APPENDIX 26
Work commissioned by the Committee from
Ms Holly Sutherland (CP 36)
THE FINANCIAL CONSEQUENCES OF MOVING TO A
FULLY MEANS-TESTED SOCIAL SECURITY SYSTEM
SUMMARY
This paper explores the short-term financial
implications of abolishing earnings replacement social security
benefits and relying on the system of means-tested benefits to
replace them.
One of the major differences between the non-means-tested
system of benefits and the means-tested system is that the former
is based on individual entitlements and circumstance, whereas
the latter depend on the income and circumstances of all the people
in the benefit unit. In the case of couples, both of their circumstances
affect their joint entitlement. This is the major factor which
explains the failure of the means-tested system to compensate
for the abolition of non-means-tested benefits.
A third of benefit units in the UK would face
a loss of income from the abolition of non-means-tested benefits
(including the basic pension). Even after accounting for consequential
rises in means-tested benefit entitlements, around 25 per cent
of all UK benefit units (7.5 million) remain worse off (Para 2.3
and Table 1).
If the basic pension is retained, the scale
of the losses is smaller, but the means-tested system is even
less effective in taking the place of the earnings replacement
benefits: only about a fifth of losers are fully compensated and
8 per cent of all UK benefit units would remain worse off in cash
terms (Para 2.4 and Table 1).
The lower are the rates of take-up for means-tested
benefits, the greater is the extent of net losses (Table 1).
The net effect of the abolition of earnings
replacement benefits would be a considerable reduction in spending.
This would permit a cut in income tax rates of about 7 percentage
points if the basic pension were included in the benefit cuts
and 2 percentage points if it were not (Table 4).
However, the logic behind the abolition of National
Insurance benefits would also imply that National Insurance contributions
should be abolished. If this were done, the increase in means-tested
benefits could be financed by a rise in income tax rates of 4
percentage points (if the basic pension were retained). The marginal
rate of alternative forms of taxation would be higher if the base
were narrower than income tax (eg using the present NIC base)
or lower if the base were widened (eg creating a new flat tax
on all income except benefits). (Table 4)
In general, a revenue neutral package involving
cuts in tax as well as in non-means-tested benefits is not able
to reduce the number of losers from the benefit cuts alone. The
number of family units losing when income tax is cut remains the
same as when there is no tax cut. Alternative financial adjustment
mechanisms all involve additional losers as well as gainers (Para
3.5).
Reforms to the means-tested system of benefits
to make it more generous do have the capacity to reduce the number
of benefit units that lose. Three enhancements are examined:
(i) A disregard of up to £85 per week
for income from private or occupational pensions.
(ii) An increase of capital limits to £20,000
and capital thresholds for tariff income to £10,000.
(iii) A general increase of 10 per cent in
all personal allowances and premiums, with a 100 per cent increase
for the carer's premium.
Of the three, the most expensive and effective
enhancement is the £85 pension disregard, closely followed
by the increase in all means-tested benefit rates. The increase
in capital limits has a relatively small effect (Para 4.3 and
Table 5).
In combination, the three enhancements reduce
the proportion of losers from 25 per cent to 14 per cent (or 26
per cent to 19 per cent if benefit take-up is incomplete) in the
scenario where the basic pension is abolished. Where it is retained,
the reduction is proportionately less—from 8 per cent to
between 6 per cent and 7 per cent (Para 4.5 and Table 5).
Overall, the enhancements have very little effect
on family units in the top 40 per cent of the income distribution.
At no point in the distribution can the enhancements guarantee
that there will be no losers. (Para 4.7 and Table 6).
Much of the impact of the enhancements is on
benefit units not currently in receipt of earnings replacement
benefits (Para 4.4).
The following table summarises the main result
of the analysis. It shows the proportion of all UK family units
who are losers after each of three stages: (i) abolition of earnings
replacement benefits, (ii) allowing means-tested benefits to compensate
for the loss in income and (iii) enhancement of the means-tested
system to make it more generous. The differential effects across
the income distribution are shown in Table 6 and Figures 1 to
4 (Para 5.1).
PERCENTAGE OF ALL UK FAMILY UNITS WORSE OFF
AFTER THE SHIFT TO MEANSTESTING, WITHOUT AND WITH ENHANCEMENTS
| |
All earnings replacement benefits abolished (scenario A)
| Basic pension retained (scenario B)
|
| (i) abolition of earnings replacement benefits
| 33 | 10
|
| (ii) after means-tested benefits adjust
| 25 (26) | 8 (8)
|
| (iii) after enhancement of means-tested benefits
| 14 (19) | 6 (7)
|
NOTE: Figures assume 100
per cent take-up of all benefits. Figures in brackets show percentages
of losers under incomplete take-up for means-tested benefits.
