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Comment by SilasX | Hacker News Reader

Relatedly, I learned about Universal Credit, an attempt by the UK to merge all their social benefits into one coherent system, and it seems like the cliff problem here is worse. From the BBC description:

https://www.bbc.com/news/uk-41487126

>Under the old system many faced a "cliff edge", where people on a low income would lose a big chunk of their benefits in one go as soon as they started working more than 16 hours.

>In the new system, benefit payments are reduced at a consistent rate as income and earnings increase - for every extra £1 you earn after tax, you will lose 63p in benefits.

In other words, after fixing the cliffs of the system, you would "only" face a 63% effective tax rate for working more. So whatever system they have no is even more discouraging. (That understates it because it's phrased post-tax; including a positive income tax, the total effective tax is even more!)

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I think you have misread or misunderstood this.

Under the old system, it was possible to take a job, and then have less actual income than you did before.

Under the new system, _every_ extra hour of work you do causes you to have more money in your pocket, and you are always incentivized to do more work, or start a job that pays less now but might pay more as your experience grows.

I'm not sure how else you'd want this to be designed.

My point was that 63% is still very bad, and if it’s supposed to be an improvement, then the existing system is abysmal from an incentive perspective.

It's not 63%, it's a reduction of £0.63 in benefits (not in your total income) for each extra dollar you earn in income over the cutoff level.

This prevents situations where it's better to stay under a cutoff of X in income until you can jump straight to an income of X income + Y in benefits, while staying on benefits until then.

Surely if benefits are part of your income, a £0.63 reduction in your benefits is a £0.63 reduction in your total income (up until the benefits are zero)? In other words, an effective tax rate of 63% on earnings while you receive a nonzero amount of benefits?

How else would you see this working, exactly? You've got to make sure people who need the benefits and can't work get supported, you need to not discourage people from working (and most people _do_ want to work), and you also can't just (afford to) unilaterally extend benefits to a whole bunch of people who don't currently get them.

So, concrete proposal on how you'd structure this?

The exact same way as the new system, except instead of 63% it's a much smaller number.

Edit: Why are people downvoting this?

I don't understand what's so confusing about SilasX's argument.

Removing cliffs and changing it to a smooth dropoff is good.

But that dropoff doesn't have to be £.63 in benefits per £1 earned. That's a pretty big effective marginal tax rate! Why not £.50 or £.30?

It should be extremely easy to understand how this proposal works, right?

It would technically bring more people into the system, but they'd be at the top end, and therefore only be receiving a small fraction of the current levels of benefits. It's totally doable.

> The exact same way as the new system, except instead of 63% it's a much smaller number.

If it's less than 63%, you "unilaterally extend benefits to a whole bunch of people who don't currently get them".

Let's say benefits for the unemployed are £1,000 a month (chosen to be an easy number to work with). You lose 63p of benefits per extra pound you earn. The government gives you (some) benefits up to the first £1,587 you earn. If you go to 50%, the government gives people earning up to £2,000 a month benefits, and so on, which probably includes a bunch of people who don't currently get any.

You can't change 63% without either paying much more in the way of benefits overall, or without reducing the benefits of those who can't do any work.

> It would technically bring more people into the system, but they'd be at the top end, and therefore only be receiving a small fraction of the current levels of benefits

That's not how the maths works. Assuming an even distribution of people at each wage level, changing this to 30% effectively doubles overall spend.

The people making between £1,587 and £2,000 are getting £206 or less though. That's not an unsolvable expansion, especially because those people probably do in fact need the help.

> That's not an unsolvable expansion

So your solution is "spend a lot of extra money on social security", which is fine, but it doesn't satisfy the constraints.

You said you didn't want to "unilaterally extend benefits to a whole bunch of people", not that the cost couldn't increase even the tiniest amount.

But even so, smoothing out the curve some might be better overall even if the max amount drops.

Also you could extend the curve so that 'benefits' go negative at the high end. Now your budget is fine...

Your plan both massively increases the number of people on benefits and also increases costs by 20% on your 50% proposal, which in the UK means £15b-ish. Reconciling this with "even the tiniest amount" is impossible.

> Also you could extend the curve so that 'benefits' go negative at the high end

You've just invented tax, congratulations.

> massively increases the number of people on benefits

You have a very different definition of 'massively' than I do.

> You've just invented tax, congratulations.

