Saturday, July 12, 2008

In Defense of Tax Credits

So many people seem to be saying get rid of tax credits, just raise the earnings threshold. It's a mantra that's repeated often but is nowhere near as effective a weapon as many people think.

If you raise the tax threshold by £1000 that's effectively deducting £200 from the tax bill of everyone who earns more than that threshold. That's everyone, from workers on the minimum wage right through to CEO's on million pound salaries.

Obviously, making such a tax cut carries an associated cost, a finger in the air guess is at around £6 billion. And here's the rub, that £6 billion is being spent making a considerable number of not so needy people £200 better off. Surely a better plan would be to concentrate that money where it's most needed.

Hence tax credits, clumsy and bureaucratic no doubt. But far more effective at putting money where it's most needed than the "raiding the tax threshold" panacea.

3 comments:

Robert said...

But it takes so long to get and so many mistakes are made that people refuse to claim it,like all these benefits lots of poeple do not know about it or are worried they will end up with bailiffs knocking on the door.

I work non paid of course being disabled as a helper adviser to people learning the job, when I say tax credits or working credits or pensioners credits people say no thanks its trouble. For me being disabled with two grandkids to look after I applied for tax credits it took a year, the mistakes being made was a nightmare I was told no you cannot claim then yes you can, then it took twelve months to get it.it's poorly thought out

Stu said...

"If you raise the tax threshold by £1000 that's effectively deducting £200 from the tax bill of everyone who earns more than that threshold. That's everyone, from workers on the minimum wage right through to CEO's on million pound salaries. "

And the problem with that is... what?

Leaving aside the possibility of paying for the tax cut by reducing the higher tax threshold, what you're essentially saying is "let's not help poor people, just in case the rich get something out of it, too". Give over. The rich already pay into the NHS while also buying private healthcare, they already pay into the education system while also buying independent schooling. The also pay far more in tax than any of us poor people earn before taxes.

Plus, surely you should think about these things in terms of the difference they make to people. For the low-wage earner making £13,000, that £200 represents a rise in earnings of just over 1.5%. To the CEO earning £13,000,000, it's a rise in earnings of 0.0015%. Clearly, the low earner will get by far the most benefit out of the change.

Coming back to that idea of raising the higher tax threshold, raising the 20% tax threshold by £1,000 while simultaneously lowering the 40% threshold by £1000 will prevent the higher earners getting any extra money at all. Adding a 55% band for those who earn over £150,000 would raise more money still for the envious. You could endlessly fiddle. Your suggestion that it's tax credits or nothing is just being obtuse.

Andreas Paterson said...

stu - The point on lowering the 40% threshold is taken, it's an effective way to limit the cost of cutting the main rate.

On your larger point about the rich paying tax, I believe that since the rich get the most benefit from society they should pay the most towards it. I also believe that a redistibutive taxation system is essential for maintianing a stable and prosperous economy.

If you take the view that you have X amount to invest in fighting poverty then you would want to invest it as efficiently as possible, applying money where it is most needed (your point on percentages demonstrates this well). A fixed payment across the entire income range is not as effective as a payment that aids low earners the most with higher earners seing less in benefits.

Tax credits were constructed with the aim of combating poverty, particularly child poverty while also incentivising work and not causing excessive marginal taxation as they are withdraw n towards the higher end of the income spectrum.

I don't think they are the only game in town, but I do think they have been highly effective in combating poverty and often come in for far more stick than they deserve. I also think that raising tax thresholds as an alternative is simply not good enough.