Wednesday, 13 August 2014

The Bedroom Tax is not a Tax

Warning: This is a bit of a bugbear of mine, what follows is pretty much just a rant.

Disclaimer: Just to get it out in the open before I get any complaints about defending this unpopular policy: I am not a fan of the under-occupancy penalty, I think it is unfair to large numbers of people, many of whom will be among the most vulnerable members of our society (minorities, the poor, the sick and the disabled).  This post should not be taken as a defence of the policy, which I oppose.  This post is merely about the term "bedroom tax" which is an inaccurate and misleading way to describe this policy.  I think it may also be counter-productive for opponents of the policy to label it such, in much the same way as calling anyone who disagrees with your political leanings a communist, a Nazi or (most commonly) a fascist.

[Begin Rant]

Let me state explicitly and to avoid any ambiguity: the "bedroom tax" is NOT A TAX!

I'm talking about the under-occupancy penalty - to give it it's proper name - which is part of the Welfare Reform Act 2012.

So, if it's not a tax, what is it?  It is a reduction in benefits paid out to people living in council housing deemed to have "spare" or "unoccupied" rooms.  Some people may read this and think to themselves "what's the difference?"  I suspect that that's how the colloquialism "bedroom tax" came about in the first place.  Someone has equated a withdrawal of benefits to a tax.  And taxes are bad, right?  So, the bedroom tax must be bad!

Whilst I agree with the conclusion, it is not because of this argument.  The problem here lies in the first premise, that equating of a withdrawal of benefits to a tax.

From the perspective of an individual, a reduction in benefits and the levying of a tax may look the same and may have exactly the same consequences for the individual concerned.  For example, imagine Dave currently works part-time in a low wage job, he doesn't earn enough to pay Income Tax or National Insurance (Social Security) contributions.  He also receives some money paid to him by the government in benefits of some sort (e.g. Child Benefit, Working Tax Credits, Carer's Allowance, etc.).  Now, imagine the government alters the tax rules, so that Dave now has an annual tax bill of £200, but his benefit payments remain unchanged.  The effect of this is obvious: Dave is £200 per year worse off, he's going to have to cut back on £200 per year of consumption (or saving) or draw into any savings he may have.

Now, lets imagine an alternate scenario where Dave's tax bill (from Income Tax + NI) remains zero, but in this alternative universe the government reduces Dave's benefits payments by £200 per year.  What is the effect on Dave and his consumption?  The answer of course is exactly the same as in the previous scenario where Dave's benefit payments were untouched, but he was taxed more heavily: Dave is again £200 per year worse off and he's going to have to cut back on £200 per year of consumption.

This is, I suspect, where shallow thinking has led some to conclude that:

Reduction in Benefits = Tax


Under-Occupancy Penalty = Bedroom Tax

The problem with this equivocation is that taxes and benefits are not morally equivalent.  This becomes apparent if, instead of looking at it from the perspective of a single individual affected by the changes, we look at it from the much wider perspective of society as a whole:

If the government reduces the benefits it pays out to Dave, it must also reduce the amount it taxes Nick (all other spending remaining equal), since all benefits payments are someone else's taxes.  The government has no money of it's own, it merely shuffles money around between individuals.  This offsetting benefit to Nick exactly cancels out the harm done to Dave (in strict monetary terms).  Whether or not this is good or bad policy depends on the specific circumstances of Dave and Nick and crucially it requires a value judgement.  A similar story can of course be told regarding taxes, albeit the opposite way around.  If the government increases the taxes it charges Nick then it can increase the benefits it pays out to Dave.  Again, a value judgement is required to judge the merits of such a policy change.

The key difference is that a tax is the government taking money by force (or the threat of force - if you don't pay your taxes you can go to jail) from an individual who has rightfully earned that money.  A benefit is the government giving out money which it did not rightfully earn (whoever paid the tax to fund that benefit did).

Viewed in these terms then a reduction in benefit is seen to correspond to a reduction in tax, or in other words a reduction (however minor) in the coercive power of the state.

An increase in tax is precisely the opposite - an increase in the coercive power of the state.

From the libertarian perspective the former is unambiguously a good thing and the latter a bad thing.  However, that being said, policy changes that reduce the coercive power of the state still have to be weighed up against the harm that they inflict upon individuals.  In my opinion there is a long list of more desirable policy changes which could be made to reduce the coercive power of the state which I'd rather see implemented (e.g. university tuition fees and prescription fees in Scotland) and the under-occupancy penalty scrapped.

[End Rant]

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