Wednesday, May 20, 2009

Tax credits don't deliver social justice, so scrap them

Have just spotted a rather interesting press release from HMRC about tax credits statistics which says,
The statistics show that the level of overpayments in 2007-08 was £1 billion compared to £2.2 billion in 2003-04. The number of families entitled to end of year top ups has increased as anticipated last May to 1.29 million (£798 million). This is as a result of one of the components of the package of measures announced in the Pre Budget Report 2005 to reduce overpayments.
Did you spot it? See how first of all they're comparing figures today with figures from 4 years ago? It couldn't be because they can give maximum impact of the reduction in overpayments to distract from the fact the system is still so broken it pays out £1,000,000,000 each year when it shouldn't, could it?

There's more in there though. Notice the bit about they've increased the "end of year top ups" by £798 million and that is because of measure they introduced to reduce overpayments? What they;re saying is that they introduced measures to reduce overpayment by introducing underpayment to the system, which, at the end of the year, means people get top-ups to rectify their payments.

This is the classic case of a press release trying to make something that is crap look good. Reading between the lines though it's pretty clear that the tax credit system remains thoroughly broken. Where once it was just paying certain people too much - and then ripping the money back - now it is not only paying some people too much, its also paying 1.29 million people too little, and then having to correct itself.

Here's a radical idea on how to fix it. How about, instead of taking low income people's money through tax, spending a bit of it in order to employ people to process the forms that have to be filled in to get a little bit of back (either too much or too little), why don't they just not bother taking the money in the first place?

To be honest, I've always found Labour support for tax credits utterly bizarre. It doesn't take a genius to see that the system is (a) wasteful of taxpayers money (b) stupidly complex, meaning many don't get the benefits, and (c) when they do get the benefits its so broken that the wrong amounts are paid. Added to this of course it is means-testing, something that Aneurin Bevan fought so hard to abolish, as he said,

"[the] purpose of the Means Test is not to discover a handful of people receiving public money when they have means to supply themselves. The purpose is to compel a large number of working-class people to keep other working-class people.
Admittedly, tax credits are a bug bear of mine. An incoming Tory Government should pledge to scrap them and introduce tax measures that actually take the low paid out of tax altogether. It's always seemed perverse to me that in an alleged progressive tax system the lowest paid have to pay tax, and then, when they get tax credits, they see themselves taxed at marginal tax rates of over 70% when they try to earn a little bit more.

How exactly can anyone from the Labour Party consider that "social justice"?

Update: It may not be clear in this post that I am referring to those tax credits that are given to people who are working, hence references to not taxing them at all. I say this because of a comment that seemed to think I was referring to "tax credits" (which are really just benefits and nothing to do with tax, that are given to those who can't work because of, for example, a severe disability.


Rocksteady Eddie said...

Totally agree there should be an earnings figure where people just do not pay any tax. However this Government would just put up VAT to claw it all back so it would be self defeating.
Regarding tax credits and all the other benefits, one needs to look into the people actually running the departments that deal with these things.
Most break the law routinely and most don't give a dam because of the people the system serves.

Mark M said...

You'd think you could bring minimum wage into this. By the joys of our tax system, a person working full time on 'minimum wage' (as defined by government) pays an overall rate of 15. Surely, by definition, minimum wage workers should pay no tax.

They just don't seem to understand that you don't bring people out of poverty by giving them other people's money. You bring people out of poverty by letting them earn and keep their own money.

Robert said...

I'm disabled but looking for work sadly my disability is a lesion of the spinal cord which means from the waist down nothing works, I've got two kids both in school I get £90 in child credits, which means I get this money to help me on benefits of £125 all in. Stopping the credits would hit me hard, now I know that I should be of course working sadly with my problems to be honest the chance of me finding work is like well a dead person.

dizzy said...

I probably should have made clear that I am referring to Working Tax Credit, not the credits which are paid to people who are not working.

Anonymous said...

At a time when the great unwashed public has every good cause to be questioning the trustworthiness and competency of MPs, it is high time to move the agenda onto a re-consideration of the policies of recent years. The tax credit system remains an utter disgrace, both in its design and its implementation. We also need not to overlook that the system is so broken that very susbtantial amounts have leaked from the public coffers through tax credit fraud. Anecdotal evidence suggests that well in excess of £1BN plus has been lost forever to organised fraudsters.

Anonymous said...

I could not agree more. December 2008 I was made redundant, therefore our household income dramatically fell, my wife’s income £22k. In April I phone the tax credit people to ask for the form for tax credits. I was told that I was not eligible because I had earned too much money the previous year. This is their only criteria, how much you earned the previous year. So I have paid tax into the system, but I am not allowed to claw it back when my circumstances changed.
There are two types of people in this country, those who pay tax and those who receive it.

Guy Herbert said...

Your update contains one clue you need to why Labour supports tax credits: they have helped Gordon to fiddle the economic figures for a decade. Because the money given as additional benefits to the unemployed, disabled and (massively) pensioners is defined as a 'tax credit' it is deducted from tax receipts, counting as lower taxes rather than higher public spending.

The other reason is harder to comprehend, but I'm sure it is true: both Labour and the HMRC think that taxation is intrinsically good and want as many people as possible to be grateful for the existence of the taxation system. They actually believe that filling in a complicated form in order to get your own money 'generously' passed back to you in unpredictable amounts gives the public the same warm feeling as filling in a lottery ticket - reminding us that the money we don't actually get back goes to good causes. Watch a fes Tax Credit commercials and try to view them through the eyes of the person who approved them. The tax credit processes are them helping us to help them help us, all working together as a happy collective family.