We conclude that the means-tested system is not an effective
"shadow" for the non-means-tested system of benefits,
nor can it be made so. Many individuals qualify for the latter
type of benefit without being in families that are entitled to
the former type of benefit.
1. INTRODUCTION AND
METHODOLOGY
1.1 This paper explores the short-term financial implications
of abolishing earnings replacement social security benefits and
relying on the system of means-tested benefits to replace them.
We use a tax-benefit model, POLIMOD, to calculate the aggregate
revenue effects as well as the losers and gainers from each option.
This model uses representative household survey micro-data from
the Family Expenditure Survey to calculate taxes and benefits
before and after policy reforms.[72]
In these calculations we inevitably focus on the short term cash
effects of the changes. We limit the analysis to the impact on
family units, or benefit units,[73]
rather than individuals. This is an important limitation since
one of the major differences between the non-means-tested system
of benefits and the means-tested system is that the former is
based on individual entitlements and circumstance, whereas the
latter depend on the income and circumstances of all the people
in the benefit unit. In the case of couples, both of their circumstances
affect their joint entitlement.
1.2 The following additional points deserve attention
but are not explored here.
— The changes may involve redistribution of income
within households or between partners in couples.
— There may be a differential impact on men and
women.
— There may be an impact on work incentives, particularly
on the incentives of the partners of current recipients of earnings
replacement benefits.
— The incentives to participate in the formal economy
will be reduced.
— The costs of administration (for the government)
and of compliance (for claimants) are different in the two systems.
— Shifting the focus of the social security system
away from earnings replacement and more firmly onto short-term
poverty relief could have many long-term effects on the acceptability
and sustainability of the system. Such a fundamental change may
have implications way beyond the cash accounting that is the basis
of this paper.
1.3 Even in terms of cash changes, the model results
should be treated as estimates with a margin of error. In particular,
they do not incorporate the effect of any changes in behaviour
that may come about following this major shift in policy. As stated
in a recent Government report "Models do not give answers,
they give insights". (PIU, 2000; page 62). The modelled scenarios
should be treated as illustrations, not forecasts.
1.4 In particular, the analysis uses the post-October
1999-2000 tax and social security system as the baseline. SERPS
and other pension incomes in payment at that time are assumed
to remain in place. None of the changes to pensions that are under
discussion are included in the modelling.
1.5 Section 2 examines the revenue and distributional
implications of abolishing earnings replacement benefits. Section
3 explores ways of financing the new system. Section 4 discusses
ways of improving the extent to which the means-tested system
can compensate for losses of non-means-tested benefit. Section
5 concludes.
2. ABOLITION OF
CONTRIBUTORY AND
EARNINGS-REPLACEMENT
BENEFITS: WHO
LOSES?
2.1 We explore two alternative scenarios. The first (A)
involves the abolition of all contributory benefits and those
non-contributory benefits that are intended for earnings replacement.
Details of the benefits abolished and those that remain are listed
in the appendix. The second scenario (B) does the same, but retains
the basic state retirement pension. In each case we expect entitlements
to means-tested benefits to rise, involving increased entitlements
for some existing claimants of these benefits as well as an increase
in the number of family units in receipt of benefits.
2.2 One of the issues to be addressed when comparing
benefits of different types is the fact that rates of take-up
may not be the same. Contributory benefits have rather high take-up,
with rates close to 100 per cent. There is evidence to show that
take-up of means-tested benefits is much less complete (DSS, 1999).
Our modelling makes two alternative assumptions. The first is
that take-up behaviour corresponds to that estimated by the DSS.[74]
Under this assumption some families do not receive the means-tested
benefits to which they are entitled. The second assumption is
that all family units with entitlements to benefits do in fact
receive them.
2.3 Table 1 summarises the revenue effects and number
of benefit units who would lose from the reform for both scenarios
under the two take-up assumptions. It also shows the number of
benefit units who would be worse off if the means-tested system
did not take the place of non-means-tested benefits. Under scenario
A, a third of benefit units in the UK would face a loss of income
from the cut in non-means-tested benefits. However, the majority
of this group is not compensated by the means-tested system:
around 25 per cent of all UK benefit units (7.5 million) remain
worse off. There are enormous net savings. Less than half the
savings from the non-means-tested system are absorbed by extra
expenditure in the means-tested system. There are also relatively
minor reductions in income tax revenue due to the fall in taxable
income, mainly in pensioner benefit units. The net reduction in
the cost of all social security benefits is between £20 and
£25 billion a year, depending on the take-up assumption.
