Universal Credit ensures that everyone is better off working than staying on benefits. Other welfare reforms and the increase in the threshold for income tax have also helped make that a reality. This is an important Conservative achievement. Under the Labour Government many were trapped on welfare – they were faced with the prospect of losing money if they took a job.
However the incentive remains too modest. The “taper rate” on Universal Credit was reduced last year from 65 per cent to 63 per cent. That was a welcome change but it is still pretty steep. Also income tax and – especially – National Insurance start punishing those who work even on low earnings. In this tax year anyone earning over £157 a week will be hit by National Insurance and once they earn more than £221 a week income tax kicks in. Paul Lewis has illustrated what this can mean in practice. For each extra pound earned 32p could go in tax. So that leaves them with 68p. Then the Universal Credit reduction applies. So they lose 63 per cent of that 68p. That leaves them with 25p.
Little enough, but that is not the end of the story. At that point another “taper” rears its ugly head – for Council Tax. Usually this is 20 per cent. So that means the 25p is cut to 20p.
The extent to which the aspirations of the poor are clobbered by this Council Tax payment varies. The principle of localism applies. Different councils vary their schemes for “Council Tax Support”. I am grateful to the New Policy Institute for sending me their spreadsheet based on Freedom of Information requests which gives details for different councils. There are three councils that set a lower taper, each of 15 per cent. All three are Conservative councils – they are Wiltshire, Mid Sussex and Brentwood. So in those areas the reward for working is increased.
However I am afraid that several other councils set a taper above 20 per cent. In London those that do so are Lambeth (25 per cent) and Brent, Harrow and Waltham Forest (all at 30 per cent).
Surely the Laffer Curve applies to the poor as well as the rich? Also welfare payments have an impact just as tax does. The higher the taper the more damaging it is.
Labour politicians are quick to attack Universal Credit and to highlight the hardship of those struggling on low pay. Yet Labour councils are making matters worse. They are penalising the poor with excessive Council Tax demands.