Labour's Poverty Trap

FRIDAY, OCTOBER 09, 2009

Labour's Poverty Trap

Don't you dare lecture us on poverty

One of the most striking sections of Cam's speech yesterday was when he accused Labour of letting down the poor - the very people they always claim to help.

We've blogged Labour's poverty trap before (eg see here): how low income households are trapped on welfare by effective marginal tax rates that can easily exceed 90%. The complex interaction of tax and benefits is notoriously difficult to unravel, and varies from one household type to another, but Cam quoted this jaw-dropping example:

"In Gordon Brown’s Britain if you’re a single mother with two kids earning £150 a week, the withdrawal of benefits and the additional taxes mean that for every extra pound you earn, you keep just 4 pence.

What kind of incentive is that? Thirty years ago this party won an election fighting against 98 per cent tax rates on the richest."

He got his figures from the Centre for Social Justice, which recently published aweighty report on this very subject.

Here's their chart showing the effective marginal tax rate (MTR) for a lone working parent with two children for earned income levels up to £30,000 pa. It shows how straightforward income tax and national insurance rates (the blue blocks) interact with a complex mix of withdrawal rates for various welfare benefits (all the other colours) to give effective marginal tax rates of up to 100%. Cam was quoting the 96% marginal rate that applies to annual incomes between about £6,000 and £11,000:

As we've noted before, effective marginal tax rates at these levels make it very difficult for welfare recipients to take paid employment of any kind. And it can be even worse for other groups (such as childless single adults).

Now, of course, most welfare systems have issues with poverty traps, because of benefit withdrawal as people earn more for themselves*. But the CSJ report also gives some international comparisons, showing how Labour's regime is among the most poverty-trapping anywhere.

For example, here's their chart showing the so-called Participation Tax Rate (ie the effective tax rate for those moving from unemployment to employment - PTR) for a childless single adults (25+) at 60% of the average wage. The UK's tax rate of over 70% is higher than any country, bar four:

Brown may have started out with good intentions. But his horrendously complicated array of welfare benefits and tax credits has done the working age poor no favours at all: it has trapped even more of them in poverty and welfare dependency, with no realistic chance of escape.

*Footnote - Yes, we realise there are alternatives to means tested welfare that avoid poverty traps altogether. And in principle, we are very attracted to the concept of Citizens' Basic Income, whereby all adults get a standard handout from the state which is theirs to keep whether they work or not. The trouble is, in practice, it would simply be too expensive - or at least, we've never been able to get the sums to add up (see this blog).