I have a vision of a perfect income tax and welfare system but it is very difficult to convince people and difficult for people to understand. This partly due to its simplicity that others can’t get their head around. So how does it work?
- flat tax on all income
- welfare payments for all, based on circumstances
- include wealth in assessing 2, but ignore income
The flat tax rate might be around 37%. The welfare payments would replace existing welfare payments and make the tax-free threshold and progressive tax rates irrelevant. The result would be similar after-tax incomes for the vast majority, except that anomalous high effective marginal tax rates for low-income households would be removed. The main beneficiaries would be workers earning low incomes.
Assessing the universal welfare payments would ignore income, but include all wealth. Rent payments would also be ignored. The main circumstances to account for would be:
- Age, e.g. child, adult or pensionable age
- Family type, single or couple
- Disability, payments tailored to cover additional costs associated with disability
- Dependant children, position in family and age
- Recent income tax paid would increase the payment
- Education participation
- Wealth above a threshold relative to age
There are three beautiful outcomes of this system:
- No one has a disincentive to earn money because of losing welfare payments, so there are no poverty traps
- There are no ways to work the system
- Everyone faces the same set of rules so we remove the blame game
And there is more… Any policy is immediately transparent in terms of its budgetary cost, impact and benefits. Since income is no longer part of the qualification for benefits the bureaucracy surrounding payments becomes so much simpler and cheaper to administer. The unemployed would have an incentive to earn income as the payment rises for those with a tax-paying history. Child payments would diminish for second and subsequent qualifying child.
The result would be ideal. That’s my opinion.