The idea of tax credits is simple, they are just negative income tax, which gives tax that other people have paid to people who the government think need more money. It is what the left call “progressive”, which means punishing people who strive, work hard and succeed whilst rewarding those who shirk and thus fail.
Working tax credits were introduced by Gordon Brown in April 2003. Basically they were a socialist plot to make as many people as possible dependent on the state, so that they would become guaranteed Labour voters. Obviously Labour extended their scope as widely as possible.
By 2014 Working Tax Credit (WTC) and Child Tax Credit (CTC) combined cost an incredible £30 billion per year with about 7 million people entitled. Obviously a ridiculous and immense distortion of the benefits system. And this huge taxpayer funded bribe ultimately failed in its intended purpose of returning Labour governments.
The system is widely open to fraud and abuse. Nobody really knows how much but in 2004 the Office of National Statistics estimated that of the £13.5bn paid out in tax credits £1.9bn consisted of overpayments. Here is a case of one person fiddling £55,000, another who fiddled £30,000, but most fiddling will go undetected, the government just doesn’t have the resources to police it.
The problem with socialists is that they come up with ideas which implement their unworkable dogma but don’t think them through. So it is with the tax credit system. It has two very wide ranging flaws that massively damage the British economy.
The first is that the whole system is means tested, so a person can get punished very severely if they earn more than a certain amount. It just isn’t worth doing more work. So we have millions of people refusing to do any more work or, in some cases, refusing to take a pay rise! They don’t want to lose their handouts of money that other people have worked for.
The second flaw is that encourages employers to pay people badly, knowing that the tax credit system will make up the difference to what they should be paid. In other words the companies that do this are receiving a huge invisible subsidy. Hard working taxpayers are financing companies to reduce their cost of employment.
The big problem with the whole tax credit edifice is that it is incredibly difficult to undo. Take the credits away and genuine hardship will result. So George Osborne is taking a two pronged approach.
The first is to force employers to pay their staff properly and not to expect other taxpayers to pay them. He has done this with the living wage. The current minimum wage of £6.50 an hour goes up to £9 an hour by 2020.
The second prong is to reduce income taxes on the low paid by increasing personal allowances. Currently £10,600 is the amount of income you don’t have to pay tax on. This goes to £12,500 by 2020. Both of these changes are being tapered in, so people can adapt to them.
Nine out of 10 families qualified for the state top-ups introduced by Gordon Brown. This has fallen to 6 in 10 since 2010 and will now drop to 5 in 10. Osborne’s measures reduce the £30bn annual bill for tax credits by £9bn, so they are just a start. There is far more cutting to come.
Tax experts and economists have run up the figures for a number of different individuals, some win a bit, some lose a bit. But these “experts” have not thought through the real world effect. Now it will pay to work, being a striver will be rewarded where before it was punished. So people will apply themselves to making a better life for themselves and their families, something that was just not worth doing before. George Osborne’s reforms will set people free. We are headed for a low tax, low benefits economy in which everyone wins.