2.4 The scale of the effect of the switch in benefit
type is smaller if the basic pension is allowed to remain (scenario
B). However, the proportion of benefit units who lose non-means-tested
benefits who are not compensated by the means-tested system is
even larger: only about a fifth are fully compensated, compared
with a quarter under scenario A. Two and a half million family
units (or 8 per cent of the total) would remain worse off in cash
terms. The net revenue gain is more modest but still substantial:
around £7 billion per year.
Caseloads
2.5 In moving to a means-tested system some benefit units,
already receiving top-ups to their non-means-tested benefits,
will find that abolition of non-means-tested benefits results
in an increase in their entitlements to means-tested benefits.
In general they as a family will not become worse off in cash
terms, but there may be some re-distribution of income within
the family. For example, take the case of a couple where one receives
incapacity benefit but because they have no other income they
are jointly entitled to some income support. On abolition of incapacity
benefit the spouse entitled to it loses this source of independent
income. It is replaced by income support for them both, but the
pattern of income receipt by the couple will be altered. These
benefit units are not included as "losers" in Table
1 but individuals within the units may well consider themselves
to be adversely affected by the reform.
2.6 In other cases, the unit becomes newly qualified
for means-tested benefits. In general in these cases they will
suffer a reduction in income. There is a third group who may currently
be entitled to one set of means-tested benefits (housing benefit
or council tax benefit) and, on the loss of non-means-tested benefit
become entitled to income support.[75]
In general in these cases there will be some loss of income. Table
2 shows the percentage increase in benefit units receiving Income
Support and Working Families Tax Credit (WFTC) under the two scenarios
and the alternative take-up assumptions. The Income Support caseload
would increase by about 40 per cent under scenario A and by 13
per cent under scenario B. The increase is between 4 per cent
and 5 per cent for WFTC. Some benefit units will also become newly
entitled to housing benefit and council tax benefit.
2.7 However, the net effect on housing benefit is to
reduce the number of benefit units entitled, as more move from
housing benefit onto income support than move from receiving no
means-tested benefit onto housing benefit and/or council tax benefit.
Distributional effects
2.8 Table 3 shows how these losses are distributed by
benefit unit income level. For clarity we focus on the calculations
that assume full take-up. The table shows the average reduction
in benefit unit income across the income distribution. This is
done in two stages: first, following the reduction in non-means-tested
benefits and secondly, after the rest of the tax and benefit system
has made adjustments. The proportion of the income lost from earnings
replacement benefits that is made up by increases in means-tested
benefits is also shown.
2.9 Not surprisingly, the means-tested system of benefits
is more effective at mitigating the loss of non-means-tested benefits
at the bottom of the income distribution than at the top. However,
two important observations can be made.
2.10 Firstly, not all the poorest benefit units would
be fully compensated. In the bottom 30 per cent of the distribution,
around 78 per cent of the aggregate loss is compensated under
scenario A and around 83 per cent under scenario B. The failure
to compensate fully is due to a combination of factors including:
— the capital rules in the means-tested system:
benefit units may have amounts of capital that disqualify them
from means-tested benefits or that reduces their entitlement to
benefit. It is worth noting that people who qualify for contributory
benefits necessarily have a history of earnings, and are more
likely to have savings than those that have depended on means-tested
benefits for some time. Thus, potentially, the capital rules may
have a greater impact on entitlements for those brought into the
means-tested system, than for existing claimants;
— the fact that some benefit units with incomes
just above income support level may not qualify for tapered means-tested
benefits (eg they may be owner occupiers and not qualify for housing
benefit).
It is also worth noting that the extent of the failure to
compensate at the bottom would be worse than that shown in Table
3 if take-up of means-tested benefit is any less than 100 per
cent.[76]
2.11 Secondly, there are many losers among higher income
benefit units who are not compensated at all. The rate of compensation
in the top half of the distribution is just 25 per cent under
scenario A and 18 per cent under scenario B. This is due to:
— the fact that many people in receipt of earnings
replacement benefits have partners who have earnings or other
income,
— some people have other sources of income that
do not affect entitlements to contributory benefits but which
are included either fully or partly in the income tests for means-tested
benefits. Examples include income from private and occupational
pensions and income from Child Support and other maintenance payments,
— the capital rules, as above.
