So what’s wrong with tax credits?

I have written about tax credits on this blog before, here and here, and regular readers must thing I’m obsessed with the issue. But, following  yesterday’s post, I  think it is important to spell things out more clearly. One reason for doing so is that there really seems to be a lot of misunderstanding about the issue, in many different political quarters and countries.

A couple of weeks ago I was at a conference in Brussels on the theme of ‘Building a Gender Just Society’ and there was a very impressive presentation by Marcella Corsi (professor of economics at the Sapienza University of Rome) about how to reduce gender gaps in the EU. I agreed with just about everything she said except one: there, included (admittedly rather tentatively) in the ingredients of the ‘Pink New Deal’ she was proposing, was the idea of tax credits as a solution to the poverty and precariousness experienced by so many women. It seems that tax credits are often raised as an option in debates on the feminist left in Italian politics. And this, I suspect, is not very different from the kinds of debates that took place in the UK prior to the 1997 general election after which tax credits became such a strong feature of New Labour’s policies. (though I must confess I took no part in these debates).

Why am I so convinced that this view is mistaken? Tax credits, on the face of it, do seem to solve a lot of  problems: they lift (some) people out of extreme poverty; they remove some of the ‘traps’ that previously made it difficult for people to move off benefits and into work without being financially worse off; they can be claimed by people without a previous record of paying contributions into the national insurance system. What’s not to like? Well, in my opinion, plenty. Tax credits are a crucial component of the architecture of the new neoliberal employment regimes, which, under a benign guise, are actually dismantling the welfare entitlements that earlier generations fought for in the 20th Century. There is NOTHING that they provide that couldn’t be provided better, and as or more cheaply, by other means, as I hope to show.

But before listing what is so invidious about them I should probably first explain what they are and how they fit into the tax system as a whole. Incomes have been taxed in Great Britain since 1798 when they were introduced by William Pitt to pay for the Napoleonic Wars. Right from the beginning, taxes were graduated, starting at 2 old pence in the pound (there were 240 pence to the pound so this was less than 1%) on incomes over £60 (the equivalent of about £5,500 in today’s money) and increasing up to a maximum of 2 shillings in the pound (there were 20 shillings to the pound so this equalled 10%). Those earning less than £60 a year paid no income tax. Although eroded in several respects, the principle is still the same. In 2015, the ‘personal tax allowance’ (the amount of earnings on which you pay no tax at all) will be £10,000. On earnings up to £31,865 the tax rate is 20%, rising to 40% on incomes between £31,866 and £150,000 with a maximum of 45% for people earning above that level. Tax credits (which the UK government describes as  ‘benefits’) are currently in the process of being transformed into ‘universal credit’ but, since this has not yet been fully rolled out I will describe the situation in 2014, with two main types of credit in operation. One of these is for people with children, payable to households earning less than £16,000 a year (if they have one child) or £32,200 (if they have two or more children). The other is for childless single people earning less than £13,000 a year or childless couples with a joint income of less than £18,000. What these credits effectively do, after various means tests have been applied and bureaucratic procedures followed, is top the income up: the state adds to it, rather than subtracting from it as it does when it takes income tax.

So what is so invidious about this?

  • People who are claiming tax benefit are working people on very, very low earnings, in very, very badly-paid work.
  • They have lost the right to refuse low-paid work because the conditions of obtaining unemployment benefit (‘job-seekers allowance’) have been made so penal that they are ‘sanctioned’ if they refuse to take whatever job they are thrust into.
  • When they work for wages that are below subsistence level and claim a tax allowance, it is the employer who benefits.
  • Tax credits are therefore a way to subsidise employers who pay below-subsistence wages.
  • The direct link between hours worked, pay and survival is broken: if workers get a pay increase, the amount of the increase is simply knocked off the credit.
  • So there is no incentive to join a union and campaign for better pay. Why pay union dues, that a low-paid worker can ill afford, for no financial benefit?
  • Again, it is employers who benefit and workers who suffer.
  • The level of tax credits is set by the government. It is a political decision that workers have no say over and can be reduced at a stroke.
  • Reducing wage levels in this way would be much harder. Minimum wages are embedded in contracts of employment and collective agreements and can’t just be unilaterally taken away.
  • Tax credits are seen by the government as a ‘benefit’ and therefore make up a high proportion of what is regarded as the ‘unacceptably high’ benefits bill.
  • The category ‘benefits claimants’ is elided with the category ‘unemployed people’ or ‘scroungers’.
  • The last time I looked at the figures (2012) benefits to the unemployed actually accounted for only 4% of welfare spending, while tax credits, paid to working people, accounted for 27%. Since then, the disparity has increased still further.
  • Raising the minimum wage would therefore, at a stroke, reduce the benefits bill.
  • Nevertheless, the demonisation of the unemployed as undeserving scroungers continues unabated.
  • In the mass media this can be seen every day in TV programmes like Saints and Scroungers, Benefits Britain, Benefits Street,  Nick and Margaret: We all Pay your Benefits and Tricks of the Dole Cheats.
  • It can also be seen in government advertisements encouraging people to call anonymously to report neighbours they suspect of being benefits cheats (despite the fact that, to quote the BBC, ‘only about 1% of all benefits are fraudulently claimed. Indeed more money is lost through administrative error than benefit fraud’).
  • This false dichotomy between ‘hard-working tax-payers’ and ‘claimants’ doesn’t just drive wedges into communities, it also legitimises further demonisation and further welfare cuts in a continuing downward spiral.
  • Again, it is employers who benefit and workers who suffer.
  • An extra ingredient in this toxic stew is the role of tax credits in migration.
  • Although they are actually quite hard to claim, requiring a lot of paperwork that most migrants don’t have, the fact that migrants are in principle entitled to claim tax credits not only perpetuates a myth that Britain is unusually generous to its migrant workforce but also allows anti-immigrant right-wing parties to whip up resentment which is then used to legitimate even more benefit cuts.
  • Again, it is employers who benefit and workers who suffer.

I could go on. I would like to emphasise here that all these arguments against tax credits do NOT mean that I am against the idea that the state should provide a guaranteed minimum income for all. Quite the contrary. But that will be the subject of the next post in this series of blogs.

to be continued

5 thoughts on “So what’s wrong with tax credits?

  1. Pingback: An unconditional citizen’s income | Ursula Huws's Blog

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