A new report from the IEA argues for the introduction of a Negative Income Tax

The IEA proposes a solution that would simplify the benefits system much further

In a new report released today, Transforming welfare - incentives, localisation and non-discrimination, the IEA endorses the general direction of the coalition’s welfare reforms, but sets out proposals for developing the policies to get more people off welfare and into work.

The government’s proposals take us in the same direction as the proposals in this paper but it is likely that many of the static and dynamic benefits of reform will be lost by the coalition as a result of an unwillingness to go far enough.

The proposals in this paper would substantially simplify the welfare system, putting in place better incentives to encourage work and discourage welfare dependency. They tackle the full extent of the system from middle class benefits to those who are unemployed, those working part-time and those on low full-time incomes. If adopted this system would see less money being spent on bureaucracy, more people in work and people keeping more of their own money in the first place. The key proposals include the following:

• Replacing benefits and tax credits with a Negative Income Tax – We propose replacing the complex benefit and tax credit system with a negative income tax which would dramatically simplify the way welfare is delivered. Crucially it would also eliminate the high withdrawal rates that are a disincentive to work and which to a significant extent will remain under the Universal Credit proposals. It would work by setting different allowances for different types of household. For example, if there were an allowance of £28,000 for every two-adult-two-children household, and a Negative Income Tax with a rate of -33%, a family earning £18,000 would receive an additional £3,333, topping up their disposable income to £21,333. They would not pay Income Tax, but they would not receive tax credits either – the problem of 'fiscal churning' would therefore be eliminated.

• Enormous reduction in middle-class benefits – ‘Middle-class’ benefits should be severely curtailed – but not simply by raising withdrawal rates, since this would disincentivise progress in the labour market. Under the negative income tax those on low incomes who need support would receive this through the negative income tax payment rather than through lots of small payments for child benefit, winter fuel, eye tests etc. With the abolition of middle class benefits complementary tax reductions could also be made.

• Introducing a local ‘workfare’ system – Work requirements generally should be a requirement to receive of out-of-work benefits, following the model tested in the US state of Wisconsin. Under a ‘workfare’ system, the daily life of benefit recipients should not be that different from the daily life of their working peers, which would both remove the stigma from recipients, and encourage them to look for full-time employment in the regular labour market. There should be continuing work requirements for those who are not in full-time work but who are claiming benefits. Schemes should be administered and funded at local level. Devolving power would allow experimentation and a diversity of schemes, allowing us to see wh