A new report today highlights how the present system of redistribution through taxation and welfare is inefficient and could be reformed to give more support to those on low and middle incomes.
The report, by the Resolution Foundation, argues politicians must “grasp the nettle” of tax reform if they are concerned about growth and redistribution, that simply making the current system more generous to those on low incomes “will not be sustainable in the long run” – the structures of welfare, VAT and council tax need reform.
Figure 1 of the report, “Fairer by design: efficient tax reform for those on low to middle incomes” (pdf), shows how the income of low to middle income households as a group is presently made up:
It indicates they receive about 15 per cent of their gross income (before tax) from benefits and tax credits, but lose about 20 per cent of their gross income through direct and indirect taxes.
The report says the tax-benefit system must do more to ensure work pays for groups who known to respond to incentives, and which will be important to rising living standards:
• For parents, cash benefits could be made more generous for younger children and less generous for school-age children when parents are more likely to want to work;
• For second earners, the new Universal Credit system could introduce a separate disregard for second earners, allowing them to keep more of the money they earn; and
• For older workers, National Insurance Contributions (NICs) could be reduced by either bringing forward the age at which people stop paying NICs to 55 or by or increasing the NICs threshold at this age, whilst potentially delaying the age at which Pension Credit becomes available.
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Resolution Foundation chief executive Gavin Kelly said that, in the current climate, increases in living standards will have to come “overwhelmingly from employment rather than big increases in state support”, adding:
“Our tax-benefit system and public services will need to do far more to support work – whether for parents held back by lack of childcare or older workers who see little incentive to stay in work.”
While report author Paul Johnson, of the IFS, concluded:
“If politicians are serious about wanting both growth and redistribution they must face up to the need for reform and tackle elements of the tax system which have for too long been in the too difficult box.”
Meanwhile on VAT reform, they argue the current system of extensive zero and reduced rating of VAT (much more extensive than in other countries), is an “expensive and inefficient way of effecting redistribution”, and can be reformed over time “in ways which benefit low and middle income households”.