NEF’s Error – A Universal Income Is On Top Of The Tax Allowance, Not Instead


The New Economics Foundation – usually known as not economics frankly – tells us that we should abolish the personal allowance for income tax and instead have a near £50 a week universal basic income. This isn’t the right way to be doing it at all – the point is to free the poor from high marginal tax rates, not to further trap them in that destitute state.

And I speak as one of the two that managed to get that personal allowance raised up to that £12,500 it soon will be. On exactly these simple grounds, that the poor shouldn’t be paying income tax at all. Because they’re poor, d’ye see?

Sure, we need to have government, even if not quite as much as we do have. Thus we need tax revenues to pay for it. But that tax should be, where it is derived from income, paid by the better off among us. As Adam Smith pointed out, people should be paying more than in proportion to their income. I would actually argue that income tax should only kick in at median income but agree that would require a smaller state than we’ve got now. Actually, that’s why I would propose it.

Still, that does mean that this suggestion fails at that first hurdle:

The tax-free personal allowance, which rises to £12,500 in April, should be scrapped and replaced with a flat payment of £48 a week for every adult, according to radical proposals welcomed by shadow chancellor John McDonnell. The proposal, from the New Economics Foundation thinktank, is for a £48.08 “weekly national allowance,” amounting to £2,500.16 a year from the state, paid to every adult over the age of 18 earning less than £125,000 a year. The cash would not replace benefits and would not depend on employment.

It’s a universal basic income. Excellent stuff therefore. But the error is to think that this should replace that personal allowance. Assume that they’re including NI in that no allowance thing – if they’re doing it for income tax then they probably will for NI. What that means is that anyone earning more than £50 a week is facing a 40% marginal tax rate (yes, 40%, employers’ NI is incident upon the workers’ wages).

Do we think that’s a just way to pay for diversity advisers? That someone on £50 a week gives up 40% of any income over that? No, we don’t, we think that’s an entirely unjust taxation system. Actually, it’s a really stercore taxation system.

The correct way to do this is to have a universal basic income – around the pension guarantee, £150 a week is about right – and then a substantial tax free allowance on top of that. Actually, the allowance should be a little more than we have now, say £15,000 a year. That plus the UBI would mean that only those on the median wage or above would be in the income tax system at all. Which is about where we should be if we are to be just and righteous about matters.

For yes, the richer should carry more of the burden of the State. And if that moral righteousness means we’ll have a smaller State then all to the good, eh?