Sunday, 20 May 2012

Sunday, May 20, 2012 Posted by Jake 32 comments Labels: , , , , ,
Posted by Jake on Sunday, May 20, 2012 with 32 comments | Labels: , , , , ,

Who do benefits really benefit? 

There is a general misconception that benefits are simply handouts to the poor. A misconception abused by drum banging politicians promising to starve the “work-shy” back into jobs. They hope to drum up votes by cutting benefit claimants' incomes and booting them out of the more desirable residential areas, with the collateral benefits of lower taxes and posher neighbours for the working man and woman.

The reality is benefits are just as much a subsidy to businesses:
a)      Businesses are able to pay lower wages, which are then topped up by the benefits system.
b)      Businesses are able to raise prices on the better paid majority of Ripped-Off Britons, knowing that the minority on benefits won’t be pushed into the disruptive behaviour of the desperate. It avoids untidy stuff like living on the streets, shop-lifting, and general misappropriation of unaffordable goods and services.

In short, the benefits system holds the heads of the poorest above water so the rest of us can get a soaking. It boosts profit margins with higher prices and lower wages, and in addition maintaining labour flexibility by keeping a pool of the willing but unemployed subsisting on the reserves bench. 

Sure, there are undoubtedly many benefits cheats. But the only people who get rich on benefits are employers paying lower wages and landlords charging higher rents.

The evidence for this can be seen in the marginal tax/deduction rates of those on benefits. In plain English – my ‘marginal tax/deduction rate’ is the percentage of the last pound I receive that is taken away by the government. It's taken either as taxes, or as deductions in the money I receive in the form of benefits and credits.

For example in 2012-13 tax year:

  • For an individual earning the moderate salary of £25,000 per year, the tax on the 25,001th pound would be 20% (income tax) + 12% (NI Class1 contribution).
    • A marginal tax/deduction rate of 32% means he pockets 68p in the pound.
  • An individual earning £200,000 per year, the tax on the 200,001th pound would be 45% (income tax) + 2% (NI Class1 contribution, which is only 2% on the portion of salary above £42,475 per year).
    • A marginal tax/deduction rate of 47% means she pockets 53p in the pound.
If that sounds a bit steep, consider a single parent with two children, working 30 hours a week earning the National Minimum Wage.
  • National Minimum Wage pays about £9,120 per year (assuming 50 weeks work a year at £182 per week). For the 9,121th pound, taking into account withdrawal of benefits, she pays a marginal tax/deduction rate of 95.5%
    • A marginal tax/deduction rate of 95% means she pockets 5p in the pound.
This graph, provided by the Excel spreadsheet wizards at the Department for Work and Pensions, is an excellent depiction of how benefits are withdrawn as employment income increases. Benefits are withdrawn at close to the rate employment earnings increase, leaving the individual little better off by getting a job.

In terms of marginal tax/deduction rate, the graph looks like this:

Spiking at times above 100%, this low paid person has to earn about £40,000 before his marginal rate drops below 47%, the amount paid by the earnings elite who earn above £200,000 per year.

It all makes one wonder why governments of all complexions are convinced that to incentivise the wealthy they need to be given more, and to incentivise the poor they need to be given less.

And by the way, government figures reveal that the number of benefits cheats is wildly exceeded by the number of those who don't claim the benefits they are entitled to. DWP figures published in 2010 indicate £1 billion of benefits pinched due to fraud, and upto £12.7 billion saved because those entitled did not make claims.

Department of Works and Pensions, research published in June 2010.


  1. Sadly the excellent spreadsheet used in this post is no longer produced by the Department of Works and Pensions. They had a consultation end of 2010, to which nobody responded - which they construed to be a sufficient lack of interest to stop producing the data. Alas!

  2. Nothing concerning the benefits system in the UK surprises me.

  3. incredible. but as daniel says, not surprising.

  4. I don't get how you can include withdrawal of benefits in the 30 Hours NMW example and not include the fact that other two examples have to pay living costs out of there wages.

  5. If 2 people work next to each other every day earning the same wage, should one pay less tax (or continue to receive benefits) simply because they previously had to make use of the safety net?

  6. Reported in the Guardian: National Housing Federation say by next election one million working people will depend on housing benefit to afford rent. In May 2012 there were 903,440 working recipients of housing benefits – more than double the figure for November 2008 and a jump that signifies an alarming rise in in-work poverty.

    An example of how benefits enable business to pay low wages by providing a housing subsidy.

  7. Great article, but you know it gets worse. How much tax is then paid from Net income; Vat, insurance premium tax, road tax, fuel tax @75% approx. What do they do with it all. System is so inefficient and fueled by self interest - MPs expenses, you know how the rest goes

  8. Sadly not been updated to take account of the extra 9% taxes most ex students have to pay on top of everything else, and the 74 - 100% marginal tax rate for high rate tax payers losing child benefit. And the dual effect of being a ex graduate having both extra 9% tax and losing child benefit too, for a large family would push the marginal tax rate over 100%

  9. Within reason benefit claimants money just gets recycled back into the system so there could be a case for saying it doesnt cost uk anything to pay benefits. If youre on low income all your money goes on utilities, food, vat, rent. If govt sells off everything overseas then that benefit cash follows it.

    1. Exactly. The worst things for our economy are major business i.e. Apple, Starbucks, Walmart... siphoning off money to pay its ceo's in other countries.

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