Means testing
Means testing is often suggested as a way to get the best out of a government programme: to provide targeted help, without wasting money. It crops up everywhere, for almost any new bit of expenditure. Should we cap energy bills – and can we do it only for the poor? Should we cut student loans – or can we pay fees only for the poor?
There is a legitimate fear of wasting money; no-one thinks that we should extract money from the less well-off and give it to the wealthier. Except Conservative loons, that is, who dress it up in a fog of incoherent twaddle that hides the effect of their beliefs, even from themselves. Trickle-down economics, tax cuts to incentivise investment, government support to pay businesses to do the right thing, oil and gas tax reliefs… these all give money to the wealthier.
But why should a government programme do everything at once? If we’re worried about whether government distribution is regressive, we have the perfect system for changing how much money people have: taxes. We use our tax system to set the wealth distribution; we use other policies to do other things.
It’s not hard to invent a few analogies. Imagine a cricket team which realises that it is weak at batting. Should the coach keep the line-up that is all bowlers from the squad and tell them all to do some batting practice? That seems an ideal way to lose and probably get himself fired. You get batsmen to do batting, and bowlers to do bowling, and welcome the occasional player who’s decent at both, but rarely as good as your specialists.
The same is true in rugby. If you’re losing at the ruck because you don’t have enough weight and driving power in the team, you can feed up your backs so that they’re a bit heavier and slower, but then you lose their speed in open play. You need to train up your forwards and keep the backs as good as they can be.
I know less about football, but there are strikers and defenders just the same. In a team with only one good striker you play a formation and tactics to get that player the opportunities. You don’t keep your striker in midfield and give everyone a go at playing upfield.
Back to running a country, the tax system is how we redistribute: it’s our perfect tool for this and we need no other. Making other policies try to redistribute wealth just makes them worse policies, which is helpful for those who oppose them, but entirely unnecessary.
If a policy helps the rich or high-income people (not the same thing: plenty of high income people have yet to reach the dizzying heights of the phenomenally wealthy) we could fiddle with the policy, changing it from a simple concept to a complex web of rules and regulations that define who gets how much. Or we could accept that the wealthy get that benefit and tax them more as a consequence.
For example, we might decide that we want public transport to be free. This might help poor people who need it to access jobs and other services, and it might help take cars off the road and reduce time spent paying, speeding up buses even more and reducing pollution. This would give rich people free public transport and that might seem wrong: we might want someone to deserve our help before getting it.
So we could introduce means-testing: we could ask people to show an ‘I-deserve-it’ card, a student card, or proof of being under 18, or over 65 (although plenty of rich people have been and are children, and live to be over 65); or we could issue free-travel passes and only give them to people who meet a raft of criteria, and we could employ a few clerks to process it all, and we’d not pay them much and the rules would be complex and poor people would have to spend time and effort applying through this process when they have little attention spare (if they didn’t, they probably wouldn’t be poor) and we’d have people moaning about faceless bureaucrats denying obviously needy people their rights and people moaning about cheats scamming the system because the bureaucrats aren’t checking things properly and ensuring everyone ticks all the boxes…
In the grand scheme of things, all this bureaucracy wouldn’t cost that much money. Civil servants are cheap. Free travel really adds up, just like free television licences for the elderly, or any population-wide scheme. One clerk can process a lot of applications, and each application represents dozens or hundreds of uses of the benefit. But it does still cost money, and it costs time and aggravation for people, none of whom really wants to be filling in forms. It’s important to remember that administrative cost of policies is rarely the major cost (Covid testing apps being an obvious exception); complexity is, however, a good source of fraud and error as well as being a burden on the population.
It makes far more sense to decide that good public transport is just a benefit and feature of civilised societies, and make it free for everyone. Then we don’t need to check passes when people use it; buses remain fast, a whole pointless industry is lost, and people have something to be proud of: a benefit provided to citizens, all of whom are of equal moral worth and all of whom deserve and get good services… If we believe that public transport should be free: it’s just an example.
To pay for this free service, we need money. How does government raise money? It taxes people. So we raise taxes in one way or another, and any sensible tax system taxes the rich much more than the poor, so the end result is the same: the rich pay and the poor get free transport.
Of course, you might not trust the current tax system, and therefore not want to rely on it. You might think that corporation tax should be higher, or you might think that tax on high incomes is not high enough. You might be outraged at the endless list of loopholes (‘reliefs’) that mostly rich people can use to avoid tax. Adding means testing to other policies doesn’t help. If the tax system is broken, fix it. If your batsmen are pathetic, get or train better ones: don’t ask your bowlers to give up on bowling and train to bat.
