Making sure it always pays to work is political motherhood and apple pie: something so obvious it’s barely worth saying. Odd, then, that last week when Kemi Badenoch suggested changing childcare rules which leave successful parents facing crazy 100%-plus tax rates if they earn more than £100,000, she faced a barrage of criticism.
The critics weren’t claiming her logic was wrong. No-one seriously believes that sky-high tax and benefits withdrawals encourage anyone to work hard. It’s the reason why our top income tax rate is 45% rather than anything higher, and why no chancellor has raised it for decades.
Some benefits have hidden cut-offs where getting a promotion or working a few hours overtime can mean claimants cross hard-to-spot lines where the system suddenly takes away big chunks of help
Instead, the naysayers argued she shouldn’t have started with high-paid people, but focused on the less well-off instead. There are plenty more tax and benefit cliff edges that wreck work incentives for lower-paid people too but, while they’re all bad, the £100k cliff edge is the steepest of all. And inflation is pushing thousands more people towards it every year.
So Badenoch is fixing the worst example first, but of course she shouldn’t stop there. Those other cliff edges may not be quite as steep, but they affect more people. Lower-paid households on housing benefit and Universal Credit can easily face combined tax and benefit withdrawal rates of 70p in every extra pound they earn. Why should we expect a benefit claimant earning £15k to react differently to bad work incentives than their better-paid neighbour on £60k? They’re poor, not stupid.
The damage doesn’t stop there. Some benefits have hidden cut-offs where getting a promotion or working a few hours overtime can mean claimants cross hard-to-spot lines where the system suddenly takes away big chunks of help. That unpredictability makes working harder scary, which cuts incentives still further.
How can we deliver political motherhood and apple pie, by making sure it always pays to work? Step one is to abolish all those complicated benefits cut-offs and cliff edges, replacing them with a single, simple combined rate of income taxes and benefits withdrawals that’s capped so it never goes higher than the top rate of income tax. It would apply to all income from work and, once claimants had repaid all their benefits including the value of ‘in-kind’ or ‘passported’ benefits like Motability, Warm Home Discount or discounted housing, they would only pay normal income taxes after that.
It would mean that someone getting £8k state benefits who worked full time at the minimum wage would repay everything they’d claimed each year, and always be much better off working too.
The effects would be electric. Millions of low-paid benefits claimants would suddenly have the same strong, simple and predictable incentives to work as Britain’s top earners, so everyone would know that getting promoted or working a little overtime will always pay, no matter how much they’re getting at the moment. All the complicated, expensive red tape and bureaucracy in the benefits system would be gone. It would be easier and simpler to work your way up out of poverty, we’d unlock economic growth as employers found it easier to fill entry-level jobs and Britain would be fairer because the higher-earning ‘haves’ would no longer be paying lower combined tax rates than the lower-paid ‘have nots’.
But we shouldn’t stop there. The second step should be to reform the inflexible, expensive and unsustainable childcare system that sparked this row in the first place. We should start by sweeping away today’s mountains of over-complicated rules and regulations, replacing them with a simple, cheap, Ofsted-inspected standards scheme which ensures all professional childcare settings are safe, and that any which include specialist support for disadvantaged families have to meet higher educational standards on top.
Then we should combine all the taxpayer cash which the government is already spending into a single, simple family child tax allowance for all working parents with a child under 11, for them to spend how they want. Professional childcare providers would be free to set the times, types and prices of the services they offer, and working parents would use the money from the new tax allowance to pay for them directly. If parents want to provide care themselves while working part time, or to get help from relatives, they will be able to spend the money on other young family costs instead. Parents with multiple children under 11 would get larger allowances, while funding and commissioning of early years interventions for disadvantaged families wouldn’t change.
The transformation would be prompt and profound. Childcare providers would be able to offer more care at different times of day, and on different days of the week, than today’s inflexible and mainly school hours services. There’d be a wider range of cheaper care, alongside specialist support for disadvantaged families too. Parents would suddenly find it was miles easier and more affordable to work a few extra hours overtime, apply for promotion, or move to a better-paid job. Life chances would improve, gender pay gaps would shrivel and glass ceilings would shatter.
Badenoch has taken a valuable, vital first step on what could and should be a much longer journey to make sure it always pays to work. This is the map for the rest of her route.
This article is the latest in the fortnightly ‘Small State Initiative’ series of policy proposals for CapX from John Penrose and the Centre for Small State Conservatives.
If you like this idea, you’ll find more details, soundbites and rebuttals about it under Making Work Pay and AffordableChil;dcare in the Policy Thumbnail section of our website
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