Rationalising the interaction of tax and social security - part II

Discussion Paper 423 described current problems in the interaction of the tax and social security systems, analysed the impact of the new tax system reforms, and proposed a number of reforms aimed at further addressing problems of high effective tax rates and associated work disincentives. This paper takes the analysis a step further by considering more major structural reforms which could address such problems in a systematic manner, and allow the implementation of a designed set of effective tax rates (ETRs) for social security clients and taxpayers. There are four main classes of reform options, namely: Negative Income Tax (NIT) or Guaranteed Minimum Income (GMI) integration of tax and social security, abolishing separate social security means tests and using a system of income tax surcharges and/or special rates to recoup benefits as income rises full separation of the two systems, using special tax scales or tax rebates to avoid tax cutting in until benefit entitlements are fully exhausted; and full (integrated) coexistence, such that the combined tax and social security tax rates approached a desired configuration