Reforming of the UK Welfare System - Essay Example

Taxation Introduction The present welfare system has evolved guided by good intentions but has overall delivered flawed results. Successive governments have struggled to improve the system but failed to considerably to address key malfunctions: increasing costs of state support, entrenched culture of welfare dependency. The challenges also stems from two underpinning problems: poor incentives to work and an intricate system (Macleavy 2011, p.355). The reforming of the welfare system is directed at making it fairer, more affordable, and more capable of tackling poverty, welfare dependency, and worklessness. First, the paper explores the evidence presented by Mirrlees that is applicable to welfare reform, then analyses the shortcomings of the current benefits and welfare system, the changes proposed to the welfare system, and lastly, criticisms launched by various parties to the proposed changes to the UK benefits and welfare system. Relevance of Mirrlees Review to the Benefit and Welfare System The Mirrlees Review delivers a comprehensive review of tax reform drawing on new evidence, new (applied) theory, and new economic environment. The main motivation for the call for reform was a tax structure that does not work as a system (absence of joining up between welfare benefits, corporate taxes, and personal taxes); is not neutral in cases where it should be (irreconcilable savings taxes and a corporate tax system that elevates debt over equity); is not well structured where it should diverge from neutrality, and fails to attain progressivity efficiently (Auerbach 2012, p.685). The impact of taxation on work effort forms one of the core sources of inefficiency of a distortionary tax system. Labour supply models convey the trade off between work and leisure. The evidence detailed in Labour Supply and Taxes detail that the hours of are comparatively inelastic for men, and a bit responsive for married women (Meghir and Philips 2008, p.3). The participation of low education men is more responsive to the incentive to incentives than initially thought. For men with enhanced levels of education, participation is virtually responsive. Empirical Evidence and Tax Reform The Mirrlees Review considered evidence under five headings: critical margins of adjustment to tax reform; measurement of effective tax rates; the significance of information and complexity; evidence on the size of responses; and, implications from theory for tax design (Mirrlees, et al. 2010, p.2). The review delivers empirical evidence on labour supply responses for individuals and families at both the intensive and extensive margins and by age and demographic structure; taxable income elasticities; consumer responses to indirect taxation; and, intertemporal behaviour (consumption, savings, and pensions; persistence and magnitude of earning shocks over the life cycle). This distinction is critical for tax design since a significant extensive elasticity at low earnings can “turn around” the impact of declining social weights. It is essential to utilize taxable income elasticities as a guide for the top tax rates rather than labour supply/hours (Brewer 2010, p.8). Recent labour market history reveals three key trends that also highlight the three critical margins where responses to tax reform are most likely to manifest: dwindling male employment (especially among older men); a powerful increase in employment and total hours of work among women; and, a slump in employment among those in late teens and early twenties mirroring rising levels of educational attainments (Meghir and Philips 2008, p.4). Hence, optimizing the balance the extensive and intensive margins holds significant implications to understanding the responses to reform. In most cases, empirical analysis regarding labour supply centres on estimating wage elasticity. Lone mothers shape a demographic group of remarkable policy interest since they tend to be poor and since they face significant costs of work (Yeandle 2009, p.22). Generating the best incentives and conditions for them to work and subsequently escape poverty has been the main concern for the UK government. The participation elasticity for lone mother is one of the highest among all demographic groups, which implies that thoughtfully designed policies should be capable of attracting many to work (Holden, Kilkey and Ramia 2011, p.157). The key findings of the review entail that there is a shift of out of work support inclined towards families with younger children (an optimal tax regime with “tagging” as per the age of children). The results point out pure tax credits at low earnings for individuals with schools aged children or those in pre-retirement ages. The findings also suggest a “life-cycle rearrangement” of tax incentives and welfare payments in order to align with the elasticities (Meghir and Philips 2008, p.5). Shortcomings of the Existing Benefits and Welfare System The present UK welfare system has failed to match the change within the economy and society. Overall, successive governments have only managed to render piecemeal reforms devoid of rationalizing the entire landscape. The present welfare manifests two key problems: 1) work incentives for certain sections of the society or some groups are poor whereby the transition to work appears risky and vague. 