Management in the Social and Safety Services

Norman C. Hunt, W. D. Reekie

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781136428449
• Edition: 1
• Topic: Medicina
• Subtopic: Atención sanitaria

Tavistock Press was established as a co-operative venture between the Tavistock Institute and Routledge & Kegan Paul (RKP) in the 1950s to produce a series of major contributions across the social sciences.
This volume is part of a 2001 reissue of a selection of those important works which have since gone out of print, or are difficult to locate. Published by Routledge, 112 volumes in total are being brought together under the name The International Behavioural and Social Sciences Library: Classics from the Tavistock Press.
Reproduced here in facsimile, this volume was originally published in 1974 and is available individually. The collection is also available in a number of themed mini-sets of between 5 and 13 volumes, or as a complete collection.

The Use of a Reverse Income Tax to Administer the Distribution of Welfare Benefits

GEORGE AND PRISCILLA POLANYI

NOTE:

Our references to the proposed tax credit plan for the UK are based mainly on the official announcement of its general principles in March 1972 and on the Green Paper describing the scheme (Cmnd 5116) issued in October 1972. We have, however, commented on a subsequent important alteration in the treatment of family allowances which was recommended in the report of the Select Committee of the House of Commons, set up to examine the scheme (HC 341, HMSO 1973) and then adopted by the Government (pp. 151–152 below). The information on scales of social security benefits and estimated poverty-line income is for 1972; income tax rates and allowances are for 1973–74.

INTRODUCTION

The preparation of this paper coincides with the introduction by the Government of plans for a system of reverse income tax.¹ The proposed new ‘tax credit’ scheme – which in effect is a system of reverse income tax – forms part of a radical reform of the system of ordinary (positive) income tax. Introducing the new system, the Chancellor of the Exchequer described it as: ‘the most radical reform … of the PAYE and social service systems for a quarter of a century’.²

A quarter of a century takes us back to the introduction of the pay-as-you-earn income tax in 1944 and the introduction of Britain’s post-war welfare state system of social benefits in 1948.³ It seems therefore that an appropriate starting point for our consideration of reverse income tax as a method of distributing welfare benefits is to ask what are the shortcomings of the existing system of benefits and taxes that call for such radical reform.

In principle, there are two major defects. They are, first, the cumbersome and wasteful process of paying out cash benefits to everyone in defined categories of need irrespective of their income, and then levying tax largely on the same people or the same income groups to cover the cost. And secondly the fact that the universal and equal cash benefits are too small in amount to lift the poor out of poverty.

The two defects are – as our discussion will show – largely interrelated. The connection is that where benefits are paid in equal amounts irrespective of income of the recipient, the cost in taxation is high, both absolutely and per unit of benefit for the poor. Consequently the amount of extra taxation needed, and the corresponding degree of resistance among taxpayers, has been quite disproportionately large, compared with the amount of increased benefit for the poor required to raise them out of poverty. This has been the main limiting factor tending to keep benefits at an inadequate level.

Perhaps one should mention here that the defect of the system in giving benefits to people who will then largely pay them back in taxes was not nearly so evident when seen from the point of view of Sir William Beveridge designing the welfare state in the 1940s. His view of society was based on the income distribution of the 1930s. At that time there were – to a much greater extent than now – two nations. In 1929 the top slice of 5 per cent of highest incomes accounted for one third of total personal income before tax (34 per cent); by 1969–70 this share had been approximately halved (16 per cent).⁴

While income distribution before tax has become more equal, the scope of taxation has widened, largely because of the growing share of national income devoted to social expenditure. Taxes as a proportion of national income have increased from 24 per cent in 1933 to 43 per cent in 1970. Consequently, instead of income tax being largely paid by the minority in higher income groups while the majority receive social security benefits, the two groups now largely coincide.⁵ Thus greater equality of incomes and tax obligations has created the situation of a two-way process of levying tax from and giving benefits to the same people or the same income groups, with its adverse effect on administrative efficiency and on efficiency in concentrating help on people in most need.

Granted then that we are in this situation, how does reverse income tax help? The basic principle of such a system is that the state makes automatic payments to families with incomes below a specified level, on the analogy of ordinary (positive) income tax whereby payments are automatically levied as income rises above a specified level. In effect, it is a scheme for extending the income tax system to incomes below the level where income tax is now levied, and in this low income range giving instead of taking money – hence the term ‘reverse’ or negative income tax.

Such a system will alleviate the defects of the present tax and social welfare distribution system in two respects. First, it reduces administrative inefficiency due to the two-way process of paying out benefits to and levying taxes from the same people. Since existing social welfare benefits are merged into the automatic payment (or credit) for which people become eligible below a specified income, this two-way process is eliminated. For in a reverse income tax system a family cannot be both liable for positive tax and reverse tax – there is only one transfer, either to or from the state.⁶

Secondly, insofar as the reverse income tax replaces the existing system and also insofar as it is designed to concentrate benefits on low income groups (in practice a matter of degree between alternative schemes), such a system can substantially improve the efficiency of directing help to people who most need it. Consequently, it is possible, by designing an appropriate reverse income tax plan, to ensure that all families below a recognized poverty line will have their incomes raised out of poverty, and to do so at much lower cost in extra taxation than would arise in the present universal benefit system. This, together with the automatic character of the payments and the avoidance of certain objectionable features in existing means tests, makes it a much more feasible route to the abolition of poverty than the existing social benefit system, which has, under successive governments since 1948, failed to achieve Beveridge’s major objective: ‘the abolition of want’ (Beveridge, 1948, p. 7).