3. FINANCING THE
MEANS-TESTED
SYSTEM
3.1 As shown in Table 1, significant reductions in public
spending on social security benefits are implied by the abolition
of earnings replacement benefits. Thus in this context "financing"
means ways of reducing government revenue. Four illustrative financial
adjustment mechanisms are explored. In each case they are taxes
or contributions which depend on individual, not family unit,
incomes.
3.2 The four financial adjustments that are considered
are:
(a) Retain all NICs and cut income tax rates
This option uses the existing NIC system as a revenue-raising
mechanism and reduces income tax. However, the logic behind the
abolition of National Insurance benefits would also imply that
National Insurance contributions should be abolished. The
following three options do just this, assuming that:
— In Class 1 employee National Insurance contributions
(NICs) a 1.6 per cent contribution is retained and paid by those
not Contracted Out of SERPS.
— Employers' NI contributions are retained.
— The equivalent contributions paid by the self
employed (Class 4) are retained.[77]
They raise the necessary revenue using three alternative
tax bases and schedules.
(a) Raise income tax rates
The logic behind this option is that existing means-tested
benefits are financed out of general tax revenue. The extension
of meanstesting is financed in the same way.
(b) Use the existing NIC structure as the basis for an
earmarked social security tax
The equivalent of Class 1 contributions on earnings and Class
4 contributions on self-employment income are levied (the Contracted
Out Class 1 rate and the addition to the Class 4 rate are set
at the same level, between the existing lower and upper limits).
(c) A "flat" tax on all earned and unearned income
This is an alternative structure for an earmarked or hypothecated
social security tax. It is levied at a single rate on all non-benefit
income.
3.3 Table 4 shows the revenue-neutral rate(s) of NICs
and/or tax for both scenarios under each take-up assumption. In
fact, scenario A reduces the cost of social security by such a
large amount that even the abolition of Class 1 (employee) and
Class 2 NICs does not reduce revenue sufficiently to result in
a revenue neutral combination. Thus no figures are provided for
financing mechanisms (b) to (d). The combination of scenario A
and abolition of NICs raises £1.0 billion under 100 per cent
take-up and £5.6 billion under partial take-up. Abolition
of NICs on its own costs £19.6 billion, equivalent to 6 percentage
points on income tax rates.
3.4 To aid comparison of the effects of the financing
measure Table 4 also shows the fall in the combined marginal rate
of tax and contributions for a single person with (Contracted
Out) earnings of £20,000 per year (and no other income) under
each financing system. Under the current system this marginal
rate is 33 per cent. Not surprisingly the financing mechanism
with the widest income base (d) produces the largest cut in marginal
rate as well as the greatest number of losers.
3.5 The proportions of benefit units gaining and losing
from the combination of benefit changes and financing mechanism
are also shown. In general we see that the cuts in tax or NICs
are not able to reduce the number of losers from the abolition
of non-means-tested benefits. This is because at any one time
the two groups—non-means-tested benefit recipients and income
taxpayers—are largely different. Tax cuts are not a viable
mechanism for compensation for the loss of benefits. The number
of family units losing under financial adjustment (a) remains
the same as when there is no tax cut. The other financial adjustment
mechanisms all involve additional losers as well as gainers.
4. ENHANCEMENTS TO
THE MEANS-TESTED
SYSTEM
4.1 In order to explore whether there are ways of making
the means-tested system better "shadow" the effect of
the non-means-tested system, particularly in the lower half of
the income distribution, we examine three possible enhancements
to the means-tested system.
(i) A disregard of up to £85 per week for income
from private or occupational pensions (Including SERPS). This
disregard is on an individual basis (both partners in a couple
may claim it if they each have pension income in their own right).
(ii) An increase of the capital limits to £20,000.
For Income Support this is an increase of £12,000 from £8000
and for housing benefit and council tax benefit it is an increase
of £4000 from £16,000. The capital thresholds for tariff
income are also increased from £3,000 to £10,000. The
capital limits for Working Families Tax Credit remain unchanged.
(iii) A general increase of 10 per cent in all means-tested
benefit personal allowances and premiums, with a 100 per cent
increase for the carer's premium. (These increases are not applied
to Working Families Tax Credit.)
(iv) A combination of (i), (ii) and (iii).
4.2 The effects of these enhancements are examined individually
and in combination in the context of both scenario A and scenario
B and for both take-up assumptions. Table 5 shows the effects
on the net cost, and benefit units gaining and losing. These are
compared with the results for the scenarios without enhancements
("None").
