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Could a “Citizen’s Income” address tax and welfare problems?

Sunday, August 31, 2014
by Tom White

Here are a couple of current UK problems. Firstly, although the economy is recovering strongly, tax receipts aren’t. Secondly, flaws in the way the welfare system operates may be creating disincentives in the labour market. Could a radical proposal: streamlining the whole welfare system by paying everyone a ‘citizen’s income’ help?

The Guardian has some good coverage of this interesting suggestion. Firstly, they describe the problem of disappointing tax revenues. With more people in work, together with tills ringing in the high street, there should be a big improvement in the public finances as higher income tax and VAT receipts roll in. One explanation why this has not happened is because Britain has become a part-time economy, and one that has seen a vast increase in self-employment (which accounts for more than 80% of the net rise in employment since 2008). What’s more, older people are now topping up pensions by doing a few hours a week of part time work. This broad group of people may be earning less than the income tax threshold of £10,000.

So either the jobs that are being created are so low paid that they are not subject to either income tax or national insurance, or something else is going on. That something could be that people on benefits are doing some informal paid work but not declaring it to the taxman because they lose almost as much in benefits as they gain from working. And that the new army of self-employed are not declaring all they earn to the tax man. Maybe, maybe not. Discovering how much economic activity goes unrecorded because people hide it from the taxman is notoriously difficult. But it would help explain why consumer spending is rising more rapidly than wages, and why VAT receipts are growing slightly more strongly than income tax receipts.

What should the government response be? One option would be to employ more tax inspectors and launch a crackdown on evasion. That, though, would be difficult. The number of tax inspectors is small and low-level evasion is large. An alternative would be to encourage those working in the informal economy to join the formal economy. The barrier to that is a tax and benefits system that is hugely complex, means-tested and perhaps discourages those working less than full-time on low earnings from working longer hours.

That leads on to the radical suggestion: everybody would receive a citizen’s income. Under this scheme, waged and unwaged, children and adults, the working aged and pensioner, rich and poor alike would receive the same basic income financed by the phasing out of virtually every tax relief and allowance. It would be universal and hence avoid the stigma attached to benefits. Secondly, people taking a job or starting a business would have the security of knowing that they would still have their citizen’s income if the venture did not work out.

You can probably spot several problems with this idea! Some people might lose all incentive to work and just draw their citizen’s income. But big questions merit some radical suggestions…

Doubts about Fair Trade

by Tom White

According to The Economist there is a long history of efforts to distinguish products that have been made more ethically than others. In the late 18th century, anti-slavery campaigners urged British consumers to boycott sugar from the West Indies in favour of supplies from India. Today’s fair-trade movement took off in the 1960s, mostly in religious organisations that wanted to help the poor, whom they saw as losers in the global trading system. Fair Trade is a really important issue for discussion.

There’s been a lot of debate about the future of Fair TradeThe Economist reviews a book that takes a negative viewpoint, arguing that the label is a failure. Ndongo Samba Sylla, a Senegalese development economist argues that things started to go wrong in the mid-1980s when leaders of the movement decided to enter mainstream consumer markets by labelling produce as fair trade if it met certain production rules. Among the problems has been a proliferation of labels and organisations that make a living from certification and licensing use of the labels. There are over 600 labels in Britain alone. This has blurred the definition of what qualifies as fair trade.

Furthermore the author argues that there is little evidence that fair trade has lifted many producers out of poverty. And why the focus on agricultural produce, when a booming fair-trade manufacturing sector potentially would help far more countries? And most of the benefit from fair-trade produce seems to stay where it is consumed. According to Mr Sylla’s calculations, for each dollar paid by an American consumer for a fair-trade product, only three cents more are transferred to the country it came from than for the unlabelled alternative.

I’m not totally convinced, and still would like to support the Fair Trade concept – but recognise that we should all try to avoid policies and practices that make us feel good, rather than actually do any good. According to the review, that’s also the book’s conclusion: so far, the fair-trade labelling movement has been more about easing consciences in rich countries than making serious inroads into poverty in the developing world. 

Quiz on the World Economy in Figures (2014)

by Geoff Riley

Here is a new twelve question quiz drawing on economic indicators from the Economists's Pocket World in Figures (2015 edition) which has just been published. Good luck!

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