We often hear that work is the best route out of poverty. If people are just willing to get up every day and put in a few more hours at work, then they can move up and ‘get on’. But the reality for many is quite different.
Most of the poorest workers in Britain actually see very little benefit from extra work. Despite going to work every day, and ‘doing the right thing’, they are often trapped in a position of low pay or even working poverty. The reason for this is a punishing system of welfare withdrawal and taxation that sees their money taken away from them almost as fast as they earn it.
The Government’s Universal Credit welfare reform will go some way to simplifying a Byzantine system of benefits, and as a report from the Institute for Fiscal Studies today shows, it will also slightly reduce the worst disincentives for people to enter work on very low wages and work very few hours. However, for many families this will not be enough to lift them out of poverty.
Our report, The Aspiration Tax: How our social security system holds back low-paid workers, shows that a working household earning just £10,600, and in receipt of Universal Credit, sees 76p from every extra pound they earn swallowed up by a system that seems to actively penalise their hard work. If they want to work their way out of in-work poverty and off of social security this leaves them running up a down escalator.
Of course, such a high marginal tax rate doesn’t hit everyone. Someone in the richest 1% only loses 47p of every extra pound they earn. In other words, the very richest get to keep more than double that of a low income worker on Universal Credit. As ever, we’re faced by the perverse argument that you pay the poor less and they work harder, but pay the rich more and they work harder.
This isn’t how a social security supports low paid workers, and it certainly isn’t how you incentivise work. Just look at how other countries do it. Compared to other, modern, developed economies, the UK’s tax rates on low earners are abnormally high. While a minimum wage household in the UK loses 73p of each £1 increase in earnings, the average loss in OECD countries is just 27p.
Public polling from Ipsos, conducted with the Equality Trust, shows that British people recognise the ridiculousness of our system. When asked how much a working parent on £10,600 receiving tax credits should get to keep of every extra pound they earn, 83% of people thought they should keep more than they do. On average they believed they should keep 75p of every extra pound earned, a fair bit more than the paltry 24p on offer under Universal Credit. Unsurprisingly, when told how much someone receiving Universal Credit gets to keep of every extra pound earned (24p), 70% believed this was too little.
It is clear there is little support for a system of taxes and social security that holds back low income workers, but lets the rich get richer. So what can we do? The most important move would be to return Universal Credit to the original proposals set out by the Centre for Social Justice. That would mean Universal Credit being withdrawn at a rate of 55p rather than the current swingeing rate of 65p of every extra pound earned. This would mean an income boost of £127 per month to a working single parent on the average wage.
The cost of this policy change, at around £4bn, is a perfectly realistic and achievable aim. One of the Government’s current flagship policies to help those on low incomes is its planned increase to the personal tax allowance. But this is a measure that is poorly designed in its support for the poorest, with the benefits felt most by those earning far more. Halting the planned increase would provide ample finances to return Universal Credit to its original proposal.
We have a system of taxes and social security which is clearly unjustifiable and very obviously holds back working families on low incomes. If we value the aspirations of everyone, and not just the very rich, we need to stop placing unnecessary barriers in front of them. It’s not too late to build a fairer system that would incentivise work and support the poorest to work their way to greater prosperity.
For full details of our report, see here.
Tim Stacey, Senior Policy and Research Advisor