The poor who lose their welfare payments as they start to work face a very high marginal rate of tax

The poor, who lose their welfare payments as they start to work, face a very high marginal rate of tax. We can prevent that by giving the dole to everybody, so that there is no benefit withdrawal as you move from welfare to work But that is expensive, as we have seen. So the cost of eliminating the high marginal rate of tax on the poor is to impose a high rate of tax on everybody else. What actually happens, of course, is that benefits taper off as in-work income increases. Tapered benefits cost more than withdrawing the dole completely as soon as you get a job, but are much less expensive than giving the dole to everybody. The more gradually benefit is withdrawn, the greater the incentive to take a job, but the greater the cost to the Exchequer and the higher the taxes on the better off.In other words, the price of encouraging the poor back into work might be tax rates that discourage the better off from working so hard. Once the state pays people for doing nothing, anyone with low earning power, whether in or out of work, will calculate that it is barely worth working.

That is the poverty trap created by the well-intended relief of poverty.Do the unemployed really choose not to work or is joblessness thrust upon them? In the 1980 or 1990 recessions many of the unemployed had no choice in the matter. But in the current, service-sector led boom many of those who do not work have turned down jobs as not good enough So it is, to some extent, a matter of choice and incentives. One well known solution to the incentive problem is to give everybody a basic income (paid for out of taxation) of pounds 100 per week, whether they work or not. How do they feel about getting up on a dark winter's morning and struggling into work to bring home a wage of say pounds 120 for a 40 hour week? Compared with a life of leisure on pounds 100 per week, 40 hours work for pounds 120 may seem a poor deal. Work that seemed worth doing for pounds 3 per hour looks distinctly less appealing when the net gain, compared with the dole, is only 50p an hour.That, in a nutshell, is the central problem that welfare-to-work must resolve. Yet, as long as the poverty trap exists, it will be extremely hard to move people from welfare into work.Expressing the cost in tax terms helps us to understand another key point.

It would involve increases in taxation that Mr Brown is committed not to impose. But it will not have escaped the reader that giving everybody pounds 100 per week is 10 times as expensive as giving this sum only to the bottom 10 per cent. The cost is pounds 100bn, equivalent to over 50p on the basic rate of income tax.These back-of-envelope sums reveal a basic but important truth: relieving poverty is quite cheap, but getting rid of the poverty trap is very expensive. Their reward for working would be restored to pounds 3 per hour. This would mean that the second poorest 10 per cent would, in effect, get the dole along with the bottom 10 per cent. The problem leaps into focus as soon as you start to think about the 10 per cent just above the bottom 10 per cent. The cost of giving 2 million people pounds 100 per week is pounds 10bn.

That is a tiny fraction of the total public spending bill of pounds 260bn and surprisingly small in relation to a total social security bill of around pounds 80bn. There is, unfortunately, a further hidden cost to giving the poor enough to live on. The combination of technical progress and economic specialisation that has marginalised the bottom 10 per cent of our nation has made the rest of us rich enough to support them Indeed, the relief of poverty is surprisingly cheap. "Rosy scenarios are followed by gloom which is followed by `stable but slow' expectations.". IT IS NOT surprising that Gordon Brown, a famously workaholic Labour chancellor, does not much like the idle rich But nor does he like the idle poor.