Alternatives to the BI+FT

Various parties (the LibDems, UKIP and BNP, at least) argue for an increase in the income-tax personal allowance to address the same issue that we aim to address with the BI+FT. The LibDems, for instance, propose to increase the personal allowance from its current £6,500 (or so) to £10,000, so you only pay tax on taxable income of over £10,000.

A higher personal allowance would be a positive move, though an expensive one (the LibDems acknowledge that it would cost around £17bn/year, which will therefore either require higher taxes, balancing cuts, or a further exacerbation of our massive deficit). There is no Laffer-Curve benefit (of increased revenues due to increased compliance), because the beneficiaries would be paying a rate of 0%, which yields no revenue.

A personal allowance of £10,000 would reduce the amount of effective income tax that everyone pays. Those earning between around £6,000 and £43,000 would take home roughly £700/year more. This then increases to around £1,400/year for those earning over £48,000 (roughly).

Disincentive to work not much reduced

However, the effect on the marginal effective rate (MER) of tax is less significant. To recap, the MER is the additional amount of income that someone has to spend for each additional pound that they earn. It is affected not only by the tax paid, but also by withdrawal of means-tested benefits, which effectively act as a tax. It is the most significant factor in the incentive to work (if you don't keep much of any extra that you earn, why would you bother doing more work?).

Under our current system, the MER is 70% or higher for many low-to-middle earners. So for each extra pound paid to many people earning between (roughly) £6,000 and £40,000, they keep only 30 pence.

A higher personal allowance has little impact on this MER. The biggest factors in such a high MER are the basic rate of income tax (20%), the basic rate of employees' National Insurance (11%) and the rate of withdrawal of significant means-tested benefits, such as Tax Credits and the Pension Credit (39-40%). The combination adds up to around 70%. Some benefits (e.g. Jobseekers Allowance) are even withdrawn at 100% (i.e. they take away a pound of benefit for each pound of additional earnings), so that someone taking a job gains absolutely no income from doing so. Our proposals would eliminate these major disincentives. None of the parties who have proposed a higher personal allowance, or indeed any other mainstream party, has proposed any significant way to reduce the MER, and therefore to reduce the massive disincentives to work in our economy.

These disincentives are a primary reason why it is not practical for British citizens to take low-paying and seasonal jobs, forcing employers to turn to immigrants, and increasing social tensions. BI+FT (+ abolition of the minimum wage) would directly address the reasons that resentment against immigrants is brewing. No other party (including the BNP) acknowledges, let alone addresses this problem. We are the only party with a practical proposal that will get British people back into work without spurious promises on training, job-creation, and immigration controls.

Carers and stay-at-home parents penalised

A high personal allowance also has another unintended consequence. The personal allowance is the main cause of the unequal tax treatment of stay-at-home parents and carers. In households with two or more adults, if each adult works, each person can make use of their personal allowance. If one or more adult does not work, the benefit of the personal allowance is lost. Increasing the personal allowance only increases the penalisation of those households where an adult stays at home to care for children or disabled relatives.

For example, consider two households: A where both adults go out to work for £25,000/year, and B where one adult goes out to work for £50,000 per year, while the other stays at home to look after dependants. The households' combined earnings are the same: £50,000/year. But, with a personal allowance of £10,000, household A will only pay £6,000/year of tax, whereas household B will pay around £8,500 of tax. This is a strong disincentive for people to look after their own dependants.

Under the BI+FT, both households would pay exactly the same amount of tax. It would be a purely personal decision, unaffected by perverse incentives created by well-intentioned but misconceived government interventions.