2) The system is too intricate for claimants based on the interaction between diverse benefits and Tax Credits and layers of prior reforms, with multiple diverse benefits addressing the same underpinning issue and entitlement to benefit paid by on agency influencing the benefit payable by another (Mirrlees, et al. 2010, p.3). Rising Costs of State Support The costs of sustaining a failing system have been spiralling out of control, and UK cannot reasonably continue spending at such a rate on welfare. Multiple agencies utilize valuable resources to collect and manage largely the same form of information in analogous ways. Overpayments impact on the poorest hardest, with error and fraud being estimated to cost the taxpayer averaging around £5.2 billion (Auerbach 2012, p.686). The cost of welfare has been increasing at a period when the economy cannot afford. Welfare dependency has become a critical and the rising problem in Britain, with immense social and economic cost to both claimants and wider society. The present system has been unsuccessful in generating and sustaining positive behavioural effects. Complexity and poor financial incentives to work are a central factor in entrapping people, in worklessness. This is powerfully associated with poverty and reduced wellbeing, and an enhanced likelihood of becoming involved in criminal justice system. The present benefits and Tax Credits system impacts on work incentives via earnings disregards, Tax Credits, and Tapered withdrawal (Auerbach 2012, p.685). The System is too Complex The intricacy of the system is a barrier in itself and successive attempts to adapt the benefits system to satisfy immediate priorities have yielded layer upon layer of ill-fitting alterations, frequently with long periods of transition protection (Great Britain 2010, p.7). There are three essential income-maintenance benefits for individuals who are out of work: Job Seeker’s Allowance, Income Support, and Employment and Support Allowance (HM Revenue & Customs 2010, p.3). Research indicates that this complexity makes it complex for individuals to understand what benefits and Tax Credits they can derive. Complexity in Delivery Given the broad collection of benefits and agencies, it is not surprising that delivery of welfare benefits is fragmented and complex demanding that clients make numerous contacts with diverse organizations. Applying for, varying, or quitting benefits still demands too much paperwork from far too many diverse government agencies, which leads to rise in unproductive time. The scale of the failure of the present welfare system is demonstrated by the working age welfare budget that has risen by 45% in the last decade while poverty for the working-age has risen and social mobility halted (HM Revenue & Customs 2010, p.4). The welfare bill has over the years become unsustainably expensive with the real of this failure being paid by the poorest and the most vulnerable within the society (Brewer 2010, p.5). A life of welfare benefits dependency can be regarded as a poor substitute for a working life, and the present system can be regarded as working towards maintaining people on benefits rather than aiding to flourish in work. The present structure of UK taxes and benefits fails to mirror the principles highlighted by the Mirrlees Review entail system, neutrality, and progressivity, and do not work as a coherent system. In the present structure of UK taxes and benefits, welfare benefits, personal taxes, and corporate taxes are disjointed (Mirrlees, et al. 2010, p.3). The core defects within the current welfare/benefits system features that participation tax rates at the bottom remain significantly high. In the UK, effective marginal tax rates surpass 80% for some low-income working families mainly owing to the interface between taxes, tax credits, and means-tested benefits (Macleavy 2011, p.356). The foundation to effective policy design depends largely on avoiding high work-distinctiveness, whereby responses to taxes are most probable to remain high while sustaining a desired level of distribution (Brewer 2010, p.9). The Proposed Changes to the Welfare and Benefits System The proposed changes to the welfare system include: capping the household benefit systems to ensure that families do not receive more in welfare compared to median after-tax earnings for working households. Other changes entail withdrawing Child Benefit from families with an enhanced rate of taxpayer; instituting measures directed at controlling the cost of Tax Credits, Housing Benefit and Council Tax Benefit; and, time-limiting contributory Employment and Support Allowance for individuals engaged in Work Related Activity Group. In proposing changes to the welfare system, the government asserts that it wants to make it fairer, more affordable, and capable of tackling poverty and welfare dependency while continuing to support the most vulnerable within the society (Brewer 2010, p.5). One of the principles for reform promotes the notion