A point upon which we can all agree is that the best way to encourage somebody into work is to pay them with a living wage. We currently have an income tax allowance which is stated to ‘make work pay’ by leaving the first £11,000 tax free. So far so good. Until you earn £11,000 an hour’s work earns you an hour’s wage.
Unless you are receiving social security benefits. The current system takes the superficially sensible, but practically absurd, approach that your benefits should be withdrawn as you start to earn. We call this means-testing. The rate at which support is withdrawn (known as the marginal deduction rate) is the major failing of this system. When withdrawal of benefits is included with National Insurance contributions and tax on earnings, claimants can face an effective tax rate that can be as high as 96% (1). Compare this to the highest tax rate of 47% on additional earnings over £150,000 in Scotland and it is clear that the poorest members of society are taxed at a rate far, far higher than the wealthiest, a reality completely at odds with the stated goals of our ‘progressive’ tax system.
This is what we mean by a poverty trap. Taking up work brings with it childcare costs, transportation costs, as well as other sundry costs like buying lunch and appropriate work clothing. When you’re facing a marginal deduction rate of 75 to 85% and you’re working for the National Minimum Wage you are taking on these costs for a net wage of less than £2 an hour. With the proliferation of zero-hour contracts and extremely part-time work it becomes even less enticing to enter the workforce especially when the jobs on offer are unsatisfying, unskilled, and ripe for automation. The narrative of ‘work-shy’ or ‘lazy’ benefit-recipients is untrue as most people are motivated to work if they are able to do so and work pays, but also undermines the mental health of people receiving benefits and corrodes trust and social cohesion.
It is uncontroversial that ‘work should pay’ but piecemeal reform to benefits has not yet succeeded in getting rid of poverty traps. As abolishing all benefits is not the answer, we believe that the only solution is to create a social security system unaffected by work and earnings. We have two options now, either to set that platform at £0, provide no support at all to any member of society out of work and embrace the poverty and slums that will result, or set that level of support at something above £0. Suddenly we’re talking about a basic income, and the question becomes at what level a Basic Income should be established such that people are prevented from living in poverty and yet working remains attractive. Let’s have that debate. Help us by becoming a supporter.