Iain Duncan Smith's imminent landmark announcement on welfare reform is billed as a "once in a generation" attempt to end the dependency culture and the appalling social breakdown caused by endemic unemployment. The narrative the cabinet minister wants to sell is that ending the welfare trap is crucial to getting people back to work – and many on benefits are doing an entirely rational thing by not taking jobs and thereby seeing their state handouts vanish.

The solution is to simplify the system so that it guarantees benefits to a certain level of earnings and then sees anyone who gets into work lose their welfare entitlements at a fixed rate. This is welfare's holy grail, a policy that possesses miraculous powers to re-energise jobless people's willingness to work, breaking them from a so-called debilitating addiction.

The beauty of universal credit is its simplicity. But this may also be its undoing. The reason is the simpler the universal credit system, the larger the number of losers it will create. The problem stems from the fact that increasing numbers of people face marginal tax rates of more than 70%. Duncan Smith wants the tax rate facing the poor to be 65% at most. The reason for such penal rates are that people's varying circumstances are taken into account. The bewildering complexity of the benefits system is that it aims to smooth the topography of modern poverty.

The poor lead complex lives and a one-size-fits-all policy is hard to reconcile with the facts on the ground. So we can expect that the universal credit system won't include every benefit. Child tax credits, council tax benefits and free school meals will all lie outside it. But housing benefit will be included and the dramatic changes to it are a pointer to where universal credit is going.

Taken to a logical extreme the proposed changes end up paying a "common" housing benefit rate, which does not take into account a recipient's circumstances. Extrapolate enough and you see that the amount of housing benefit available in the future will be way below what many receiving help get today. In this analysis universal credit appears to be a Tea Party-style policy. But it's a flat benefits system rather than a flat tax one.

Paul Gregg, professor of economics at Bristol University, in a recent paper, argues that much of this is unnecessary. One of the coalition's most potent arguments is that welfare bills have jumped by 40% in the last decade. "If you cumulate the last 10 years you do indeed get a figure of a 40% increase in real terms," says Gregg. "However, what first strikes you from the picture is that the rise was much greater in the 50s, 60s and 70s than now. So if spending is out of control now it pretty well always has been."

Gregg has long been concerned that universal credit is a big bang approach that is not needed. He argues that its worst effects could be mitigated by reducing the tax rate for low earners, favoured by the Liberal Democrats, or not withdrawing tax credits. But both are expensive and hardly options in an age of austerity. What's left is reducing the generosity of the universal credit. This is the politics the coalition government says we can afford.

So you hand less to poor people and therefore have less to take away – making universal credit affordable. You also make poverty a work incentive, mimicking workfare in the United States where benefit levels are so low that many people don't apply.

The message over the weekend was that the long-term unemployed faced losing their benefits if they did not partake in community service. This again is an American import: work requirements have long been used to force people off benefits. But the evidence from the US is mixed: rising numbers on food stamps and in receipt of unemployment benefit. If Duncan Smith is really dealing in such weapons of mass destitution, the political fallout will be felt for years to come.

Randeep Ramesh is the Guardian's social affairs editor.