The most universal benefit of them all

While the UK debates ending universality, economists in America are talking about making income itself universal.

With Labour's decision to push for the end of winter fuel payments for all, Britain has seen yet another step against the principle of universality in benefits this week. But while the tide here is pushing more and more in favour of means-testing every intervention possible, in the US, the opposite debate is being had: should even the largest interventions be universal?

In early May, Mike Konczal wrote an article in the Washington Post proposing a universal basic income (UBI), also called a "citizen's income". The idea is that significant proportions of the social insurance system get replaced with a "poverty-level" income which is given to all, universally and unconditionally. So rather than claiming unemployment benefit when out of work, disability benefit when sick, or a state pension in retirement, you claim a standard sum every month from the age of majority to your death, regardless of your status.

Many of the benefits of a UBI are the same as the benefits of universalising any part of the welfare system: it massively reduces bureaucracy at all stages; it's far easier to get benefits where they need to go; and it removes the stigma of claiming help from the state. For some benefits, even one of those arguments is enough to justify universalising them. So, for example, we don't means test the NHS – among other reasons – because the thought of keeping someone in the emergency room while we check their past six months of payslips is anathema to most people.

But the UBI carries its own additional upsides, by virtue of being so large compared to other benefits. The most important one is that its universality reduces so-called "income traps", points in the tax-and-benefit system where the marginal value of every pound earned drops too low. So, for example, as your earnings rise, you may find that you leave the personal tax allowance, lose working tax credits, and become ineligible for housing benefit all around the same time. That could mean that a job which pays thousands of pounds leads to a take-home pay rise of a tenth of that, giving you a serious incentive not to take it at all.

That problem is also what the Universal Credit is aimed at solving in Britain; but despite the name, it's not a universal benefit, and so it can at best smooth over the problems caused by withdrawal, rather than remove them already.

But Konczal's most interesting point is that there are strong right-wing – or, more accurately, libertarian-right – arguments for a UBI. By removing conditionality of benefits, it also removes a method of state control. It is no longer up to the government, for instance, to determine which types of work experience you can do while still being paid unemployment benefit; nor can they shape society by deciding which types of non-labour activities ought be rewarded – carers, community gardeners, political activist or artists all get the UBI without having to prove their worth.

In fact, as Konczal points out, it's the left which should really be wariest of arguments for a UBI. It has the potential to extend market logic to every reach of society, by equating "being a citizen" with "being paid". That's exactly the sort of thinking Michael Sandel warned against when I spoke to him last month, because, in his words, it "may crowd out attitudes and norms, non-market values, worth caring about".

Konczal's piece sparked a wide debate in the economics community. Despite his strong argument that a UBI ought to be a libertarian idea, many of them opposed it, arguing that handing out a UBI would mean that people would never work, and the government would instantly lose the tax revenue it takes to pay it in the first place.

That argument doesn't quite work; in fact, the understanding as to why that is was the great breakthrough in 19th century economics, the marginal revolution. People tend to make their decisions, not based on absolute levels, but on marginal changes. If you are given a UBI, then you still face the choice as to whether or not to go to work and earn an extra sum of money. And since people working on poverty pay don't tend to decide never to increase their income, it seems likely that a UBI wouldn't discourage much work.

But it would discourage some, because that's the point of it. By removing the link between "having to work" and "starving to death", a UBI would promote a healthier attitude to work, removing the element of fear which forces employees to sell their labour to exploitative employers. Instead, work would occur based on equitable negotiation: if the employee no longer lives in fear that they will be on the streets without a job, their bargaining position is greatly improved.

In the end, it's that outcome which will mean the UBI can never truly catch on among right-wingers – or even the centre-left – leaving the Green Party the only one in the UK to support it. In radically redistributing economic power from capital to labour, it is anathema to the conventional order . That is true despite the fact that elements of it ought to be hugely appealing to people from across the political spectrum. It is freedom-enhancing, bureaucracy-reducing, and in some cases life-saving, but it's also going to remain no more than a thought experiment. That's a crying shame.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.