More, Mr Beadle Brown

Labour is committed to not raising income tax. But the way the benefit system operates, the poor continue to be hit by hidden `taxes' which are a disincentive to work. Paul Vallely and Conal Walsh explore the poverty trap

``One for you, 19 for me," sang George Harrison. The Sixties was a time for protest songs, and the Beatles were indignant that Conservative and Labour prime ministers alike thought it a good idea to levy a top income tax rate of 95 per cent. Such days may be gone for the super-rich but they are still very much with us for the poor. They form an intrinsic part of the structures that keep the poor in their place.

Yesterday's Downing Street breakfast seminar for top business leaders is the first in a number of New Labour moves to address those structures. Bringing in the private sector is but one avenue. Future initiatives will look at voluntary-sector work, full-time study, and jobs with an environment task force. A scheme to bring more single mothers back into the employment fold has already been hinted at. Representatives of the unemployed were yesterday under-whelmed by the plans.

More than one approach will be needed. There is not one poverty trap but many. There are large numbers of poor people who are, in effect, taxed at a much higher rate than anything even George Harrison paid in the Sixties.

Take an average couple who are both unemployed, living in an average council house with average council tax. They would get each week:

Income support - pounds 77.15, extra for two children - pounds 33.80;

Family premium benefit - pounds 10.80;

Housing benefit - pounds 33.22;

Council tax benefit - pounds 6.80.

Their total weekly income is therefore pounds 161.77.

Should one of them land a job that paid pounds 180 a week they would lose 97p for every pounds 1 they earned. (The rate was fixed under an economic orthodoxy which proclaimed that a 50 per cent top rate of income tax was too much of a disincentive for the better off. The rich, it seems, need carrots as incentives, where the poor require sticks.) Only if this average couple earned more than pounds 220 a week would the family settle down to a normal tax and National Insurance rate of about 35 per cent.

Rescuing the poor from such traps is the task Tony Blair has set the head of Barclays Bank, Martin Taylor, who is due to deliver a review of the tax and benefits system by the end of the year. It is part of the brief for the long-term reform of welfare being conducted by the social security minister, Frank Field. And it has implications for the strategy to be adopted by Gordon Brown in the Budget next week in determining how to reform the windfall tax to get young unemployed off welfare and into work.

The nation's think-tanks have come up with a number of proposals. Taxes on the low-paid should be cut, according to Patricia Morgan of the right- wing Institute for Economic Affairs. "The tax rate cuts in at a very low level today," she says. "People who receive benefits shouldn't be taxed."

On the left the Institute for Public Policy Research would like to see benefits phased out more gradually - "perhaps so that you never lose more than 50p for every extra pounds 1 you earn," says its director, Gerry Holtham. Another solution would be to address the problem that "with some benefits you start to lose as soon as you earn anything - so if you're on housing benefit, for every extra pounds 1 you earn you lose 60p, but if you're on housing mortgage relief, you lose the lot as soon as you earn a penny".

An end to means testing is what Sally Witcher of the Child Poverty Action Group would like to see. "It's counter-intuitive," she says. "Most people assume that it's sensible to target benefits on those who are poorest, to avoid waste. But means-tested benefits are far more expensive to administer, as well as creating these gaps which the poor find it almost impossible to leap." She wants to see flat-rate benefits paid to the unemployed.

Others are more radical. Holtham floats the possibility of a negative income tax. "There would be a certain income at which you pay no tax; above it you do, and below it you get a single benefit payment." The notion finds support on the right: William Hague's campaign manager Alan Duncan and a colleague, Dominic Hobson, have also suggested that benefits should be replaced by a simple Tax Credit, administered by the Inland Revenue.

But what do those who are mired in poverty think of all this? Not a lot. "What we really need is a minimum wage," Tom Rogers says "A job with a minimum wage and less tax on the low paid would be an incentive to get off the 'broo [the dole]," says Brian Lennox, who is caught in the part- time poverty trap. Professor Peter Townsend has said that equipping the poor for the workplace is meaningless unless Labour is prepared to commit itself to creating public-sector jobs and fostering new industries.

But would that really help Brian and Wilma Lennox? Their trap is that she has been forced to give up a full-time job because they lost too many benefits if she worked anything more than part time. Janet and Richard Pier are caught in a more acute version of the same catch-22. "I had a job cleaning at Newham hospital," says Janet. "But the money was up and down; some weeks it was pounds 100 and I could manage, but other weeks it was as low as pounds 88 and I couldn't. There's a big difference. It affects the basics, like how much food you can buy. I realised I would be better off on benefit."

The problem for Janet was the unpredictability of her income. It is one of a number of factors that Gerry Holtham says must be addressed. "It is such a rigmarole to get on to benefit that people won't come off it for a few weeks to do a casual job, because it takes so long to get back on," he says.

