Adam Smith Institute

Barak Obama's social security (pensions) plan looks a mess. Last month, he called for a new social security payroll tax on incomes above $250,000 a year. Currently, the tax is levied only on the first $102,000 of income. That's easily more than the wages of most Americans, but to avoid antagonizing the middle-class millions who do earn more, Obama's plan is to leave incomes between $102,000 and $250,000 untouched. So it's only the 'millionaires and billionaires' – about 3% of the taxpaying population – who will pay it.

Whoever said that politics is two wolves and a sheep deciding what to have for dinner? The argument is that the tax would be just small change for the likes of Warren Buffett. But does that make it just? Where do we end up when politicians forget the principle of equal treatment and are willing exploit minority groups one by one?

Actually, we need more millionaires and billionaries, and we need to encourage people to make themselves millionaires and billionaires. They days have gone when rich people owed their wealth to inheritance so that an extra tax really was small change for an unproductive class. But today, wealth comes principally through building up a business. You take a huge risk, but you reap a huge reward. Like the National Lottery, it's the size of the star prize that induces millions of people to take the gamble. Lower the reward and the number of players tails off remarkably quickly. Taxing 'the rich' is a counterproductive policy.

And, of course, moves like this further complicate the tax code.

The US social security system, like the UK's National Insurance, is already corrupted by this sort of expediency. In the US, the payroll tax is 6.2% – but as in the UK, employers pay a lot more (indeed twice as much, in the US, at 12.4%). That's designed to disguise the tax: employers notice it but employees don't. Until businesses find their costs rising so much that they have to lay people off, of course.

The system's rotten. The quicker we move to a compulsory, privately funded pension system the better.

Following the government’s broadly popular welfare reforms, there has been much discussion on welfare. Debate has been centred on how deserving those in receipt of welfare are. Interestingly though, there seem so be growing consensus that people are abusing the system and few have come out in defence of the current welfare system. The status quo has become indefensible, so those in favour of welfare are now calling for the government to spend our (and their) money in “better” ways.

A good example of this supernanny argument is Deborah Orr writing in The Independent. She argues that:

The children who are really at risk of becoming professional system-milkers, on drugs, working in the black economy, causing local havoc, need to be helped while they are still at primary school. It is often easy to spot children who are likely to go off the rails very early on in their education. But the things that will help them – boarding schools, special schools geared to their needs – are invariably dismissed as too expensive or out of step with the idiocy of under-resourced, lip-service "inclusion".

It is indeed often easy to spot children who are likely to go off the rails…their parents have been in receipt of welfare for years. They are the children who grow up in areas that are wholly sufficient on government largesse. These areas have had their societal structures fractured by the downward pressures of government interference. Orr’s idea of removing them further via their inclusion in special schools is something of a perverse incentive. After all it was government interference that created these children, more government is not the solution.

Despite claims that we are all middle class now, there is a clear underclass in Britain whose lives are distorted reflections of the twisted dreams of socially conscious politicians. The need for the special education that Orr is demanding is a by-product of a state controlled life.

She is right about one thing though. The government’s welfare proposals are not radical enough. However, instead of special schools, a good place to start would be a flat tax that incentivizes hard work while taking the poorest out of the income tax net. If this was coupled with the introduction of competition and choice in education, it would go a long way to empowering those downtrodden by government.

Influencing policy is rarely straightforward. Sometimes it takes a while for it to sink in. This week James Purnell, the Work and Pensions Secretary, has decided it was time to cut incapacity benefit, making it a “temporary benefit, not a permanent snare” and introduce the private sector into back-to-work programmes. Policies we have been advocating for quite a while.

When the Adam Smith Institute released Why Unemployment and Why Not Work? A Radical Solution to Unemployment - published in 1985 and 1991 respectfully - welfare needed to be changed dramatically. Alas, despite tinkering with the system, the boat continued to head in the wrong direction, disincentivizing people to work. In 1979 there were 700,000 people on Incapacity Benefits, now the number is in excess of 2.5 million.

Last year we released a paper entitled Working Welfare. This called for all working age people not meeting national disability criteria to face immediate work requirements and the delivery of welfare to be devolved to local agencies, which would be paid according to results. Agencies would be rewarded for getting people into work for a set period of time, ensuring an ongoing and personalised service for jobseekers.

Decentralizing the system was essential to the policy proposals in Working Welfare and is key to its success. Yesterday, Frank Fields MP in The Times echoed this point. Let us hope that this government, or the next, heeds this message and that we don’t have to wait another twenty years this time.