So much then for the background and general principles. In what follows we will try to fill in the picture of just what is involved in the defects of the existing system and in the possibilities of reform by a reverse income tax.

THE EXISTING SYSTEM

Public expenditure on social security benefits in the UK was about £4000 million in 1970–1. This is about two and a half times the amount spent ten years previously (Table 1).

Social security expenditure accounts for about a quarter (27 per cent) of the total current expenditure of central government (including the national insurance fund). It is equivalent to nearly a tenth of national income (8 per cent of GNP at market prices); and its share of GNP has increased by about a third since 1960–1 (from 5.8 per cent).

The main items of expenditure are set out in Table 1. By far the most important, accounting for nearly half (45 per cent) of total expenditure in 1970–1, is retirement pensions at £1800 million. This is the major component of national insurance benefits (total £2854 million), of which other important items are sickness benefits at £418 million and employment benefits at £142 million in 1970.

TABLE 1 Social security benefits Public expenditure in the UK, 1960–1, 1970–1

	1960–1 £ million	1970–1 £ million
National Insurance of which:	1056	2854
of which:
Retirement pensions	687	1800*
Sickness benefits	140	418*
Unemployment benefits	34	142*
Supplementary benefits	190	615
Family allowances	141	365
Total: Social security benefits**	1499	3968

* Calendar year 1970.

** Including items not listed.

Source:

Monthly Digest of Statistics, May 1969 and May 1971; National Income Blue Book, 1971.

Apart from national insurance benefits, the two major categories of expenditure are on supplementary benefits (£615 million) and family allowances (£365 million).

The general framework of the system – still largely as it was when Beveridge established it – is that national insurance benefits plus family allowances are intended to provide the main support in supplementing incomes. The support is given in defined conditions of need (unemployment, sickness, old age) or for situations where there is exceptional expenditure (family allowance paid for second and subsequent children, maternity grant, death grant, etc.).

The distinction between national insurance benefits and others is that the basic scheme as designed by Beveridge was for benefits ‘as of right’, paid ‘in return for contributions’ (Beveridge, 1948, p. 7). Accordingly, the national insurance scheme comprises contributions intended to finance the benefits, although in practice, as noted above, they have failed to do so, particularly for the most important form of benefit – retirement pensions. Family allowances were an exception and were to be financed from taxation, partly because Beveridge felt it was a matter of public concern that the birth rate should be increased and also because he feared that the limit of bearable taxation in the form of the ‘poll tax’ of flat national insurance contributions might be exceeded if the contributions had to meet the cost of family allowances (Beveridge, 1948, pp. 154–5).

Supplementary benefits (originally national assistance) are the other major exception to benefits intended to be financed from contributions. This form of extra assistance financed from taxation (a continuation of earlier schemes for public assistance) was intended to meet special needs not covered by national insurance. It was envisaged as being required on a major scale only in the temporary period before contributory pensions reached subsistence level.⁷ After that it would assume a minor role (Beveridge, 1948, p. 141). In fact, because of the shortfall of the level of national insurance benefits below the poverty line, supplementary benefit has been paid on a substantial and increasing scale.

All national insurance benefits and family allowances are paid without means test, in line with Beveridge’s (1948, p. 7) principle of equal treatment for all (benefits ‘as of right and without means test’). Supplementary benefit is the only major social security payment subject to means test.⁸

Contributions were also intended by Beveridge to be equal for all, irrespective of means. The major part of national insurance contributions is still flat rate, although extra graduated contributions have increasingly been added since they were first introduced in 1961.⁹ Plans have now been put forward for eliminating the flat rate contributions and introducing a comprehensive system of income-related contributions which for most employees will be 5

per cent of earnings.¹⁰ But this departure from the equality principle will not affect entitlement to the existing ‘universal basic benefits’ which are available to all on an equal basis irrespective of their income.¹¹

Defects of the System

The defect of the existing system in giving rise to unnecessary two-way payments of benefit and tax to and from the same income group, is illustrated in Table 2.

The Table shows that in spite of the absence, in general, of means tests the average level of social security benefits (shown as ‘cash’ benefits in the Table)¹² does vary with income. This reflects partly the income-related payments ...

Table of contents

• Cover
• Half Title
• Title Page
• Original Copyright Page
• Copyright Page
• Contributors
• Contents
• Preface
• Editors’ Introduction
• Rationing and Financing Health Care Resources
• Applying PPB to Police Expenditure
• Some Implications of the Career Structure for Social Workers
• Management Nursing
• The Balance between Centralization and Decentralization in the Fire Service
• Management in the National Health Service
• The Use of a Reverse Income Tax to Administer the Distribution of Welfare Benefits
• Policy Analysis and the Welfare State
• Subject Index
• Name Index