Positive taxes can balance out negative taxes, ~tada~.

Dylan, just note that the problem as originally posed is not solvable. Your „solution“ is one that violates one of the constraints and then says „but it’s minimal“. Sure. But that was exactly the point of the comment above: by the nature of things, any change you make leads to an undesirable consequence. Either people who need the benefits don’t get them, or the „marginal tax rate“ is very high, or you extend the benefits to more people (which is costly). You’re stuck on the horns of a trilemma, and that’s the solution the UK has chosen, and any „improvement“ you suggest will be worse on at least one of the dimensions.

> Dylan, just note that the problem as originally posed is not solvable.

The original constraint was not a $0 increase. I did not violate the original constraint.

And even if you did take it to be $0, it said you can't "just afford to" increase. Proposing a tax to make up the difference meets that critera.

But even inside a hard "no more spending" constraint, it's not nearly as unsolvable as you make it out to be. It's quite possible that giving less money to people mildly below the old cliff edge, while giving more money to people mildly above it, is a net positive. That doesn't screw over people at the bottom, and it doesn't increase total cost.

Going from a hard cliff to a 90% marginal rate was obviously better, right? And going from 90% marginal rate to 85% was obviously better, right? They decided to stop at 63%. It doesn't mean that going further is a priori wrong.

And on top of all of that, smoothing out the curve to 50% very likely motivates more people in the range to work, reducing the amount of benefits they use.

I totally agree, but I just realised -- there’s another cliff edge here!

I surveyed opinions on tax brackets a while back, and it seemed like there was a big psychological barrier at the 50% rate.

Most high earners would be willing to pay a 50% marginal tax rate (albeit some very grudgingly) but almost nobody was willing to go over 50%.

What’s good enough for the rich should do for the poor as well. The benefit drop off rate (effectively a marginal tax rate) should be 50% at the very most.

“For each dollar earned, I get to keep more than I give away in tax/benefits” is a cliff edge, but I think a reasonably justifiable one.

In the UK there's already a higher-than-50% marginal tax rate between £100 and £120k because you lose your personal tax allowance.

It's over 50% at £50k if you have a plan 2 student loan

Yes! That’s silly and should be fixed (although it’s hard to drum up any sympathy for those poor folks earning only 110K or so).

Edit to clarify: if your salary is £100K and you get a £10K raise, you see almost none of it in your payslip. But if you’re on £120K and get the same raise you get to take a good chunk of it home. That’s what seems silly to me.

What does 'willing to pay' mean, exactly? Surely they're not turning down a raise out of stubbornness. And pay of that caliber is not often hourly.

This was in the context of a political discussion about what the tax bands should be, not about paying the current taxes in reality.

Some people want higher taxes and some want lower; what I’m saying is, 50% stood out as an arbitrary threshold that many people seemed possibly willing to agree on.

Some complained that rich people shouldn’t be expected to prop up the rest of society, but conceded that progressive tax bands might be okay as long as the top rate was no more than 50%. Others felt that highly progressive taxes were essential; they wanted at least 50% as the top rate.

Tax rates dont pay for services, they pay for preventing inflation. The government printing money pays for services.

Tax rates dont pay for services

What are you replying to?

You are being needlessly contrarian.

Fiscal policy comprises both borrowing and taxing; the two are fungible as far as spending is concerned.

The government can only effectively print money to the extent that they can convince bond purchasers that taxes will be collected in the future.

They might accept the raise and try to work less hours to keep the total similar. Or it works as an incentive to start finding ways to pay less taxes, out of a notion of fairness.

They're being paid hourly? How many people making six figures are paid hourly, and what kinds of job do they do?

To be clear, I easily understand how a high marginal rate is demoralizing and unfair at the low end. I'm not convinced it's a problem if tax brackets at the high end go to some number above 50%.

Consultants and professionals who serve the public charge hourly.

I loathe Universal Credit.

This 63% thing is the replacement for "working tax credits" -- it's a top-up of wages for people on low paid work. People get their wages, and then on top of that they get extra money.

In the past this would have been working tax credits.

The advantages are that claimants do not need to ask for permission before starting work. They can just do the work and then declare it. The disadvantages are that the system can't cope well with zero-hour contracts or self-employment, and this is leaving people in severe financial hardship.

The drop off corresponds to the benefit. If you reduce the amount less you make from making more money, you are reducing the benefit people are getting.

