Our panellists battle it outby Kate Andrews, Ken Clarke / November 12, 2015 / Leave a comment
Should the government rethink its policy on tax credits?
The Tax Credit system, where employees on low pay can reclaim some tax, was introduced by Gordon Brown in 1999. The government plans to phase it out by 2017, replacing it with Universal Credit. Those plans were halted in October by a House of Lords vote urging further study of the consequences.
It’s easy to understand why people might be conflicted about tax credits. On the one hand, tax credits are a direct handout from the state, often given to those only working part-time. On the other, they incentivise work and benefit those at the bottom on relatively low pay.
Combine this internal conflict with the UK’s welfare structure as a whole, and it would seem necessary for the government to implement some kind of reform to the various systems, tax credits included.
But the Chancellor is only interested in cuts, not reform.
And those proposed tax credit cuts will hit hard-working people the most. The truth is that in 2015, not all jobs can provide a livable income, and tax credits are one of the most efficient ways the UK currently has of supplementing people’s incomes. Rather than jeopardising jobs altogether, which the national living wage threatens to do, tax credits encourage those at the bottom to contribute to their own livelihoods.
Of course, tax credits are not the ideal form of welfare, and if the Chancellor were serious about tackling the deficit, he might consider implementing more radical welfare reforms that cut spending further, but not at the expense of low earners.
For example, a new Adam Smith Institute paper, “Free Market Welfare: The case for a Negative Income Tax,” shows how merging most means-tested benefits—including tax credits—into one single, individualised payment could save £6bn a year in administrative costs (compared to the £4.5bn saved from cutting tax credits outright).
The Institute for Fiscal Studies has estimated that millions of homes will lose an average of £1,000 per year as a result of the changes. For most families, that top-up is not pocket change; it’s a damaging loss of needed funds and it hits their incentive to work. If the Chancellor is allowed to go through with the proposed tax credit cuts, he will need to explain what reforms, if any,…