Tuesday 9 October 2012

"Freebies" for the well-heeled: two solutions

At a time when we are cruelly cutting benefits for those who desperately need them it does seem stupid to be dishing out freebies, or "universal benefits,"  (bus passes and a winter fuel allowance for all the over-60s, free TV licences for the over 75s) not just to millionaires but also to the thousands of comfortably-off such as myself.  However, those who are familiar with social history know that making benefits selective, ie "means testing," is not only a humiliating but also an inefficient and expensive business.

There seem to me to be two simple solutions.

1.  Don't give these benefits to anyone who pays income tax.  This seems to be a rough and ready way of identifying those who don't really need the benefits, without putting those who do to the fag of applying for them.  It shouldn't be expensive since the authorities "know who we are" and I can't see any great harm in HMRC, who collect the income tax, communicating with whatever departments dish out the benefits.

Those allergic to simple arithmetic stop reading here, but:

2.  A more sophisticated solution would be to multiply the value each benefit  by the reciprocal of the marginal tax rate,  impute this sum to the income of the recipient, and tax it. 

The explanation for this is relatively simple whilst the marginal tax rate remains at 50%, viz:

  • the reciprocal of 50%  is 100/50 which is 2

  • thus the winter fuel allowance, at present £200, is multiplied by 2 to give £400

  • this £400 is addend to the income of every recipient, though they receive only £200

  • for higher band tax-payers, this £400 is taxed at 50% ie £200, so the entire benefit is taxed away and they receive nothing.

  • standard rate tax payers have their  £400 taxed at 20%, which is £80. so they retain only £120 of the £200 received
  • non-income tax payers  would retain the whole £200.
The sums will  become a bit more complex when the marginal rate falls to 45% but the principle remains the same.  I suppose there will be complications when the imputed value pushes a non income-tax payer into a tax paying bracket, but some clever chap with a computer should be able to work out a formula for coping with this.

I offer the above system to HMG for free: not all of us are motivated by the desire for more money. If HMG would like to reward me than a KCMG would be appropriate, but I'd happily settle for a blue plaque and a CBE. 

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