Osborne’s Budget: Tax Credits
In his Emergency Budget, Osborne unveiled his most controversial policy to date: Tax Credits. However, the question remains: will a cut in Tax Credits increase incentives for workers to gain further employment?
Tax Credits: Reduced incentives for further employment
Tax credits can be seen to act as a reduced incentive to work. Indeed, in the most extreme cases, a single parent with three children, working 16 hours a week on the minimum wage, would earn £5 400 a year. However, Child Tax Credit, Working Tax Credit and childcare would bring the parent £23 855 pa! Furthermore, when an employee earns £6 420, their tax credits are reduced, meaning that they lose 41p from the welfare budget for every £1 that they earn above this value. However, in April 2016, the threshold will fall to £3 850, with the taper rate increasing to 48p. This should act as an incentive for workers to work longer hours, or obtain further employment. This is because, under the current system, in the eyes of the recipients, it is more beneficial to work less and earn approximately £6 420 a year and receive tax credits, than it is to increase working hours, where the aggregate rate of increase of wages and tax credits diminishes. Although there is an incentive to work longer, the incentive greatly decreases when the employees’ wages are higher. Therefore, rather than acting as an incentive to enter the labour market, tax credits are essentially acting as an incentive for some people to remain in low-paid work. In contrast, under the proposed system, workers will have a greater incentive to find further employment, as £ 3 850 cannot be seen as an adequate salary to live on. Furthermore, following a similar line of reasoning, the decrease in the income threshold for those claiming Tax Credits, which is expected to decrease from £16 105 to £12 125, should act as an incentive for those currently claiming Tax Credits to find further employment and progress up the income ladder.
Furthermore, there are perverse incentives in
the system, which results in people claiming Tax Credits whilst avoiding being
pressured by the local job centre to find employment. For example, a loophole
means that a self-employed businessperson can receive tax credits, both Working
Tax Credit and Child Tax Credit, if they earn no profit on their business. This
has led to a few self-employed people to claim Working Tax credits, whilst
earning profit, or not even owning the purported business.
Reduction in Tax Credits: a reduced incentive to work?
However, opponents would counter this and
argue that the reduction in the threshold value and a reduction in Tax Credits
would act as a disincentive to work, because in their eyes, the extra money
gained from working does not outweigh the benefit of staying at home and
receiving Benefits. Indeed, Tax Credits were initially introduced in order to
ensure that those on benefits would be encouraged to find employment opportunities
as they would keep a large proportion of their welfare benefits. However, this
cannot be seen as a strong case against a cut in Tax Credits. This is because
there is a social stigma against unemployment, which has not been included in
the opponents’ arguments. These
non-monetary disadvantages of unemployment are not outweighed by the ‘burden’
of working. Moreover, the increase in the National Living Wage and income tax allowance,
which is rising to £11 000 in April, should act as a further incentive to work,
and therefore should mitigate the losses of Tax Credits, and indeed should result
in higher incomes for the employed. Free
child care will also be provided to 3 and 4 year olds, meaning that parents
will have an incentive to go to work, knowing that their children will be
looked after. This is particularly important in London where childcare is the
highest in the country, which has acted as a disincentive for working mothers
to go back to work as childcare makes up a large percentage of disposable
income.
Child Tax Credits
However, Osborne should not cut Child Tax
credit. This would be even more controversial in today’s society, especially
because evidence suggests a correlation between Child Tax Credits and a
reduction in child poverty from 35pc before the adoption of Child Tax Credits
nearly two decades ago, to 19pc today. On moral grounds, we must provide
children, regardless of whether they are born into a low earning family or a
high earning family, as much of an equal opportunity at the beginning of their
life as possible. This would mean continuing giving Child Tax Credits, which
total £2 780 per child per year for those on lower incomes. This would ensure that should parents lose
jobs or do not have adequate income to provide for their children
Therefore, should parents not be able to
provide for their children, due to a lack of sufficient income, the children
would receive sufficient money in order to purchase food, clothes and basic
necessities. Children have the right to a basic standard of living, regardless
of their parents’ income.
The Verdict
Osborne is set to announce his measures in
the Autumn Settlement on Wednesday 25th November. Child Tax Credits
should remain in order to protect children regardless of their background.
There is a strong economic case for reducing Working Tax Credits, especially if
the National Living Wage is implemented alongside increases in the Personal
Allowance.
It seems highly unlikely that major cuts
would be made in today’s political climate, especially following the House of
Lords’ vote to delay Osborne’s reforms and the British public expressing their
disapproval. Even the Conservatives are split on the issue. Cuts in Child Tax
Credit seem to have been ruled out, but it is equally likely that reductions in
Working Tax Credit will receive an ‘Aye’ or a ‘Yea’. Only time will tell.
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