The problem with the whole tax credit system is that it is, and always was, an insidious ploy by the Labour Party to ensnare yet more people – people who are working for a living – in the perfidious web of the Welfare State and increase the ranks of the ‘client class’ that makes up a sizeable quotient of their electorate. I mean, you have to hand it to Labour, it really was diabolical genius: bribing people with their own money and converting tens of thousands of people who already had jobs into welfare dependants.
Of course, the really excruciating thing about tax credits is how gloriously indiscriminate they are! In 2003, even wealthy professionals with a rapidly-appreciating house in London and annual salaries upwards of £50K were perfectly eligible to claim Gordon Brown’s latest initiative to tackle so-called ‘child poverty’. Even though they were top-rate taxpayers, with their children at public schools and a Bentley on the driveway, they were still perfectly entitled to receive child tax credits, which, despite the name, is actually a social security benefit. This was not some loophole or legislative error. In 2003, you were in fact allowed to earn as much as £66,000 (I think that is roughly equivalent to upwards of £95K in today’s money) and still get child tax credits if your children were under a year old (even for older children, you could still claim £58,000!). A whopping 90% of all families with children were entitled to tax credits. As a consequence, the number of households receiving such tax credits trebled, increasing the welfare bill from £6bn to £30bn virtually overnight.
The first thing to recognise is that this terrific lefty wheeze did absolutely nothing to actually reduce child poverty. Not a thing. It served only to make people already earning a living think they were incapable of getting by without State hand-outs and created a sense of utterly bogus entitlement (why should I pay for other people’s children anyway?). Even after this splurge, child poverty continued its upward trend undaunted by Dr Brown’s largesse.
The tax credit explosion did, however, have two dire consequences for the poor: 1) in my view, by supplementing the incomes of working people, it emboldened employers to keep their wages artificially low and effectively became a state subsidy for poverty wages, and 2) it perversely disincentivised employment among the poorest, because of the way tax credits were withdrawn as people’s earnings went up. This was something I saw a lot whilst working in recruitment for four years, as people routinely turned down perfectly good work because they did not want to go over the threshold at which it would “muck my benefits up” – such was the terror instilled in them by Labour’s befuddling system of tax credits and entitlements. The whole system was and is, however, a cynical con – taxing people and then giving it back to them in little dribs and drabs, handing out money as an end in itself.
Just look at the Educational Maintenance Allowance for further evidence of this agenda. Remember the £30 bribe the last Labour Gov’t concocted to persuade teenagers to keep going to college? Even by the DfE’s own figures, as little as 6% said it made any difference to whether they went to college. Despite being billed as a benefit for children from low-income families, it was, in true Labour style, available to households with an income as high as £30,800 a year (about ten grand above the national average). It was just another wasteful, ill-conceived, poor-value Labour scheme that achieved nothing but expanding the entitlement culture and breeding dependence on the State. In fact, I would argue tax credits entrench poverty and stifle social mobility. We have essentially paid people to live on the breadline and made working for a living less attractive. We must surely have the most expensive poverty in Europe!
As long as we see tax cuts to accompany these benefit cuts, then I for one am perfectly comfortable with their being cut. I shall sound one word of caution, however. We do need to accompany this with supply side reforms as well, to focus big tax cuts on the working poor. Two obvious measures would be raising NI thresholds as well as the personal allowance. Of course, the poorest have already been taken out of Income Tax, which is very welcome, but they are still paying NI and very regressive consumption taxes. What I would like to see – and, please God, the Chancellor will put some hefty tax cuts in his upcoming Budget – is a rise in the NI threshold and, preferably, peg it and the personal allowance to the National Minimum Wage rate. That would ensure part-time NMW earners pay no tax at all.
It makes absolutely no sense to me whatsoever to both tax people AND pay them benefits. Down that road madness lies. Cutting Income Tax and, especially, raising the NI threshold is surely less complicated than making them apply for these tax credits. We must start picking this pernicious system apart.