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Welfare Reform on the Web (July 2007): Social security - UK

The poverty trade-off: work incentives and income redistribution in Britain

S. Adam, M. Brewer and A. Shephard

Policy Press, 2007

Two aspects of financial work incentives are important: the incentive to be in work at all, and the incentive to increase earnings. Work incentives are most weakened by the withdrawal of means-tested benefits and tax credits, not through high rates of income tax. Not all changes in work incentives arise through reforms to taxes and benefits; wage growth and rent levels are also important. However, changes to income tax, national insurance contributions, council tax, tax credits and benefits strengthened work incentives on average under the Conservatives and weakened them under New Labour. Simulations of hypothetical changes to taxes and benefits confirm that no easy solution exists to the trade-off between improving work incentives and redistributing income. Using universal benefits to redistribute income is very expensive, but using means-tested benefits damages work incentives; tax cuts improve work incentives but do little to help people on low incomes directly. Thus the government’s present strategy of cutting family poverty by increasing the child tax credit is effective in reducing poverty directly, but its indirect impact might be to increase poverty by weakening incentives for parents to work.

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