that individuals should view that the clear rewards from undertaking all forms of work outweigh the risks. Other principles entail enhancing the fairness between diverse groups of benefit recipients and the taxpayer. A Universal Credit (UC) can be considered as a new approach to supporting working-age households. Universal Credit utilizes recommendations from several organizations by combining elements of the present income-related benefits and Tax Credit systems, combining out-of-work with in-work support, and supplementing household earnings via credit payments (Great Britain 2010, p.8). Universal Credit system removes much of the complexity that weighs down the present welfare system. The key aims of UC are: 1) to reduce worklessness, incentivise work and personal responsibility; 2) simplify the application process; and, 3) tackle the spiralling cost of the benefits system. Universal Credit-Outline structure For individuals who are not working, the system would integrate a collection of existing benefits and Tax Credits into a solitary payment (Great Britain 2010, p.6). The amount received would hinge on needs, as well as circumstance. Universal Credit could entail elements of support, as suitable: additional aid for families in place of Child Tax Credit; aid with mortgage interest and other housing costs presently available via those benefits (HM Revenue & Customs 2010, p.4). Disregards and Tapers The response to the highlighted problem of poor work incentives and uncertainty making individuals feel that it is inconsequential to take a job or to enhance their hours. To enhance incentives to work (especially for low earners), individuals entering work would view no reduction within their Universal Credit till they attain a certain level. To enhance the incentive to earn more, the system might entail applying a single taper to minimize the Universal Credit in cases where earnings surpass the level of earnings disregard. A single unified taper would retain a set of benefits mirroring the notion that families need support for diverse reasons (Macleavy 2011, p.355). As such, out-of-work benefits and the Tax Credits would be retained. Single Working age Benefit This concept represents a simpler flat rate benefit that grants all working age claimants the same level of replacement income, irrespective of whether they were lone parents, sick, disabled, or jobseekers. The other core features entail: a universal non-means-tested entitlement for the initial 12 weeks out of work, the option of individualized entitlement for couples, and no contributory entitlement. The universal credit system is envisaged to enhance work incentives by guaranteeing that support is kept at a consistent as individuals return to work and enhance their working hours and earnings. Universal Credit is also likely to remove distortions within the current system that tend to over-reward individuals working a certain number of hours, which may not suit them or the employers. The proposed system will guarantee that all amounts of work rendered will be more financially rewarding compared to inactivity, and eradicate the present barriers to small amounts of work. The review also calls for integration of diverse benefits and tax credits in order to enhance administration, take-up, transparency, and facilitate coherent design and salience. The aim of the reform is to guarantee that work is rewarded, which is highly likely to deliver cost savings in the medium term via reduced levels of worklessness. Moreover, heralding tax credits within a single benefit system would yield to administrative efficiencies, and simplification is likely to provide a window for significant on-going savings through reduction in fraud and error administration of costs. Criticism to the Proposed Changes to the UK Benefits and Welfare System Most experts welcome the thorough analysis of the present system as presented in the 21st century Welfare, and are satisfied that they mirror numerous of the challenges linked to the current system. As such, experts support the direction of welfare reform and the intentions directed at making the benefit system simpler and clearer for claimants, and make work pay (Great Britain July 2010, p.17). Based on the government’s drive to reduce costs, majority of people are satisfied with the resolve to support citizens in the most vulnerable circumstances unconditionally. Nevertheless, evidence generated from the recently introduced employment, and support allowance generates significant concerns, especially regarding how this support will be guaranteed. Some quarters such as Citizen Advice Bureau have expressed their desire to see more articulated appreciation that, a majority of individuals dependent on the state do so for lack of other means of support. As such, they argue that the need for benefit should not be automatically judged in a negative light and that a further aim of the reform should be to alter the social attitudes of individuals who need aid from the state. Critics also fault the projected assertions that financial incentive is the sole consideration in individuals’ decisions to pursue, or enhance their work hours since practical logistics