I used to be a great admirer of the American Earned Income Tax Credit. It boosts the income of low-income working families and is better targeted than many tax allowances because it is withdrawn as income rises. Indeed, as a member of the No. 10 Policy Unit in the mid-1980s, I helped persuade Margaret Thatcher and Norman Fowler of its virtues. It was proposed in our Green Paper on the reform of social security in June 1985 and, despite being criticised, it survived into the White Paper in December 1985. But as the measure was progressing through parliament in 1986, opposition became widespread and the government had to make concessions. Instead of being a tax credit delivered through the pay packet, it became Family Credit-a benefit for low-income working families, claimed by the mother.
Family Credit now goes to approximately 750,000 families (with about 70 per cent take-up). Very few two-earner couples are eligible: their incomes are not low enough. In practice, it goes to two types of family: 351,000 recipients are working single parents. The rest tend to be couples where the wife is unlikely to be working and the husband is on relatively low pay. The average weekly award of Family Credit is ?59 per week. Total expenditure is running at ?2.3 billion per year.
Why did we end up with a benefit rather than a tax credit? And do the arguments used to defeat my proposal still apply to Gordon Brown's plan for a revised version of the tax credit?
The most vociferous opponents of the proposal to pay the money as a tax credit were worried about the position of mothers in a traditional two-parent family. They argued that if the money were paid as a tax credit via the pay packet, it would tend to go to the man. If it was paid as a benefit it could go to the mother and she was more likely to use the money on the children. This argument was put by Frank Field in the standing committee of the social security bill; it won the day.
At first, Brown and his advisers dismissed the argument of "wallet versus purse," as I had. Now they appear to be offering a concession, although it is not as good as it seems. Information will still be required about the incomes of both partners where two people are involved, as with Family Credit. However, the chancellor's plan appears to be that although the money will be paid to the working person-usually the man-it can still be paid to the woman if both partners so wish. Under the new arrangement, the man will have to agree for the money to be paid to the mother. In the old arrangement the mother had to specify if she wanted the money paid to the man. The balance will have shifted significantly away from the woman. "Wallet versus purse" was an issue I was wrong to ignore. It remains an issue now.
The 1985 proposal was defeated for another reason. The small business lobby opposed it on the grounds that it was an added administrative burden for business. This argument was put forcefully in the standing committee by Margaret Beckett, who is now in the ideal position to stand up for business in the way that she did then.
The biggest criticism of Family Credit is that it is exploited by bad employers, who use it to hold down wages. This is a significant charge. It was investigated by the Institute of Employment Studies, which found that employers did not have adequate knowledge of Family Credit, or sufficient information about potential recruits, to adopt such practices. Only 9 per cent of employers agreed that the availability of Family Credit affected the wages they paid. This is not surprising: there is no reason why employers should know if any of their employees are eligible for, or claiming, Family Credit.
The extraordinary feature of Brown's argument is that with an Earned Income Tax Credit, employers will know about their employees' entitlements. Brown's criticism therefore does not apply to the Family Credit but it does apply to his own scheme. His advisers have come up with an ingenious response to this argument. They claim that everything will be all right because the minimum wage will set a floor for earnings and stop employers abusing Family Credit or the new tax credit. At its most absurd, this becomes the claim that the minimum wage will actually save money because so much Family Credit is going to people on very low incomes. The facts do not support this. The Institute for Fiscal Studies calculates that a minimum wage of ?4.50 an hour would only reduce the number of families on Family Credit by 6 per cent. If Labour wants to find an argument for the minimum wage they are going to have to look elsewhere.
Family Credit is a good benefit. And the truth is that the working families tax credit will not deliver the objectives which Gordon Brown hopes for. I have seen the error of my ways. Will the chancellor? n
David Willetts
