] Joyce et al, Poverty and Inequality in UK: 2010, Institute for fiscal studies & Joseph Rowntree Foundation, May 2010

[6] Based on calculations made from Taxing Wages, 2011, OECD, p.109-142 (see more here:http://www.oecd.org/document/34/0,3746,en_2649_34533_44993442_1_1_1_1,00.html)

[7] Defined in this instance as ‘the child poverty rate (the share of all children living in households with an equivalised disposable income of less than 50% of the median for the total population), the poverty rate of households with children (the share of the population in households with children with an equivalised income of less than 50% of the median) and the poverty rate for the total population (the share of all individuals with an equivalised income of less than 50% of the median).Child poverty, Oct 2011, OECD (available here:http://www.oecd.org/dataoecd/52/43/41929552.pdf)

[8] Aldridge et al, Monitoring Poverty and Social Exclusion, Joseph Rowntree Foundation, 2011, p. 8 (An electronic version of the report can downloaded from http://www.jrf.org.uk/sites/files/jrf/poverty-social-exclusion-assessment-full.pdf)

[9] Aldridge et al, Monitoring Poverty and Social Exclusion, Joseph Rowntree Foundation, 2011, p. 6

[10] Aldridge et al, Monitoring Poverty and Social Exclusion, Joseph Rowntree Foundation, 2011, p. 11

Riding the curve – tax burdens, tax credits and withdrawal rates

Following my last blog, where I commented that the UK government should think about tax credit withdrawal rates if it wants to tackle child poverty, I thought it would be a good idea to look more into the withdrawal rates and tax burdens faced by one earner families. In other words, I decided to look at the tax burdens faced by these families as income progresses, from 50% average[1] wage right up to 200%. I wanted to find out not so much about absolute tax burdens at different income points for one earner families (CARE’s taxation of families publication deals with this excellently[2]), but the gradient (or rate of tax credit withdrawal, and income tax and national insurance increases) as income progresses. In past articles, I have undertaken analysis of all 34 OECD nations, however, for the purposes of this exercise I have selected just six nations; Denmark, Finland, France, Germany, UK and Austria. I have attempted to be broadly representative in selecting countries; 2 (Denmark and Finland) are broadly defined by Gosta Esping Andersen  as Social Democratic social regimes, 3 (France, Germany and Austria) are defined as Corporatist-Statist regimes, and 1 (UK) doesn’t really fit anywhere![3]

The results here are striking. First and foremost, the UK system, despite having the lowest tax burden at 50% average earnings, has a gradient (particularly between 50% and 75% earnings) that is much steeper than any of the other countries between these wage levels.[4] This demonstrates in stark visual form what we have known for a while, that the rate at which tax credits are withdrawn in the UK system is quite extreme, especially between 50% and 75% average wage.[5] In practice, what this means is that as one progresses between these two wage levels, benefits and tax credits are withdrawn more sharply than other European nations so as to make paid employment proportionately less rewarding. Indeed, many families in the UK face Marginal Effective tax rates of 76%, meaning that for every extra £1 earned, a one earner household would only see 24 pence.[6]

Moreover, all the other nations in this analysis do have a system that accommodate tax benefits in some form or another[7] and Austria in particular structures its tax credits and benefits in a similar way to the UK, and although (as you would expect) under it’s system the tax burdens for one earner households are negative they are not quite as negative as the UK’s. What is more, Austria despite having a somewhat similar system to the UK, manages to achieve a more gradual gradient, as do the other nations in this analysis.

On a final note, and linking back to the previous family fiscal policy blogs on child poverty, it is interesting to note that Denmark, which has the lowest child poverty rate in the OECD[8] has positive tax burdens for those on 50% average income. As I said in my previous blog, it could perhaps be argued that child poverty is not just about income, and as an expansion to that, poverty and the incomes of working people in general need to be looked at in the context of how tax credits and benefits are withdrawn as a household progresses up the income scale. In other words, policy makers need to look at ways in which the UK ‘curve’ can become less steep and more gentle, meaning that households keep more of their income as they progress up the income scale.


[1] Average wage is defined as the average full time male and female adult earnings, OECD, Taxing Wages 2010-11, May 2010, p.555.

[2] See Draper et al, Taxation of Families 2010/11, CARE, http://www.care.org.uk/wp-content/uploads/2012/03/CARE_Tax-families-10-11.pdf

[3] Emanuele Ferragina and Martin Seeleib-Kaiser, Welfare regime debate: past, present, futures. Policy & Politics, 2011 p. 597.

[4] Based on calculations made from Taxing Wages, 2011, OECD, p.109-142 (see more here:http://www.oecd.org/document/34/0,3746,en_2649_34533_44993442_1_1_1_1,00.html)

[5] Draper et al, The Taxation of Families, 2012, p.18’

[6] Draper et al, The Taxation of Families, 2012, p.18

[7] Taxing Wages 2010-11, OECD, 2011, p.193-553

[8] See Binder, ‘Is income just about poverty?, CARE Family Fiscal Policy blog, May 2012.