New Tax Credits: supporting families, making work pay and tackling poverty

Summary

The Working Families' and Disabled Persons Tax Credits pioneered the tax credit model as a way of supplementing the wages of parents whose household needs exceeded the level of income they could obtain from work. The LPU welcomes Government plans to improve on the current tax credit structure in small ways such as aggregating household hours, and in large ways such as extending the model to households without children.

There are obvious attractions to the idea behind ICC of a single vehicle to deliver all of the child focussed elements of existing benefits, tax credits and tax allowances. It will give visibility to the level of support provided by the State to parents for their children, whilst joining together the benefit and tax credit components shifts the emphasis away from the employment status of the parents and creates an income bridge between work and benefits.

The merit of the ETC is less clear cut. Our view is that a strategy that focuses on raising the level of wages for workers at the bottom to obviate the need for wages top-ups must remain the long-term goal. In the short-term, ETC will alleviate in-work poverty for childless households. Over time, wage subsidies can be counter-productive and perpetuate low pay.

We welcome the move to assess income on an annual basis. This can create the flexibility to introduce a threshold up to which incomes can rise before tax credit entitlement is reduced, creating a springboard for households to benefit from wage growth, rather than extending the poverty trap.

Yet we remain deeply sceptical about the possibility of integrating a weekly hours test with an annualised income assessment, and the way that this will mesh with the benefits system. Claimants whose hours vary from week to week may find themselves slipping in out and of entitlement to ETC. A rolling assessment of hours may also mean that claimants lose out on entitlement to IS/JSA instead.

We believe that the current 16 hour rule and the proposed 30 hour rule for households without children is arbitrary, and that lowering the hours thresholds for both groups would encourage contact with the labour market. We support the proposal to make the 30 hour credit available to couples whose joint hours put them above this threshold and recommend that this logic should be applied to the 16 hour qualification threshold for ETC for those with children in their household. Aggregating hours will allow households more choice over how they participate in the labour market and remove disincentives for a second earner.

We have continued concerns about the delivery mechanism of WFTC - payment via employer - which the consultation document proposes to adopt with some modifications for ETC. The principle of payment through the wage packet has been strongly asserted in order to reinforce the link between work and entitlement. In our view, the benefit of any putative psychological link created by payment through the wage packet is outweighed by the costs to business and the risks to workers, which have been documented. We believe that reversing the obligation on business to deliver tax credit payments would demonstrate a willingness to listen to business concerns and, at the same time, increase the job security of low paid workers.

If the ETC is to be paid through the payroll, we support changes that design out many of the administrative difficulties associated with WFTC and DPTC. Yet there is a real concern that reducing the reporting requirements on employers will increase the reporting requirements on claimants.

Childcare costs represent a significant barrier to parents moving into work and we recognise that the childcare tax credit available under the current system has reduced these barriers for many households. We are concerned, however, that the proposals do not address a fundamental structural problem with the design of the childcare tax credit: namely that the calculation for childcare costs, being based on a maximum 70% entitlement, is not progressive and disadvantages low-income households. We recommend that a higher proportion of childcare costs should be included in the initial calculation.

We welcome the move towards better integration of tax and benefit systems, yet we are concerned that the difficulties associated with household assessment in the benefits system are now being entrenched within the tax credit system. We believe it would be a mistake to try and solve some of the more intractable problems associated with HB through the operation of tax credits, whilst offering two recommendations concerning HB and CTB which would address key aspects of difficulties that arise in their interaction.

The consultation paper does not address many of the key issues such as the rates at which the new credits will be paid, and the rates at which they will be withdrawn as incomes rise. Ultimately these issues are likely to determine the success or failure of the new tax credit models in meeting the objectives of reducing child poverty and ensuring that work pays more than benefits. They will also determine whether the structure will facilitate wage growth or perpetuate wage stagnation. We have included contributions to these structural questions in response to the consultation points on housing benefit and childcare tax credit, and look forward to the opportunity to make further contributions at a later date.