Both the outgoing Labour government and the incoming Coalition government pledged to make work worthwhile. Both agreed that the best kind of spending cut was a cut in welfare benefits because out of work people had found worthwhile jobs.
Some opponents unfairly quip that Conservatives want tax cuts for the rich and benefit cuts for the poor. They claim that Conservatives think the rich need incentives and the poor need pressures to earn. The truth is kinder and more prosaic. Conservatives want tax cuts for people at all income levels. We want tax rates that mean the rich pay more, and tax rates which mean the poor pay less. Indeed, the Coalition government with the agreement of both parties in it has driven hard to exempt the first £10,000 of income from all Income Tax, and will doubtless get there soon. Imposing a zero rate for lower incomes is a sign that the government wants people on low incomes to pay no tax, not that they wish to penalise them.
There remains the more difficult issue of benefits, which has taxed governments of all persuasions. Labour in office has agreed with means testing benefits, and agreed that getting people into work is designed to get them off benefits. The Coalition government, determined to make it more worthwhile to work, then increased out of work benefits by more than twice the rate of increase of pay this year, which has set back the task of making it more worthwhile working.
The problem with means tested benefits is they have to be withdrawn, and the act of withdrawal recreates disincentives to work harder or at all. Most people agree that if you move from unemployment to working, you should lose some of the benefits the government is paying you when out of work with no income. Most people agreee that it is a nonsense to pay benefits to people with good incomes, or with substantial savings and other resources. The nice question is how do you get from benefit dependence to self support without creating a large disincentive?
You can either have a few people facing a high rate of withdrawal of benefit, the sharp cliff approach, or a lot of people facing a less dramatic rate of reduction of benefit as it is taken away more gently. If the range of income that faces benefit withdrawal also attracts standard rate income tax, then the combined rate of tax and benefit withdrawal can be high and can act as a disincentive.
There is no way of avoiding one or other of these approaches to benefit withdrawal. The more people that can be exempted from Income tax the better, as then the benefit withdrawal loss is not compounded by income tax loss. There has not been enough study of what rate of benefit withdrawal is possible without acting as a major deterrent to working for an income. Those settling the rates of withdrawal have to bear in mind the costs of getting to work as well as the loss of state income. The simple truth is that all income levels the system works best if there is a fair and substantial incentive to work more, work smarter or work at all.