4.3 The most expensive enhancement is the £85 pension
disregard (i), closely followed by the increase in all means-tested
benefit rates (iii). The increase in capital limits has only a
small effect, and this mainly among pensioners.
4.4 There are gainers from the enhancements in addition
to the family units being compensated for the loss in earnings
replacement benefits. Not surprisingly, increasing benefit rates
has a particularly large effect beyond compensation.
4.5 Focusing on the losers—those who remain not
fully compensated, in spite of the enhancements—we find
the following.
— The enhancements are most effective at reducing
the number of losers among pensioners (ie in scenario A).
— Not surprisingly, enhancement (i)—the pension
disregard—is most effective among ex-recipients of the state
pension (scenario A).
— Relaxing the capital limits is not effective at
all in decreasing the numbers of non-pensioners (scenario B) who
lose, although the degree of compensation may be increased among
losers.
— Enhancement (iii)—increasing benefit rates—is
most effective among pensioners.
— All the enhancements are less effective if means-tested
benefit take-up is incomplete.
— Overall, the combination of three enhancements
reduces the proportion of losers from 25 per cent to 14 per cent
(or 26 per cent to 19 per cent for incomplete benefit take-up)
under scenario A.
— Under scenario B the reduction is less—from
8 per cent to 6 per cent or 7 per cent.
4.6 Clearly it is difficult to target losers among the
non-pensioner population with means-tested benefit enhancements.
This is mainly because working age claimants of earnings replacement
benefits are more likely to have non-pension income, or partners
with independent income, than are people of pension age.
4.7 The position in the income distribution of the losers
under each combination of scenario and benefit enhancement is
shown in Table 6. This confirms that the enhancements have very
little effect in the top 40 per cent. Nor is there any point in
the distribution where they can they guarantee that there will
be no losers.
5. CONCLUDING COMMENTS
5.1 Figures 1 to 4 summarise the effect across the income
distribution by showing the proportion of losers that remain after
each of three stages: (i) abolition of earnings replacement benefits,
(ii) allowing means-tested benefits to rise for those entitled
and (iii) then enhancing the means-tested system to make it more
generous. The black parts of the bars show the benefit units that
remain as losers after means-tested benefit enhancements. The
dark grey sections show the reduction in the number of losers
dues to the benefit enhancements. The pale grey sections show
the benefit units in receipt of earnings replacement benefits
that are compensated for the loss of these by the current means-tested
system.
5.2 For example Figure 1 shows that 55 per cent of the
4th decile group of family units receive earnings replacement
benefits (including the basic retirement pension). When these
are abolished, 17 per cent of the decile group are fully compensated
by the means-tested system. When this is enhanced with all three
changes a further 26 per cent of the group are compensated, leaving
12 per cent worse off than under the current system. In the 7th
decile 30 per cent receive benefits that are abolished, 6 per
cent are compensated by the existing means-tested system and a
further 3 per cent by enhancements. This leaves 21 per cent (or
three quarters of the original losers) remaining uncompensated.
5.3 Each figure shows a similar pattern, although the
scale of the changes is larger under scenario A (Figures 1 and
2) than B (Figures 3 and 4) and compensation using the means-tested
system (MTB) with or without enhancements is less successful when
take-up rates are less than 100 per cent (Figures 2 and 4).
5.4 Significant numbers of losers would remain even when
enhancement of the means-tested system is on such a scale that
it costs more than the existing non-means-tested system (scenario
B with the combination of three enhancements). Most of the losers
are in family units with above median incomes, but this is certainly
not uniformly the case. Sizeable proportions of losers are in
the poorest third of families.
5.5 We conclude that the means-tested system is not
an effective "shadow" for the non-means-tested system
of benefits, nor can it be made so. Many individuals qualify for
the latter type of benefit without being in families that are
entitled to the former type of benefit.
REFERENCES
Department of Social Security, 1999, Income Related Benefits:
Estimates of Take-Up in 1996/7 (revised) and 1997/8, Analytical
Services Division.
Performance and Innovation Unit, 2000, Adding It Up: Improving
Analysis and Modelling in Central Government, The Stationery
Office.
Redmond G, H Sutherland and M Wilson, 1998, The arithmetic
of tax and social security reform: a user's guide to microsimulation
methods and analysis, DAE Occasional Paper No. 64, Cambridge
University Press.
