Unlike American proposals for welfare reform which are concerned primarily with reducing costs by altering work behavior among present recipients of public assistance, British attempts to devise an income transfer system are based on the rationale that scarce resources should be concentrated upon those in the greatest need. There is some concern about disincentive effects, particularly when people draw benefits from more than one program. This article describes the theory and operation of recent income supplement programs in Britain, the problems and anomalies of each, and the government's attempts to devise solutions. The British and American experiences are compared in the concluding section. The British interest in a reverse income tax, in common with the American interest, has been inspired by many motives. It does not appear, however, to have involved any primary concern for altering work behavior among present recipients of supplementary benefits (public assistance) by using income-conditioning of benefits as an incentive strategy. Rather, the hope has been that tax burdens and total government expenditures could be restrained through increased reliance upon selective policies. Those who could afford to pay more for the use of social services should accept higher user charges, while the poor should receive benefits based on a test of income. The underlying rationale has been that scarce resources should be concentrated upon those in greatest need. This strategy has therefore called for the gradual reduction of universal and general subsidies. The present Conservative government came to power committed to reducing taxes and raising the standards of the poorest. The The author is a Professor in the Department of Urban Studies and Planning, Massachusetts Institute of Technology, presently on leave at the Center for Environmental Studies, London. The Journal of Human Resources * VIII * Supplement This content downloaded from 157.55.39.104 on Sun, 19 Jun 2016 06:20:03 UTC All use subject to http://about.jstor.org/terms 70 | THE JOURNAL OF HUMAN RESOURCES decision to raise charges arose from both political dogma and a pledge to cut taxes. Like its predecessors, the Conservative government hoped to improve the value of cash benefits while increasing charges for services. As a result, the cost of school meals, which had been subsidized as part of a broader food subsidy, was increased. Similarly, in a major reform of housing finances, the Conservative government will increase rents in public Council housing to a level which approaches their market value. Charges in National Health Service programs for prescriptions, dental, and optical costs have also been increased. These increased costs strain the budgets of lower-income families. Therefore, special means-tested benefits, in the form of free school meals, rent rebates, or National Health Service exemptions, had to be extended to larger numbers of families to relieve the hardships that accompany the price increases in school meals, rent, and medical care. In addition to reducing general subsidies and relying upon different means tests for in-kind and earmarked programs, the government has sought a general cash supplement to aid the working poor, a group that public policy had neglected-but not altogether. One way to aid the working poor was by family allowances. A way of limiting the cost of increasing them within the framework of a universal scheme had been introduced by the Labor government. The scheme integrated any additional increases in direct expenditures for family allowances with a reduction in the value of tax exemptions for children. This system was known as claw-back. FROM CLAW-BACK TO FIS It may be useful to review briefly the operation of claw-back, because the means-tested Family Income Supplements (FIS) bill, which altogether abandoned a universal approach, emerged as a result of its limitations. Claw-back was introduced in 1968 as a way to concentrate additional benefits in family allowances selectively among the poor. It operated so that the standard-rate taxpayer, that is, a family paying 32 percent of its marginal taxable income on income tax, received virtually no benefit from these increases. At that time this included most of the British taxpaying public. This objective was accomplished by offsetting the proposed increase in family allowances with an equivalent reduction in the total personal tax allowance. In this way, the increase benefited in full those who were below the tax threshold and also benefited, at least in part, those reduced-rate taxpayers who were paying taxes below the 32 percent level. The 1968 increase of ?183 million in gross expenditures concentrated ?47 million on low income families paying below the standard rate. And much of the rest was recouped through taxation, since family allowances were subject to income tax. In 1970, when the Conservatives took office, the changes that had been This content downloaded from 157.55.39.104 on Sun, 19 Jun 2016 06:20:03 UTC All use subject to http://about.jstor.org/terms
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Sep 1, 1997
Yin-Ling Irene Wong + 2
Open Access
