WELFARE STATE
Tax credits
Revolution or reform
Rosemary Marten
The Government's Green Paper on tax credits has been described as revolutionary: but it is not as revoluticinary as it could have been or, in my view, should have been. Mr Barber, introducing the Green Paper, said it was the biggest reform of the system for a quarter of a century and for this reason it would take at least five years to introduce. A change of this proportion provides a unique opportunity for a new look, a change in strategy, almost a fresh start. Yet many features of the present system are to remain unchanged, their anomalies perpetuated into the new system. Only family allowances and family income supplement are to be superseded — pensions, sickness and unemployment benefit, rent and rate rebates, supplementary benefit, and all the paraphernalia of the Welfare State that constitutes the "poverty trap " are to remain unaltered.
The proposals fall far short of a complete merger of income tax and social security which is theoretically attractive and has been proposed for several years by those favouring negative income tax. A complete merger is rejected on grounds of cost and administration: "It would not . . . be possible to merge the administration of supplementary benefit with the income tax machine, since it is not part of normal administration of income tax to take into account rent and rates and other special needs nor to respond immediately to these factors." It certainly is not a "normal part" and yet would it not be fairer if it were? Now computers are available the Inland Revenue should not be afraid to tackle complex variations in tax assessment. There is no logic in ignoring the same factors in one calculation while taking them into account in another. The only justification is that this is the way it has always been done: but this is a time for new thinking and new traditions.
• However, the elements of the scheme are simple and this is a valuable feature. For too long the whole process of tax collection and social security has been becoming too obscure for the man in the street to bother with let alone comprehend. Clawbackp and contributory conditions, supplements and waiting days, all obscure the process to the point of mystification — as though the welfare net was intended to intimidate rather than help the individual recipient.
The scheme proposes to merge income tax, tax allowances, family allowances, and family income supplement. There are to be three rates of tax credit — for the single person, the married couple, and dependent children. Like tax allowances, these would be set against tax that is due, but when they exceeded the tax due would be paid as cash benefits like family allowances. Thus some low-paid workers who at present earn too little to claim tax allowances will benefit under the scheme by being given their tax credit as a cash benefit. The present cumulative system of PAYE with its complicated coding system will be replaced by a simple non-cumulative system of tax deductions. Tax will be paid at a fixed rate on all income — a major simplification of the present system.
The actual level of credits and rate of income tax have still to be decided — since the scheme is not to be started until five years from now. But, to illustrate the scheme, the Green Paper suggests £4 for a single person, £6 for a married couple, and £2 per child. The tax rate is taken as 30 per cent. Presumably, approximately, these rates, adjusted for current prices, will be chosen in 1977. The credits would normally be paid through an employer for those at work, or an employment exchange or social security office for the unemployed and fatherless families. One-parent families will be helped by being paid the married couple rate of credit.
Both the low-paid and the average earner will benefit under the proposed scheme. The £20-a-week married man with three children at present pays no tax and is entitled to £1.90 in family allowances and £1.10 from family income supplement. Under the new scheme he would be liable to £6 tax on his earnings but entitled to £12 (£6 married credit and £2 for each child) bringing his income up to £26—£3 more than at present. Similarly, the average earner, a £30-a-week man, would receive £32, compared with £29.90 at present. The break-even point, where tax liability equals tax credits, would be £40.4-week for a three-child family. That is the point at which net taxation wdold begin. The break-even point under the Present system is £29, so the threshold of taxation is to be substantially raised.
Some pensioners will also gain considerable help from the tax credit scheme. Tax credits will be an automatic entitlement, unlike supplementary benefit, which the individual has to claim. At present about 600,000 pensioners do not claim for one reason or another — perhaps pride, perhaps ignorance, though they would be entitled to help if they did. The tax credit level in the Green Paper would raise the single pension from £6.75 to £8.73 (2.02 taxation and £4 credit). This increase would help those not claiming supplementary benefit, and also those who at present neither pay tax nor receive supplementary benefit.
Thus the scheme brings some help to most people and is a welcome step forward. But before accepting it as the best that could •be done in the circumstances, let us look at American experience of negatiVe income tax and its implications for Britain.
Americans have been faced with a similar dilemma to the British: rising costs of welfare and growing complexities of welfare programmes, together with the continuance of large numbers in poverty. At the last election, both Mr Nixon and Senator McGovern put forward welfare reform proposals embodying the concept of negative income tax: the downward extension of the income tax system that would pay out cash (negative taxes) to low income families. An essential' feature of the concept is that tax payments are reduced as the family's income rises above the poverty level by less than the increase in earnings, so that the family is always better off the higher its own earnings are. (This applies to the tax credit scheme too.) The concept was first presented to a broad public in 1962 by Milton Friedman of the University of Chicago, as a way of maintaining some incentive while relieving poverty. But America is ahead, of us in that they have had such a scheme going for four years in the State of New Jersey which explores the key question: how much would it reduce the recipients' incentive to work? This has meant that the programme has been tested in reality rather than worked out in theory. Four different guarantee levels (the amount paid to family with no other income) and three different tax rates (30, 50, and 70 per cent) were applied to a number of intact families among the working poor in several urban areas. 1,300 families were involved, half of whom received no negative tax payments as they were the control group. Reports of income were made every four weeks, and • money given by mail cheques every two weeks. In addition both experimental and control families were interviewed every three months on such matters as participation in the labour force, finance, medical and educational histories, familY structure, and political and social in"
tegration. The remarkable finding was that payments did not give rise to any Significant decline in weekly earnings. The difference between experimental and control group earnings was too small to be statistically significant. A second finding Was that families in the experimental group worked about 12 per cent fewer Working hours than the control group. The suggested reason for this difference is that members of the experimental group took longer to look for better jobs. The negative income tax payment enabled the worker to do that instead of having to take the first job he found. These results are most encouraging and answer the main criticism levied against negative income tax.
Such social experimentation is a valuable part of social policy making and, I hope, will be adopted here before too long. There are many advantages, and some disadvantages too: it is costly and time consuming. But the advantages far outweigh the disadvantages. The tax credit scheme is to be studied by a Select Committee — the traditional British way of testing new ideas — but this falls far Short of real life experimentation. As the scheme is not to begin for five years it would still be possible to conduct such an experiment, and I hope we will follow the Americans by doing this.
All in all the tax credit scheme is a Welcome step forward, but it is less imaginative both in concept and implementation than it might have been. It is a pity that more of the anomalies of the Welfare State are not to be swept away and a fresh start made, and it is also a pity that there is unlikely to be a pilot scheme to test out the ideas in practice.
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