Table 1
THE COSTS OF MOVING TO MEANS-TESTING
| Scenario: | A
| B |
| Take-up: | Full
| Partial | Full
| Partial |
| Net revenue cost £ billion/year | -20.56
| -25.23 | -6.70
| -7.58 |
| Abolition of Non-means-tested benefits |
-41.20 | -41.20
| -12.75 | -12.75
|
| Means-tested benefits | +18.74
| +14.06 | +5.80
| +4.92 |
| Income tax | +1.90
| +1.91 | +0.25
| +0.25 |
| Benefit units losing income, thousand(per cent)
| 7,420 (25 per cent) |
7,960 (26 per cent) | 2,410 (8 per cent)
| 2,510 (8 per cent) |
| Benefit units losing Non-means-tested benefits, thousand (per cent)
| 9,820 (33 per cent)
| 3,140 (10 per cent)
|
| Source: POLIMOD |
Table 2
PERCENTAGE INCREASE IN BENEFIT UNITS ENTITLED TO INCOME
SUPPORT AND WORKING FAMILIES TAX CREDIT
| Scenario: | A
| B |
| Take-up: | Full
| Partial | Full
| Partial |
| Means-tested benefit |
| Income Support | 43 per cent
| 37 per cent | 13 per cent
| 13 per cent |
| Working Families Tax Credit | 5 per cent
| 4 per cent | 5 per cent
| 4 per cent |
| Source: POLIMOD |
Table 3
LOSSES IN BENEFIT UNIT INCOME FROM MOVING TO A FULLY MEANS-TESTED
SYSTEM (£/WEEK) ASSUMING FULL BENEFIT TAKE-UP
| | A
| B |
| Decile group1 | Non-means-tested benefit changes
| All changes | Mean compensation per cent
| Non-means-tested benefit changes
| All changes | Mean compensation per cent
|
| bottom | -4.57
| -0.64 | 86
| -4.05 | -0.48
| 88 |
| 2nd | -33.62
| -6.43 | 81
| -8.52 | -1.13
| 87 |
| 3rd | -39.87
| -12.87 | 68
| -10.61 | -2.70
| 74 |
| 4th | -44.36
| -15.34 | 65
| -12.25 | -4.24
| 65 |
| 5th | -36.97
| -19.01 | 49
| -9.86 | -5.20
| 47 |
| 6th | -29.64
| -20.56 | 31
| -9.87 | -6.46
| 35 |
| 7th | -24.69
| -17.53 | 29
| -9.17 | -7.34
| 20 |
| 8th | -19.31
| -14.30 | 26
| -7.35 | -5.96
| 19 |
| 9th | -17.59
| -14.80 | 16
| -6.68 | -6.17
| 8 |
| top | -12.45
| -9.75 | 22
| -3.06 | -2.81
| 8 |
| all | -26.30
| -13.12 | 50
| -8.14 | -4.25
| 48 |
1 Benefit units are ranked by family disposable income, equivalised using the OECD equivalence scale(=1 for a single person (aged >13), 1.7 for a couple and 0.5 for each child aged 0-13.). Losses are expressedin £/ week without equivalisation.
Source: POLIMOD
|
Table 4
REVENUE NEUTRAL SCHEMES: TAX RATES, GAINERS AND LOSERS
| Scenario: | A
| B |
| Take-up: | Full
| Partial | Full
| Partial |
| Financing mechanism |
| (a) NICs retained; income tax rates cut by (per cent points)
| 6.5 | 8.0
| 2.1 | 2.3
|
| (b) NICs abolished; income tax rates raised by ( per cent points)
| * | *
| 4.0 | 3.7
|
| (c) NICs abolished; hypothecated tax based on Class 1 NIC of ( per cent)
| * | *
| 5.3 | 5.0
|
| per cent point fall in Marginal Tax | *
| * | 2.9
| 2.7 |
Rate for "standard person"
(a)
| 6.5 | 8.0
| 2.1 | 2.3
|
| (b) |
| | 4.4
| 4.7 |
| (c) |
| | 3.1
| 3.4 |
| (d) |
| | 5.5
| 5.7 |
| per cent benefit units gaining | 49
| 50 | 57
| 57 |
| (a) |
| | 44
| 44 |
| (b) |
| | 46
| 46 |
| (c) |
| | 42
| 43 |
| (d) | |
|
| |
| per cent benefit units losing | 24
| 26 | 8
| 8 |
| (a) |
| | 23
| 23 |
| (b) |
| | 11
| 11 |
| (c) |
| | 34
| 34 |
| (d) |
| |
| |
* No revenue-neutral tax rate.
