A nation of givers and takers: Can tax and benefits be integrated? Gordon Borrie thinks there are simpler solutions

EILEEN says: 'It just doesn't make sense. They expect me to pay tax even though I'm only earning pounds 110 a week, and yet I'm entitled to family credit as well. They take with one hand and give with the other.'

Eileen is a lone mother whom I met recently. At least she has got a job. But the system seems to tax her into poverty and then means-tests her out again. Half a century after Willie Beveridge's mould-breaking reports on social insurance and full employment, the welfare state needs reform.

For the right, an annual social security budget of nearly pounds 80bn is proof enough that something is wrong. On the left, the concern is about the system's failure to meet its fundamental aims - the elimination of want and the extension of economic opportunity.

Integrating taxes and benefits is regularly offered as the solution to the problem of work and welfare. Supporters argue it would be more efficient to assess everybody's needs and means once, establish how much people owe the state (taxation) or the state owes people (benefits) and collect or pay accordingly. The Commission on Social Justice enlisted the help of Andersen Consulting to investigate the scope for tax benefit integration. Its study, Integrating Taxes and Benefit?, published today, analyses the two competing models of integration: negative income tax and citizen's (or basic) income.

With negative income tax, every taxpayer and every claimant would complete a single return to a combined Inland Revenue and Benefits Agency, which would pay out or take in through PAYE or a computerised 'smart card'. As well as saving on administration, the aim would be to overcome the traditional problems of means-testing - low take-up, stigma, complexity - and target resources at those who need them most.

A citizen's income (or basic income) would pay an unconditional benefit every week or month to every resident - a grown-up version of child benefit. The scheme would be financed by abolishing tax allowances, reducing or eliminating other benefits and (depending on the size of the citizen's income) raising taxes.

Both proposals aim to reduce or even eliminate poverty and unemployment 'traps', where taking employment can leave a family worse off than on benefits and where the sheer uncertainty about benefits makes secure poverty preferable to insecure employment.

However, negative income tax systems face three serious problems. First, the administrative costs for both the Inland Revenue and the Benefits Agency come from the minority of 'high contact' clients. For income tax, these are the 1.6 million higher-rate taxpayers and the 2.9 million self-employed; for means-tested benefits, they are the 6 million people claiming income support or topping up low wages with family credit. An 'integrated' system would probably have to maintain two divisions to serve the two groups, eliminating most potential administrative savings.

Second, it seems likely that an 'integrated' system would also need to maintain different assessment periods for tax and benefit. Income tax is assessed annually, with most PAYE taxpayers only filling in a tax form every three or four years. But family credit is assessed over six weeks' earnings and, once awarded, paid for six months; income support is sometimes assessed weekly. We cannot ask the poorest in society to wait until the end of the financial year to receive benefit, and taxpayers would hardly welcome more frequent contact with the Revenue.

There are about 3.5 million older people who receive a retirement pension and also pay income tax. The circumstances of pensioners tend to change less often than those of younger people, and closer integration of their taxes and benefits might make it possible to reach those who fail to receive the benefits to which they are entitled.

The third problem is whether to calculate taxes and benefits for individuals or for families. Means-tested benefits currently assess all income going into a household. They could be put on an individual basis; but would any government want to pay negative income tax to the non-working wife of a rich company director? If individualisation is rejected, though, a negative income tax scheme would mean reversing the commitment to the independent taxation of married women.

Citizen's income schemes would be easier to administer than negative income tax. They recognise the needs of the growing numbers of people outside employment and a citizen's income high enough to float most people off means-tested benefits would eliminate some of the present system's poverty traps. But a worthwhile citizen's income would mean higher income taxes, higher VAT, or both. It has been estimated that a citizen's income of pounds 40 a week for adults and pounds 2 for children would need a 12p in the pound tax rise. The combined effects of unconditional citizen's income and higher taxes would persuade some people, particularly married women, to leave the labour market - further raising the scheme's costs.

Politically, too, there might be resistance to paying citizen's income to people who are neither in work, nor studying nor caring for children or other relatives. This could be partly overcome by a 'participation income' proposed by Professor Tony Atkinson - a citizen's income dependent upon useful activity. But unless one believes that mass unemployment and underemployment are inevitable, a full- blown citizen's income does not look like a solution.

So where does this leave Eileen? Her position is shared by about 300,000 taxpayers who also receive family credit. It should not be necessary to impose a new bureaucracy on the remaining 25 million taxpayers to sort out their problem.

The Andersen Consulting team suggests greater co-ordination could be achieved, short of integration, through standardisation of information systems, and creation of joint tax and benefit offices. Above all, what is needed is strategic integration in policy design.

At root, the benefits system needs reform, not for technical reasons but because the world has changed. The three pillars of the Beveridge welfare state - full employment for men, the nuclear family and a culture of deference to professional decisions - no longer exist. A world in which women are half the workforce, where one in five men of 'prime working age' is out of work, where employment patterns have fundamentally changed and where one in three new marriages is likely to end in divorce requires a profound transformation of the welfare state. But until we decide what sort of society we want to be, no amount of tinkering will deliver the enduring values of security, opportunity and fairness that must be at the heart of welfare policy.

Sir Gordon Borrie QC is chairman of the Commission on Social Justice. 'Integrating Taxes and Benefit?' is available from IPPR, 30-32 Southampton Street, London WC2 7RA, price pounds 2.95.

(Photograph omitted)