and the influence of administrative factors are equally significant. Critics point out that, although the complexity of the system is perennial, the changes advertised as simplifications may yield greater complexity (Great Britain Nov. 2010, p.3). The critics point out that the complexities of the welfare system increase, rather than diminish, and urge that the opportunity for real simplification still remains. Critics also fault that some of the principles for reform by pointing that, although some of the principles are welcome such as work pay and tackling poverty, it is hard to subscribe to the full list unconditionally owing to ambiguities of terms such as “fairness between recipients and taxpayers.” The critics also question the assumptions that underlie “affordable” relative to benefit and tax credit costs. Critics calls for a re-look into a number of issues that ought to be addresses as the proposals are developed, namely: costs of childcare, second earner outcomes, implications for a number of pensioners, administrative details incorporating IT systems, information and advice. There are numerous aspects of the 21st Century Welfare paper that many people endorse. Most people concur that the presented principles, if well implemented, could enhance the welfare system plus the life of majority of welfare recipients. This could be attained via the provision of financial benefits to those individuals experiencing in-work poverty by cutting household and child poverty rates and enhancing the tools employed to administer benefits and welfare, and minimizing error, fraud, and delays (Great Britain Nov. 2010, p.4). Nevertheless, some critics do not believe that all the principles and models presented in the paper would effectively guide reform in a manner that would enhance engagement with employment, minimize the benefit commitments and guarantee the provision of sufficient support for vulnerable individuals within the society. Some of groups such as the Wise Group believe that reform of the administration of benefits is likely to be beneficial to claimants and to the attainment of the government’s internal savings. They also hail the simplification of the benefit system and enhancements to the communication and accessibility between recipients and the state (Great Britain 2011, p.161). They also argue that the proposals awards limited consideration at reducing in-work poverty, and recommend that any benefit reforms should actively seek to minimize poverty and inequality for individuals, and households within lowly paid employment and/or unsecured employment. As such, the models presented in the paper “21st Century Welfare” are considered as useful for instigating discussion, but not as useful for assessing the impact on many benefit recipients (Great Britain July 2010, p.18). However, research from various sources into employment programmes has not adequately highlighted sanctioning and the threat of sanctioning as pertinent in enhancing the move from out of work benefits into the labour markets. Conclusions Overall, there is considerable support among service users and stakeholder organizations for the principles of reform. The hope for a simplified system that avails improved work incentives has been welcomed by many, and perceived as a positive change that is likely to address some of the critical flaws within the present system. Nevertheless, concerns have been raised detailing that, during the process of designing Universal Credit, incremental decisions on diverse elements to benefit reform may considerably minimize the proposed simplification and enhanced work incentives. References List Auerbach, A. (2012). The Mirrlees Review: A U.S. perspective, National Tax Journal 65 (2), pp.685-708. Brewer, M. (2010). 21st Century Welfare: Commentary on, and response to, government’s consultation on welfare reform, London, Institute for Fiscal Studies. pp.5-10. Great Britain (2011). White paper on universal credit: oral and written evidence. London, Stationery Office. PP.161. Great Britain (July, 2010). 21st Century Welfare, Norwich, TSO. pp.7-20. Great Britain (Nov, 2010). Consultation responses to 21st century welfare, Norwich, TSO. pp.3-5. www.dwp.gov.uk/consultations/2010/21st-century-welfare Great Britain. (Nov, 2010). Universal credit: welfare that works, Norwich, TSO. pp.6-20. HM Revenue & Customs (2010). Child and Working Tax Credits: Error and Fraud Statistics 2010-11, London, HM Revenue & Customs Press. pp.3-4. Holden, C., Kilkey, M., & Ramia, G. (2011). Analysis and debate in social policy, 2011. Bristol, Policy Press. pp.157. Macleavy, J. (2011). A ‘new politics’ of austerity, workfare and gender? The UK coalition government’s welfare proposals, Cambridge Journal of Regions, Economy and Society 4 (3), pp.355-367. Meghir, C. & Philips, D. (2008). Labour supply and taxes, Oxford, Oxford University Press. pp.3-6. www.ifs.org.uk/mirrleesreview Mirrlees, J, et al. (2010). Dimensions of Tax Design: The Mirrlees Review, Oxford University Press for Institute for Fiscal Studies, Oxford. pp.2-4. Yeandle, S. (2009). Policy for a change: local labour market analysis and gender equality. Bristol, UK, Policy. PP.22. Read More