NOTES: Under Scenario B,
full take-up
(a) Current of tax rates of 10 per cent, 23 per cent,
and 40 per cent become 7.9 per cent, 10.9 per cent and 37.9 per
cent; taxable investment income not in the higher rate band is
taxed at 17.9 per cent instead of 20 per cent.
(b) NIC NCO Class 1 rate is 1.6 per cent instead of 10
per cent; CO Class 1 and Class 2 are set to zero; Income tax rates
become 14.0 per cent, 27.0 per cent and 44.0 per cent (investment
income 24.0 per cent).
(c) NIC NCO Class 1 rate is 6.6 per cent instead of 10
per cent; CO Class 1 is 5.3 per cent instead of 8.4 per cent,
Class 4 is 11.3 per cent instead of 6.0 per cent and Class 2 is
set to zero.
(d) NIC NCO Class 1 rate is 1.6 per cent instead of 10
per cent; CO Class 1 and Class 2 are set to zero; Flat tax on
all income (on an individual basis, no allowances, reliefs or
credits) at a rate of 2.9 per cent on all income except benefits.
Source: POLIMOD
Table 5
THE COSTS AND BENEFITS OF MOVING TO AN ENHANCED MEANS-TESTED
SYSTEM
Enhancements (i) to (iv)
| Scenario: | A
| B |
| Take-up: | Full
| Partial | Full
| Partial |
| Additional cost £ billion / year1 |
0.00 | 0.00
| 0.00 | 0.00
|
| None | 6.26
| 4.42 | 4.14
| 3.35 |
| (i) | 2.65
| 2.10 | 1.10
| 0.92 |
| (ii) | 4.49
| 3.52 | 3.99
| 3.29 |
| (iii) | 15.93
| 11.89 | 10.98
| 8.83 |
| (iv)=(i)+(ii)+(iii) |
| |
| | | Total net revenue gain £ billion/year |
20.56 | 25.23
| 6.70 | 7.58
|
| None | 14.30
| 20.81 | 2.56
| 4.23 |
| (i) | 17.91
| 23.13 | 5.60
| 6.66 |
| (ii) | 16.07
| 21.71 | 2.71
| 4.29 |
| (iii) | 4.63
| 13.34 | -4.28
| -1.25 |
| (iv)=(i)+(ii)+(iii) |
| |
| |
| Family units losing income (per cent) | 25
| 26 | 8
| 8 |
| None | 18 |
22 | 7
| 8 |
| (i) | 23 |
26 | 8
| 8 |
| (ii) | 20 |
24 | 7
| 7 |
| (iii) | 14
| 19 | 6
| 7 |
| (iv)=(i)+(ii)+(iii) |
| |
| |
| Family units gaining income (per cent) |
0 | 0
| 0 | 0
|
| None | 12 |
8 | 14
| 11 |
| (i) | 3 |
3 | 5
| 4 |
| (ii) | 27 |
22 | 30
| 25 |
| (iii) | 34
| 27 | 35
| 29 |
| (iv)=(i)+(ii)+(iii) |
| |
| |
1 The cost of the three enhancements combined is greater
than the sum of the cost of each enhancement because both enhancements
(i) and (ii) cost more when benefits are made more generous as
in enhancement (iii).
