by Prof. Philip Booth, Editorial Director at the Institute of Economic Affairs
The coalition government – despite the best intentions of Iain Duncan Smith – is stumbling about in no-man’s land in its attempts to reform the benefits system. The introduction of Universal Credit is an important administrative change but it will do nothing to remove the worst features of the benefit system. If we take a family of two adults and three children, that family loses 75 pence in taxes and reduced benefits for every extra pound it earns until income reaches nearly £39,000. Furthermore, the way in which the tax and benefits systems interact strongly penalises marriage.
The government is indulging in further family bashing by its decision to withdraw child benefit from those families with somebody earning more than £50,000. This is direct discrimination against couple families – especially single-earner couple families. It is probably the single most incompetent change to the benefits system since the Second World War.
Instead of tinkering, the government’s political capital should be used to radically reform the benefits system. We need a single means-tested benefit provided to working families on very low incomes – this should not encompass two-thirds of the working population as current means-tested benefits do. We should then abolish child benefit altogether and use the £12bn to create a system of family-based transferable tax allowances – essentially a modernised and extended version of the system that existed until the late 1970s. Now – as then – families with a working adult on average earnings should pay little or no direct tax. This would help end the discrimination against marriage and family formation in the tax and benefits system. Given that only two per cent of families with two adults where one of them is in full-time work and one in part-time work are living in poverty, it is crazy that our tax and benefits system discourage both work and marriage.