I think the logic is clear. But on top of these arguments we encounter many problems with multiple means-tested benefits, which is that the system becomes complex and has perverse effects. For example, a few years ago someone calculated that there was an earnings threshold for some couples above which they lost money because the withdrawal of a range of means-tested benefits created an effective 120% tax rate.
That was for relatively normal incomes. We see similarly silly effects for very high incomes, where the range of tax reliefs is so broad that most high earners manage to claim a few, giving them lower effective tax rates than far poorer people. People might argue that many reliefs are incentives for productive behaviour (a debateable point: many are poorly-conceived with no evidence of benefit), but if these opportunities are only available for rich people, it’s not a fair society. I will bet that £6bn of entrepreneurs’ relief would encourage more innovation if it were given out as research grants via the research councils, since the evidence suggests that it has no effect at all on start-ups. At the moment all research funding totals about £2.5bn: this is all that we dedicate to improving the lot of mankind forever. A lot of low-paid people would happily be a research technician and advance humanity if we provided an incentive (i.e. a salary).
Targeted subsidy
If people are struggling to pay energy bills it’s not actually the case that they had a pot of ‘energy money’ which they can’t change. If they had the money spare, they could use other money to pay their bills. If their energy bills came in lower, they could use their spare money on other things. The rising cost of energy has pushed their total costs above their ability to pay because they were so close to the threshold already. People are still paying other bills.
So if someone’s total cost for a basic life is too high, why would we target one of those bills in particular? It’s the total that’s the problem. We teach children that 2+2=4 ; and if you can only afford 3, you don’t blame the second 2 alone. It’s the total of four that’s too high.
I’ve already discussed making your benefit universal, using the great example of public transport. But why pick one specific benefit at all? In some cases, such as public transport, there are valid reasons: payment takes time, slowing buses down. But with energy price subsidies, there is no reason for a price limit. Why throw money at energy companies when you could give it directly to the people?
Maybe some of us could use very little energy with just a little more money to spend on jumpers, or gym membership. Other people might guzzle vast amounts of energy. A targeted subsidy helps the wasteful people the most (who tend to be the richest) and punishes anyone already being frugal: frugal people use less, and so there is less price reduction on their expenditure.
If we just gave people money – and the £100bn energy price relief announced recently translates to about £3,570 for every one of our 28m households – they could choose what to do with it. They might want to buy a few cakes from coffee shops, now able to afford the coffee shop’s higher prices. They might want to stay at home and overheat the house to tropical temperatures. Whatever it is, they get to choose, and everyone gets the relief. By choosing to make it energy-specific, we target the help to the greatest spenders, who are the people we most want to encourage to change their behaviour.
My energy bills will be about £1,000 this year. The £3,500 subsidy for every household won’t make me a profit. Even if we gave the subsidy per person (including children), it’d be over £1,000. I won’t pay £0. Who will get all that money that isn’t helping me? It won’t be the poor. It’ll be rich people burning vastly more energy than I can comprehend needing: their £10,000 bills will drop a bit more. But even if it were the poor, that’d be a silly way to redistribute wealth, as we’ve already seen: we should use taxes to redistribute.
Tax and spend should be a simple cash transfer
Overall, instead of means-testing benefits, we should give all citizens extra money and let them decide how to balance their own budgets – a free society gives people control over their own lives rather than dictating decisions to them. There will be a few exceptions, such as with buses, where removing payment entirely makes the service more efficient by saving time, or when trying to help those who can’t make decisions for themselves, such as children, as we cannot guarantee that others will prioritise the child’s interest over their own.
Every time we see an announcement of new help, and a new debate over whether it should be means-tested, everyone is wrong. There should be a universal payment to all citizens, balanced by the tax system, and set to ensure that all sources of hardship can be covered. A citizens’ dividend, we could call it. Or a universal basic income. Or negative tax rates for the poor. It is the only sane and logical approach, once you remove politicians’ need to be seen to be doing something about something and think only of what would be the best policy.
There should be no help for energy, no petrol price subsidy. Just money and taxes. Someone who uses a lot but who is poor will break even. Someone who uses little but is rich will break even. Someone who uses little and is poor will get, and deserve, some benefit. And someone who is rich and wasteful will pay more. All achieved simply, easily and fairly.