As an example, you can reword this just as accurately to say that for every dollar less the person makes, they actually only make $0.27 less because benefits kick in for $0.63 of it. You can reduce that 63%, but when phrased that way, do you want to?

I have a hard time following this argument. It's not a tax, it's a limit to benefits. If the government comes along and says

> You need $30,000 / year to live at a minimum in our society. We will make sure everyone that makes less than that gets enough in benefits to make up the difference.

That's not a 100% tax rate for any money earned under $30,000 / year. It's reduced benefits because the definitions of the system (the minimum amount needed to survive) indicate the system only needs to make sure everyone is at a specific minimum level.

You can argue that working costs money (transportation, child care, clothing, etc), and that's a valid argument against working if the amount you make would mean you wind up with less money available for other things.

However, it's still not a tax. It's a limitation in the analysis of cost of living requirements. Calling it a tax is disingenuous.

It behaves the same way from the perspective of the worker. For every hour I work of a minimum wage job, I see an increase to my spending abilities of 35% of minimum wage or whatever. It's only not a tax technically, but it still cuts into your direct benefit from working exactly like a tax.

> It's only not a tax technically

In the same way that any benefit program being cancelled (eg. movies for kids for free every Friday on the town green, etc) are stealing.

It's a benefit that had some or all of it taken away.

If it's part of your pay structure, and then suddenly it's not given to you, that would be stealing.

It's a benefit provided by the taxes of all. It's not part of your pay structure.

Then remove the word “tax” from my point and rephrase it as “only capturing (less than) 37% of the wage”, and every relevant point still applies. If you still don’t see the significance, I can only blame underpractice at the skill of abstraction.

(I mean, if you don’t like the framing, fine, but you specifically said you have a “hard time following” the argument.)

> Then remove the word “tax” from my point and rephrase it as “only capturing (less than) 37% of the wage”

My problem is that I don't see it as capturing less of the wage, I see it as being granted less of the benefit / social safety net.

When you don't make enough money to support yourself, society kicks and and gives you enough so that you're ok (you meet some defined minimum). As you earn more, you need less support from society to be meet that minimum, so you're given less.

Eventually, you get to the point where you meet the minimum without assistance from society. At that point, the benefit is no longer needed (by the definition of the program).

At no point are the benefits your earnings, and at no point are your earnings being taken away by the less of the benefit. Rather, you're just not being assisted by society anymore because you don't need that assistance.

If the recipient of those benefits can't see that and, instead, sees them as "this is mine and you're taking it away", then I argue that's a problem with recipient. They are wrong. They should be happy the benefit was there for them when they did need it... and that it will be there some someone else when they need it. That is the point of social safety nets.

Now, I get that there's some "emotional attachment" to getting the money and then not getting because (as the recipient sees it) they're working (which is wrong; as noted, they're getting less because they need less, period). As such, reducing the benefits amount by a percentage less than 100% of earned ways helps mitigate those feelings. But at some point, the benefit must go away; it's not UBI. The rate at which it goes away is not going to make everyone happy, no matter what is done (that's the nature of compromise).

"My point was that 63% is still very bad, and if it’s supposed to be an improvement, then the existing system is abysmal from an incentive perspective."

This is fascinating.

There is an entirely separate debate about tax rates and incentives for high income tax payers wherein it is suggested that marginal income tax rates almost identical to the 63% you are speaking of are fair, equitable, common-sensible and could not possibly deter earners from pursuing extra marginal dollars.

I have no comment to make about either debate.

I simply find it fascinating that an exactly opposite conclusion is made depending on the subject involved ...

I think 63% marginal tax rates for high earners are stupid too, and their proponents similarly mistaken. So I haven’t changed my opinion based on the context and am not responsible for such advocates.

With this system you're guaranteed to never end up with less total money than you started with by getting a better-paying job, which makes it definitionally not a cliff. It's just a gradual reduction in benefits as you earn more.

It’s not a cliff and sounds like a step in the right direction, but it’s still effectively a 63%+whatever marginal tax rate.

I can’t remember the exact benefit numbers (they might overlap with National Insurance) but you don’t pay income tax until you’re earning over £11,000 so you shouldn’t pay marginal tax while on benefits.

Losing benefits as you make more money has the same effect as being taxed on that marginal income.

I don’t dispute that at all, I’m just saying the marginal tax brackets themselves don’t kick in until later.

