The reignited row over the proposals to withdraw Child Benefit from higher rate tax payers in April demonstrates an important principle that the left needs to firmly grasp.
The basic issue is that if one parent is a higher rate tax payer, then the benefit is removed. This leads to a blindingly obvious ‘cliff-edge’, using a phrase coined by the PM. If only one parent works and earns £45,000 per year, the whole benefit goes. However, if both parents earn £40,000 per year, despite the family earning 77% more, they keep the benefit.
This is the simple problem with all means-tested benefits. They always have an arbitrary cut off point. Who can decide whether £35,000 or £40,000 is the right level? You can live in a small house in Middlesbrough, and a family income of £30,000 would leave you much better off after the mortgage has been paid than earning £45,000 in Kensington. Each city contains the variations within them too. Therefore, setting arbitrary cut off points is an endlessly impossible task.
Further, means tested benefits are subject to the law of diminishing returns. The more strictly that rules are applied, the more it costs to administer, reducing the size of the pot to pay out.
Also, such strict application procedures are known to put off genuine claimants. The DWP reported in 2005 that the level of fraud for DLA was a mere 0.5% or £40 million pounds. The benefit is hard to get and the procedure very complicated, and many who need it and are eligible for the benefit are simply are put off.
It must be understood that the nature of humans creating a system for others to work to will always have the chance for fraud. I would rather have a 95% take up rate with a 3% fraud rate than have a 75% take up rate and 1% fraud.
Politically, means tested benefits are difficult too. If those who pay taxes into the system get less out, the political support for the system will decline. The poor will suffer most in these circumstances.
I support a system where the poorest pay nothing in, middle earners pay in about what they get out, and higher earners pay more in than they get out. I understand that is redistributing income. While the highest earners still get the benefit, they have massively overpaid into the system to start with.
Tax credits are good in intention, but flawed in my view. Why? Ultimately general taxation is subsidising low wages. Low wages are part of our flawed neo-liberal economic system, and so to reduce the effect on the poor tax credits were developed. I would rather have a real living wage in place, and then we would not need to top up people’s wages from taxation.
This is an opportunity for the left to be principled and get support from a huge number of people by championing universal benefits. It must be understood that increasing the means testing of benefits will lead to the destruction of the welfare state as support for it declines, and the insurance based system present in the USA will come to us, with terrible consequences for those most in need.