Tax credits explained

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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.

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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.

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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.

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7 Comments


  1. Remember tax credits replaced income tax married persons allowance and child allowances so they are just recycled back via an army of civil servants to create adependency culture and ‘gratitude’ to the one-eyed Scottish idiot.

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  2. your idea of tax credits is completely lost on me..i understand your point but it has very little basis in fact, I agree with stopping the benefit for more than 2 children, but don’t stop it till the low paid have actually received higher wages..the dismantling of the welfare state is ideologically driven by this government..it shows me were the priorities lie..they take away the maintenance grant for poor pupils yet allow tax inheritance to go to a million?this chancellor inherited growth in the economy, and destroyed it..his mess of a budget in 2012( widely regarded as one of the worst ever )..lost the country billions…and stagnated growth..now our economy is reliant ..on debt (household debt has never been as big) and a housing bubble? sound familiar..? the northern powerhouse has been scaled back as they cannot sort the rail network out..so 30 billion is not coming up north..also this chancellors baby..we export hardly anything..productivity is a disaster from this chancellor..far from being any good..the man born with a silver spoon in his mouth is nothing but a disaster for our country

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  3. The principle is right. Dependency should be tackled. I want to live in a country where raising children on welfare ( defined as means-tested rather than universal benefits ) is the minority position. At the moment it’s the default position that you get the State to pay you to have children, and paying your own way when having kids is the exception.

    The implementation is problematic though. The new 48% taper rate, plus 12% NI plus 20% of PAYE ( plus that invisible 13.8% employers NI which the worker can’t negotiate his labour for ) all mean a very high marginal tax rate on earnings in the 12.5k to 25k range. Better to take rich people out of tax credits ( as inheritances, other savings and maintenance aren’t included in the calculation ). And also to address the cost of living with policies like these – http://www.jrf.org.uk/publications/reducing-poverty-through-policies-cut-cost-living

    Thanks for reading Bruce. I like the ‘Patriotic Duty to join the Labour Party and vote for JC’ campaign you have.

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  4. Your second table clearly shows that a single-earner household is worse off under the new arrangements. How is this a “living wage”?

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  5. There is a suggestion here that a large number of working people do not “work hard”. Why would Care Workers, Porters, Clerks, Nurses, Hairdressers, and so on, be excluded from those who work hard? Each of them plays a role that supports the running of our country. As contributors to a functioning state/society, who would begrudge them a decent income? Nobody’s suggesting they be paid the same as a Doctor, or an IT Consultant.

    It’s also interesting to hear the same lines trotted out about “punishing people who strive, work hard and succeed whilst rewarding those who shirk and thus fail.” If these are going to be the terms of the debate, then where can I find Bruce’s ire directed at Bankers and Ministers. And, more importantly, would this ire be expressed in proportion to the amount of tax (a.k.a Bruce’s “huge taxpayer funded bribe”) revenue paid out to failing Bankers and Ministers?

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  6. The money paid to people who are working is more than people who are not
    This is a load of rubbish
    The money paid to ( poorer) people is spent on existing
    I am single dad my 8 year old sons mother died, I had to give up full time work
    I work 25 hours a week and without Gordon Brown ( peace be upon him) tax credits my son and I would quite simply be destitute

    Our money gets recycled constantly going round helping to keep the world moving

    Your so called money Rich Capitalists is taken out of society and taken off shore to hide aways your greedy counting houses
    You should be thank full Gordon saved your bacon
    Manny of us would of gladly watched your evil capitalist greed driven empire burn
    You wont stop, in 30 years your algorithms will see half the world thrown on the scrap heap and half of You bankers and business men will come to see what being seen as Worthless actually feels like
    Welcome to your blind ignorant automated future

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    1. Hi Sam,
      So you are happy for other people to work to pay for your lifestyle.

      Reply

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