Families earning more than £30,000 would have their entitlement to benefits cut under far-reaching reforms to the welfare system proposed today by former Tory leader Iain Duncan Smith's think-tank.
The Centre for Social Justice called for a radical simplification of the system which it claims would help lift more than 200,000 children out of poverty.
The report concludes that under the present system some claimants are worse off if they take a job paying up to £15,000 a year as they face the loss of benefits.
The 370-page Dynamic Benefits report recommends increasing support for working couples and measures to remove financial barriers to finding a job.
The proposals have been presented to Tory leader David Cameron as a detailed blueprint for reform of the welfare system.
Low income households would benefit by a total of nearly £5 billion under the proposals but some families on more than £30,000 a year and receiving child tax credit would lose "modest amounts", the think-tank said.
In a preface to the report Mr Duncan Smith said: "This review marks a watershed for Britain's benefits system.
"The recommendations hold to the simple principle that work is the sustainable route out of poverty.
"We believe the group's success in devising a system, which smoothes out the participation and marginal tax rates so that there is no financial disincentive to work, should be taken seriously by members of every political party.
"Unless we put the system right now, we run the risk of increasing the number of residually unemployed, only this time it will manifest itself as large numbers of younger people are permanently excluded from gainful employment.
"That is why we simply cannot go on talking about the importance of getting people into work while we persist in creating disincentives for the very people we say should be in work.
"Our existing complex and inefficient benefits system should finally be laid to rest."
The report says that some six million people of working age in the UK are claiming out-of-work benefits.
But the think-tank found the amount of income lost by a claimant taking a low paid job can be as high as 90% and the result is many people turn down jobs or fail to apply for them because they calculate they would be worse off as a result.
The report said the other key obstacle was the marginal tax rate, which can be more than 70% for low earners, deterring people from taking a better paid post or working longer hours.
The report recommends a more gradual rate of withdrawal of benefits as wages increase with a higher earning threshold for households before benefits are phased out.
The study calls for the system to be simplified with just two benefits available to working-age claimants.
The universal work credit would be "earned" through welfare-to-work schemes, taking in benefits such as jobseekers' allowance and income support.
The universal life credit would provide additional income to people with low or no earnings, absorbing benefits such as housing benefit, working tax credit and child tax credit.
Theresa May, the shadow work and pensions secretary, told GMTV: "We want to tackle worklessness. We certainly need to do that.
"The report raises some interesting questions about the way the benefits system operates - does it make it more difficult for people to get into the work place on low incomes?"
She said any reform would be carefully scrutinised.
Welfare Reform Minister Jim Knight said: "Where on earth does Iain Duncan Smith get the billions of pounds for this when David Cameron wants to cut billions in public spending right now?
"And how would this help anyone into work if the Conservatives also want to cut support for the economy and the help to get people into jobs?
"The truth is that when the Tories left government, the numbers of people on incapacity benefit had tripled since 1979.
"Over the past 12 years, we have reformed welfare to get far more people back into work and made work pay by introducing the national minimum wage and tax credits that the Tories opposed.
"If the Tories are serious about wanting to help people, they should back Labour's £5 billion investment to help people find work and off benefits."