FASE I: Planificación Preliminar

A great variety of schemes of 'negative income tax' and

tax credits' have been proposed as universal,

income-based systems of support (see for example Green,

1967; Dilnot et a l . 1984; Cmnd 5116, 1972; Cooper, 1983).

They can all be characterised by three simple parameters,

any two of which determine the third. These three

parameters are a tax rate, some form of minimum income

guarantee, and a 'break-even' income.

If M is the minimum income guarantee, that is the level

of credit paid to an individual with no earned income,

which may vary according to family size and composition,

housing expenses, or whatever; t is the tax rate per

pound of earned income, that is the rate at which the

credit is withdrawn as earnings increase; and N is the

'neutral* or 'break-even* income where pre- and post-tax

incomes are the same and above which positive taxes

become payable as in conventional systems of income tax;

then clearly Nt»M. See Figure 4.1 for an example.

Theoretically there is no need for t to be constant and

been proposed with both progressive and schemes have

T a x P a i d

B e n e f i t R e c e i v e d

Figure 4.1 The Relationship Between Break Even and Minimum

I n c o m e L e v e l s i n N e g a t i v e I n c o m e T a x S c h e m e s

P Q

OQ

OM PO

regressive tax schedules (Green, 1967). However if t is

constant across the greater part of the income range then

the scheme becomes very much simpler to administer.

In 1972 the Conservative Government developed a scheme of

tax credits of comparatively modest proportions to the

extent of administrative feasibility (Cmnd 5116, 1972).

The Tax Credit scheme was proposed primarily as a tax

reform, making the income tax system cheaper for the

Government to administer, saving between 10,000 and

15,000 Civil Service posts and obviating the need for the

PAYE system. At the same time, however, it was claimed

that it would provide an improved level of support for

the poor both in and out of work, without means-testing,

that it would be easier to understand, and that it would

reduce marginal tax rates and hence increase incentives

to work.

The principal motivation for the 1972 proposals was

administrative simplicity, but other factors were also

recognised as being significant. An important part of any

such scheme is the effect on marginal tax rates and

financial incentives to work - since it aims to bring

together or replace several existing measures which can

combine to produce exceptionally high marginal rates, it

offers the opportunity to smooth away such anomalies. In

considering the likely consequences for the labour supply

which will effect individuals' total incomes, and the

marginal tax rates which will effect both total income

and the marginal price of leisure relative to work.

The interaction with and implications for other schemes

is clearly of prime importance in a reform of this kind.

Considerations such as the appropriate accounting period

and the unit of assessment become central. At present the

tax system has an annual accounting period whereas social

security payments are based on a variety of time periods.

For the purposes of benefits it is generally regarded as

more suitable to treat the unit of assessment as the

'household' or 'family', rather than the individual which

may be considered more appropriate for tax purposes. If

the tax and social security systems are to be brought

more closely together in some unified system it would be

necessary for these definitions to be made consistent.

Another important consideration with any negative income

tax scheme is the expected consequences for wage rates.

It was noted in Chapter 2 that mistrust of wage subsidies

dates back to the Speenhamland system of 1795, and

whatever the expected effect on wages maybe, even if it

is neutral, estimates need to be made explicit.

Behavioural aspects other than the work-leisure option

and household formation which need to be considered are

level, and savings which could, for example, be Increased

if such a scheme were to encourage early retirement. A

major advantage of tax credit schemes is that since there

would be no need to apply for the credits there would be

no problem of non-take-up.

Finally, any scheme of negative income tax will

redistribute income to some extent but the degree of this

redistribution is of course dependent upon the tax

schedules and credit levels. A scheme such as the one

proposed in 1972, with only limited levels of credit and

a single tax rate for most of the population, is

inevitably restricted in this regard. Whether or not this

amounts to success or failure on the part of the scheme

depends, of course, on the philosophy underlying the

proposals.

More recently the Alliance parties (Social Democratic

Party, 1982; Vince, 1983) have proposed systems of tax

credits and the Institute for Fiscal Studies (Dilnot fit

a l . 1984) have gone a stage further and devised a scheme

of tax and benefit credits. The details of these schemes

are not important for present purposes, the issues they

raise are essentially the same as any wide reaching

reform of the income transfer system. Clearly an

information system capable of evaluating a combined

tax-benefit scheme of any description would have to be

at all Income levels.