Source: POLIMOD
Table 6
FAMILY UNITS LOSING FROM THE SHIFT TO MEANS-TESTING, WITH
ENHANCEMENTS (I) TO (IV) PER CENT
(a) with full take-up
| | A
| B |
| Decile group | None
| (i) | (ii)
| (iii) | (iv)
| None | (i)
| (ii) | (iii)
| (iv) |
| bottom | 3 |
3 | 2
| 2 | 1
| 2 | 2
| 2 | 2
| 1 |
| 2nd | 23 |
13 | 18
| 13 | 4
| 6 | 6
| 6 | 3
| 2 |
| 3rd | 37 |
19 | 35
| 27 | 10
| 10 | 8
| 10 | 7
| 5 |
| 4th | 38 |
20 | 36
| 25 | 12
| 12 | 10
| 12 | 8
| 5 |
| 5th | 36 |
23 | 35
| 29 | 17
| 10 | 9
| 10 | 9
| 7 |
| 6th | 30 |
26 | 30
| 29 | 22
| 10 | 10
| 10 | 10
| 8 |
| 7th | 24 |
23 | 24
| 23 | 21
| 9 | 9
| 9 | 9
| 9 |
| 8th | 20 |
19 | 20
| 20 | 19
| 8 | 8
| 8 | 8
| 8 |
| 9th | 20 |
20 | 20
| 20 | 20
| 7 | 7
| 7 | 7
| 7 |
| top | 15 |
15 | 15
| 15 | 15
| 4 | 4
| 4 | 4
| 4 |
| all | 25 |
18 | 23
| 20 | 14
| 8 | 7
| 8 | 7
| 6 |
(b) with partial take-up
| | A
| B |
| Decile group | None
| (i) | (ii)
| (iii) | (iv)
| None | (i)
| (ii) | (iii)
| (iv) |
| bottom | 5 |
5 | 5
| 5 | 4
| 3 | 3
| 3 | 3
| 3 |
| 2nd | 27 |
21 | 24
| 20 | 15
| 6 | 6
| 6 | 4
| 4 |
| 3rd | 40 |
29 | 38
| 33 | 22
| 11 | 10
| 11 | 8
| 7 |
| 4th | 44 |
31 | 43
| 35 | 25
| 13 | 11
| 13 | 10
| 7 |
| 5th | 38 |
29 | 37
| 33 | 25
| 11 | 9
| 10 | 9
| 8 |
| 6th | 32 |
29 | 31
| 30 | 26
| 11 | 10
| 11 | 10
| 9 |
| 7th | 25 |
24 | 25
| 24 | 23
| 10 | 9
| 10 | 9
| 9 |
| 8th | 20 |
20 | 20
| 20 | 20
| 8 | 8
| 8 | 8
| 8 |
| 9th | 20 |
20 | 20
| 20 | 20
| 7 | 7
| 7 | 7
| 7 |
| top | 15 |
15 | 15
| 15 | 15
| 4 | 4
| 4 | 4
| 4 |
| |
| |
| |
| |
| |
| |
| all | 26 |
22 | 26
| 24 | 19
| 8 | 8
| 8 | 7
| 7 |
Source: POLIMOD
Figure 1
PERCENTAGE OF FAMILY UNITS WITH EARNINGS REPLACEMENT BENEFITS
BY INCOME LEVEL: EXTENT OF COMPENSATION BY MEANS-TESTED BENEFITS
AND BENEFIT ENHANCEMENTS
Scenario A, full take-up
Figure 2
PERCENTAGE OF FAMILY UNITS WITH EARNINGS REPLACEMENT BENEFITS
BY INCOME LEVEL: EXTENT OF COMPENSATION BY MEANS-TESTED BENEFITS
AND BENEFIT ENHANCEMENTS
Scenario A, incomplete take-up
Figure 3
PERCENTAGE OF FAMILY UNITS WITH EARNINGS REPLACEMENT BENEFITS
(NOT INCLUDING THE BASIC PENSION) BY INCOME LEVEL: EXTENT OF COMPENSATION
BY MEANS-TESTED BENEFITS AND BENEFIT ENHANCEMENTS
Scenario B, full take-up
Figure 4
PERCENTAGE OF FAMILY UNITS WITH EARNINGS REPLACEMENT BENEFITS
(NOT INCLUDING THE BASIC PENSION) BY INCOME LEVEL: EXTENT OF COMPENSATION
BY MEANS-TESTED BENEFITS AND BENEFIT ENHANCEMENTS
Scenario B, partial take-up
72
See Redmond et al (1998) for more information. Data from the
Family Expenditure Survey are Crown Copyright. They have been
made available by the Office for National Statistics (ONS) through
the Data Archive and are used by permission. Neither the ONS nor
the Data Archive bears any responsibility for the analysis or
interpretation of the data reported here. Back
73
We refer to benefit units, family units and families interchangeably.
They are defined as single people or couples and any dependent
children. The whole resident UK population, not living in institutions,
is included. Back
74
We attempt to capture the effects of non- take-up of means-tested
benefits (FC/WFTC, IS, HB and CTB) by applying the take-up proportions
estimated by the Department of Social Security (DSS, 1999). For
example we assume that some 20 per cent of lone parents do not
receive the FC/WFTC to which they are entitled, and 15 per cent
of people of working age do not receive the Income Support to
which they are entitled. We assume that take-up behaviour is not
affected by changes in the size of benefit entitlements. Back
75
Plus 100 per cent support for rent and council tax. Back
76
For example, using our partial take-up assumption the mean rate
of compensation in the bottom two deciles is 59 per cent in scenario
A and 73 per cent in scenario B. Back
77
Class 3 contributions, which are voluntary, are not modelled. Back
| 
