Why is it, do you think, that the GOP is so intent on its own demise that it rejects its own insiders who would let it demolish the opposition in the near term as well as the long term? We can ignore, for the sake of argument, that it would also save the economy.

You’ll notice that the main problem here is Gordon Brown’s pet project, tax credits (a project ironically often credited with making great strides against poverty). Only since the first Labour budget of 1999 has the situation become so severe, as an IFS study has shown. The effective marginal tax rate paid by the 10% of workers facing the highest rate has increased dramatically from around 40% pre-1997 to 68% today.

Interestingly, this disastrous policy is now being copied by Barack Obama, whose assertions that “no-one earning less than $250k will pay a penny more” under his tax plans are simply false if you look at the effective tax rate. See this excellent article for a fuller explanation: http://www.american.com/archive/2008/august-08-08/the-folly-of-obama2019s-tax-plan.

However, the idea of universal payments (which would considerably ease the disincentives problem, though it would still exist to some extent) would not be workable. If you total the benefits received by those on low incomes, it is far, far higher than £5,000 a year (if we’re including housing costs, NHS, all social security, and particularly state care for the elderly). The reason the state is at present able to cover this is that most tax is paid by the richest and then redistributed (I don’t have the figures to hand, but for example the richest 10% pay much more than 10% of total taxes collected). So there is a huge imbalance in how these services are paid for. Were you to privatise these services, and eliminate welfare, replacing it with a universal payment, the universal payment (because it is the same for everyone) would necessarily be much lower than it would need to be to cover the costs associated with the services withdrawn, because they are disproportionately used by those on lower incomes. Since many people rely on services that cost far in excess of the £5,000 payment, their standard of living would decrease substantially.

So I agree with a Friedman-esque simplification of welfare by which the tangle of welfare payments is replaced by a single annual cheque. But we need some form of progressive system in order to provide a basic living standard for all. And any form of redistribution is guaranteed to cause disincentives because it distorts the market. So we want to ensure there is a safety net, and we want to minimise work disincentives. In that case, we need some form of redistribution, but we must handle it carefully. The problem is getting the balance right between what is an acceptable amount of welfare, and disincentives to work – ensuring no-one faces a marginal tax rate in excess of 50% would be a good start. This balancing act is what Labour, in its well-meaning but hapless experiment with tax credits, got spectacularly wrong, and we see its effects throughout Britain’s inner cities.