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21 October 2015

The government is in a mess over tax credits. But Frank Field’s solution won’t work

Rather than fiddling at the margins, the government should just reverse its tax cuts for the wealthy. 

By Tim Stacey Tim Stacey

The government’s proposed changes to tax credits are about as bad as they get. They will effectively punish low income people for working, and make it difficult for parents on low incomes to make ends meet. Given how damaging these proposals are, you’d hope a convincing alternative would be being advocated. Sadly, that is not the case. The main alternative policy is being put forward by Frank Field, the Labour MP for Birkenhead, and while it is not entirely without merit, it also has flaws which could make implementing it a complete disaster.

The government plans to cut tax credits by reducing the amount a person can earn before the government takes away their tax credits, and increasing the speed at which the government takes away their tax credits as they earn. Frank Field proposes that for those on the National Minimum Wage (NMW) working less than full time, the Government should not withdraw tax credits at a faster rate, but for those earning above the NMW to see their tax credits withdrawn at an even faster pace.

At first glance this may sound like a good idea, as it would protect workers on the very lowest incomes from cuts. But it would also have disastrous consequences for many people on very low pay. The Government’s proposals will significantly increase how much the working poor will lose from each extra pound they earn, but Frank Field’s proposals would raise this to 97 per cent lost of every extra pound. Field’s proposals would mean that if a family earning the minimum wage, of around £13,000 a year, managed to get a massive raise of £10,000 taking them to the average wage for the whole country of £23,000, they would only be £300 better off. This completely destroys the incentives to progress from their current position.

In reality, people don’t get offered £10,000 raises very often. Increases in wages and hours often happen in small amounts. Extra work comes at the cost of more stress and often forces parents to spend less time with young children. If extra work that ostensibly increased your pay by £100 and meant that you spent a few hours less with your children only actually made you £3 better off, you’d think twice about taking it.  For all the talk of helping people “work their way out of poverty” the evidence suggests this policy will actually make it harder for them to do so.

This is already a problem under the current system. Both the Resolution Foundation and the Chartered Institute of Personnel and Development have found in separate studies of barriers to progressing out of low pay, that often people don’t take promotions because the extra pay is not worth the stress. The Governments changes will not help here, but Frank Field’s suggestion would be even worse. They wouldn’t create a glass ceiling for those looking to progress so much as a brick wall.  

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If you are looking for a credible alternative to tax credits cuts without increasing the deficit the answer is simple, stop cutting taxes for the rich. If the Government reverse their commitment to increase the personal allowance, raise the 40p threshold, cut inheritance tax and other sops to the richest, it wouldn’t need to hit the poor at all