The history of a single New Labour policy innovation—tax credits—contains almost the full spectrum of the party’s success and failure in domestic policy over the past ten years. On the one hand, in the policy’s eight-year span it has directed over £75bn into the pockets of lower-paid workers (and some non-workers), helping make work pay for those towards the bottom of the pile and preventing inequality from rising far more sharply. It has become one of the anchors of Labour’s new “Anglo-social model,” which aims to combine relatively free markets, including labour markets, with improved social protection. On the other hand, the distortions created by the presentational politics of tax credits, the “top-down” otherworldliness of the politicians and officials who designed them and yet another public sector computer failure have combined to cast a long shadow over the policy.

The tax credit story has other elements. It is a morality tale about what happens when good intentions are not matched by a close understanding of the lives of those whom the policy will affect. It is also a story about the influence of US public policy tools on New Labour, especially those used by President Clinton. And, finally, it gives some insight into the working methods of Gordon Brown, who has nurtured the policy from the mid-1990s, when it first emerged as a leading New Labour ambition.

Instead of expanding the income supplements inherited from the Tories, Labour opted for an ambitious new tax credit system with the promise of partly merging the tax and benefit systems. Why? Part of the answer is the influence of America’s earned income tax credit (EITC), which was introduced in 1975 but greatly expanded by Bill Clinton in 1993. After 20 years in which welfare had been fiscally starved by Washington, intellectually undermined by dependency theorists and culturally stigmatised by the media, it appeared that Clinton had hit on a new way of distributing money to the poor that could repel these various opponents.

In the US, working families file a tax return at the end of the year, and when their income is below a given threshold they receive a “tax credit,” typically as a single lump sum. The fact that the payment is made through the tax system ensures that it is associated with work, which strengthens the incentive to remain in employment. But it also helps stave off the accusation…

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