The purpose of universal credit was not to solve any particular problem - it was to give conservative politicians something to say when their voters demanded something must be done [about people on benefits].

The world makes a lot more sense when you realise that laws and regulations are primarily conceived and constructed to keep incumbents in power. Maybe we should vote in our representatives for life then they'd actually have to focus on making things better.

If the system incentivizes capable people not to work and just live off taxes, that should be corrected.

That's a bit shortsighted. There are many valuable types of "work" in society that are not rewarded monetarily. Take for example, child rearing, community building, or caring for elderly/disabled/homeless people.

Should "the system" really push capable people into valueless jobs at the cost of meaningful jobs that have no monetary value?

If there is a deliberate policy decision to penalize someone for working on the grounds that "hey you would do better as a stay-at-home mom", that would be one thing; it would at least have some consistent internal logic to it.

But I don't think the UK's or US's systems are like that; they just got hobbled together by being pushed in different directions by various groups with conflicting desiderata that combined to produce ridiculous incentives, and those incentives should be corrected.

Moreover, to the extent that valueless jobs and valuable non-monetary jobs exist and can be identified, the proper response is to explicitly target them (either with penalties or subsidies), not just allow anti-market-labor incentives to exist because "hey, not every job is worth doing, you know?"

>The purpose of universal credit was not to solve any particular problem - it was to give conservative politicians something to say when their voters demanded something must be done [about people on benefits].

It's both.

The idea of Universal Credit is a good one - it rationalised dozens of benefits into one programme.

Unfortunately the implementation is - because Tories - a terrible system that causes more problems than it solves.

But no one involved in creating universal credit did so for any other reason than as an excuse to cut the number of people who are eligible.

63% is not necessarily so bad. Income tax rates for the well off went as high as 95% at some points in UK history, and those do not seem to have been disastrous (indeed they seem to be some of the country's finest years).

And beyond that you're letting perfect be the enemy of good here. Eliminating the cliffs and capping the marginal tax rate of the poor at 63% is valuable progress. If you want things to get better you should celebrate the small victories, not treat them as an opportunity to complain more.

As the reduction applies only to the benefits (not to your income), it's just a smooth reduction in benefits as you earn more money, not a tax.

Money is fungible. If a salary increase of $1 leaves you with 37c in your pocket that's a de facto 63% marginal tax rate, however it happens to be structured for accounting purposes.

The salary increase of £1 leaves you with £1.37, because you get the £1 wage plus £0.37 benefits.

I don't understand how this got downvoted, because it's literally what happens.

Universal credit replaces a wide range of legacy benefits. One of the legacy benefits it replaces is "working tax credits". These were payments made to people who were working and on a low income.

This part of Universal Credit "tops up" your earnings from work. They are in addition to your earnings. is.

When someone on UC starts working they get their pay from work, and on top of that they get their their universal credit minus 63 pence per pound that they earn from work.

In the past if you did more than 16 hours of work in a week all your benefit would stop, but under UC you can work over 16 hours in a week and keep the money.

Universal Credit work allowances: https://www.gov.uk/government/publications/universal-credit-...

What the earnings taper is and how this affects Universal Credit: https://www.entitledto.co.uk/help/Earnings-taper-Universal-C...

How your earnings affect payments: https://www.gov.uk/universal-credit/how-your-earnings-affect...

No, because in this setting your original take home was £1.00.

To lay it out in numbers:

BEFORE £1 pay increase: £X earnings, £Y benefits

AFTER £1 pay increase: £X + 1 earnings, £Y - 0.63 benefits

DIFFERENCE: £0.37

So a pay increase of £1 leaves you with an actual total increase of £0.37. This corresponds to an effective tax rate of £0.63.

Bringing up the marginal tax rates of the rich is a pretty weak defense of a >50% marginal rate for someone on welfare.

Yes, it's 'valuable progress'.

That doesn't mean complaints are invalid, or "letting perfect be the enemy of good". What a rubbish accusation. You're only letting perfect be the enemy of good when you use a problem as a reason to impede the weaker solution. This is a comment hoping for better. Don't shame that!

> You're only letting perfect be the enemy of good when you use a problem as a reason to impede the weaker solution.

If your response to the weak solution is to talk about how bad it is, you're setting the wrong incentives.

The universal credits in the uk where setup by a conservative government thats obsessed with austerity.

The intent was to cut the funding to benefits disguised as a new system.

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