Wednesday, February 14, 2007

OECD agrees Tax Credits are rubbish

Well, according to this report in today's Telegraph the OECD have issued a report on the tax and benefits system and how it affects people with children looking to get back in to work.

The position with family tax credits if you are a wage earner is this. Lets say you earn £20,000 per year and so get say £2,000 in tax credits (less than what you pay in tax and national insurance by a long way). If you then do some overtime or get a pay rise of say £1,000 then you pay tax at 22%, plus National Insurance at 11%. Total deductions 33%. So far so good. However then there is the tax credit claw back of 37% meaning that out of that £1,000 you are left with £300. Hardly worth it, is it?

I thought that stank until I read the details of the OECD report. Apparently if you are a stay at home partner going back to work you can lose a whopping 89.5%, which means out of the £1,000 extra earned example above, you would get £105, even less worth it! For £5,000 they would take home £525. Now that stinks.

But it gets worse. For a single parent moving into work, once you take account of the lose of benefits the effective tax rate is 101.3%. So if a single parent earned an extra £5,000 they would be £65 worse off than if they did nothing at all.

The telegraph report finishes with this:

Stuart Adam, a benefits expert from the Institute for Fiscal Studies, said: "Since 1997, the Government's tax and benefits reforms have acted to weaken work incentives on average. The single biggest thing driving this are the tax credits reforms."

Well, that is Gordon for you.

Hat tip to HDF on


Anonymous said...

Benedict, the reason for this is means-testing... a Tory policy. Tax Credits don't make anyone worse off [except, perhaps, the childless and very rich], but they do help those on low incomes. This is obviously going to create the problems you describe.

The solution is therefore to get rid of means-testing, as, for example, the Green Party have proposed with their policy of a "Citizen's Income". That would require higher tax rates, though...

The TOry solution to the "problems" created by Tax Credits would appear to be merely to abolish them, making the very poor worse off and only making those on middling incomes "relatively" better off but not absolutely better off at all.

I believe the Tory tax plan involved cutting some taxes on esoteric share dealings...

Benedict White said...

Anonymous, Actually I am not sure what the Conservative policies will be.

I am pleased you acknowledge the problems though.

I would look to solve the problems with tax allowances as they are no clawbacks, allowing families to share tax allowences as well.