The Institute for Public Policy Research wants to see experimental special enterprise zones set up, in which the unemployed could keep their benefits for a period of five years so long as they paid tax on whatever extra earnings they acquired. This, Holtham argues, would legitimise a lot of black economy activity and be less expensive than paying the unemployed for doing nothing.

The response of the poor is mixed. "I would go for that," says Janet, "if I could earn a bit without losing benefit. I would get something in a shop or a factory, cleaning or whatever." But Brian Lennox is unconvinced. "If you got your full benefits and could earn on top of that, that would be OK, but you shouldn't be taxed even at the normal rates. We'd be better off just not declaring money earned on the side. To keep 65p out of pounds 1 isn't much," he adds, apparently unconcerned by the fact that that is about what most of us keep, after income tax and National Insurance are deducted.

Revelations like that go to the heart of the problem, so far as right- wing thinkers are concerned. For Brian assumes he should have the right to choose to remain unemployed. "It depends on what is your model of human nature," says David Green of the Institute of Economic Affairs. "Are people motivated by economic incentives - that they will do whatever gives them the best deal? Or are they moral agents - do they believe that it is honourable and decent to work?"

His thinking is that if you rest your arguments on economic self-interest you're in a pretty weak position when it comes to getting people out of the unemployment poverty trap. The problem cannot be solved so long as it remains couched only in terms of economic incentives. Rather it is an issue of reciprocal responsibility: the community takes upon itself the responsibility of providing a safety net; in return the individual has the responsibility to work. And the community must set up the mechanisms to rekindle in the poor the qualities of foresight, energy, discipline and the ability to sacrifice now for the future, which poverty saps.

Such New Paternalism is already in practice in US states like Wisconsin, where numbers on the dole have decreased against national trends.

Gordon Brown yesterday revealed that young people who refused to enter his scheme would have their benefits cut by 40 per cent. Masden Pirie, the president of the right-wing Adam Smith Institute, is convinced that Labour will introduce something similar across the board. "After six months out of work you'll have to take a job either in the private sector or in some public works scheme - and then the choice of doing nothing will disappear."

The prospect of cutting grass in summer and collecting leaves in autumn does not impress Brian Lennox. "I get enough money off the 'broo; why should I get a job," he asks, failing at first to take on board that the New Paternalism will force him to work. Janet Pier is no more enthusiastic, but is resigned to the prospect. "I don't like living off benefit," she says. "I wouldn't mind sweeping up leaves if they offered me pounds 20 to pounds 30 a week more. If they wanted me to do it for the same money as I get now I wouldn't be happy; but I suppose I'd do it - though I'd rather go back to college and learn maths."

"It's a question of character," says David Green. "If not working is having a bad effect on your moral character then it's a morally defensible view for society to insist that you must work if you want the money. The rights-based system of welfare we've had since 1948 worked well enough in the early years. People had been brought up with the attitude that to work was moral. But by the Sixties people had become socialised by the benefits system. They have a different cultural and moral attitude."

"Some people would do compulsory work," says Brian Lennox, after thinking for a moment. "But many would just turn to robbing and mugging. The crime rate would go right up. You might even have a riot on your hands. People won't take it lying down." It's a question of character to Brian, too. And the gap between his worldview and David Green's is a measure of the scale of the problems ahead.

The Low-Pay Trap

Tom and Sharon Rogers, both 25, are a married couple with a young child who rent a flat from a private landlord in Essex for pounds 58 a week. Tom works as a security guard, earning pounds 190 a week. It's not much to bring a young family up on, and Tom would like to do overtime. But if he adds more than pounds 10 to his pay-packet, he begins to lose the Housing Benefit and Family Credit he gets as a low-earner. If he earns pounds 200 a week or more, benefits are withdrawn at a rate of 123 per cent, which means that the family is actually losing 23p for every extra pound earned. He must stick at pounds 190, unless he can leap to pounds 220 in one go.

The Unemployed Trap

Richard Pier, 43, and his 41-year-old wife Janet are both unemployed. As well as getting their rent and council tax paid, they get a total of pounds 86 a week income support: a pounds 77 married couple's personal allowance, and a pounds 9 disability benefit for Richard. He's got a bad back and can't work on anything that isn't sedentary. Janet has been out of work for four years. Before then she always worked - first in a clothing factory, and then as a cleaner at Newham General Hospital. Because of the low pay and irregular hours at the hospital, she wasn't making any more money there than she would get on benefits.

The Part-Time Trap

Brian Lennox has been unemployed on the Easterhouse estate in Glasgow for more years than he is prepared to admit. His wife, Wilma, works part- time as a cleaner in a school, doing 14 or 15 hours a week, for pounds 55-pounds 57. She used to work longer hours, which qualified her for Family Credit, giving her a total weekly income of pounds 96. But when she works less than 16 hours Brian qualifies for Income Support and their total income is pounds 144. She gets pounds 48 a week more by working less.