Leading Article: Working families' tax credit is a badly flawed measure

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The Independent Culture
BLEEDING-HEART LIBERALS with no personal experience of the social problems that prick their consciences should hesitate before criticising a policy that will give poor working families a minimum of pounds 200 a week. However, Gordon Brown's working families' tax credit (WFTC), which was launched with such a fanfare yesterday, is a badly flawed measure.

Nobody would argue with the Chancellor's desire to use taxpayers' money to top up the incomes of people who are struggling to support themselves on very low earnings. Not even the Opposition. After all, the Conservatives planned a similar measure in 1985, eventually introducing family credit instead. The WFTC is a replacement for family credit, and nearly pounds 2bn a year more generous.

The obvious improvement would have been to increase the existing benefit. But this fell foul of Mr Brown's insistence that family credit, paid by the DSS direct to mothers, must become a tax credit delivered through the pay packet to the family's main earner. He asserts that the psychological impact of this switch on people's willingness to work will be profound. That is why he billed it as the biggest shake-up of the welfare state since the Beveridge Report. For it is not the state that pays, in the form of a hand-out, but work that pays.

This happens to help the Chancellor window-dress the government finances. Increased family credit would have added to the social security bill, whereas a quirk of accounting means that the WFTC will reduce it.

Unfortunately there is a heavier price to pay for the new tax credit, an American import of plausible but unproven psychological benefit, which Mr Brown has transplanted with his usual stubbornness. In the US everyone simply files a tax return, and gets the equivalent credit at the end of the tax year. Here, companies run the tax system for the Inland Revenue via the pay-as-you-earn system.

This means that companies that have to administer the WFTC face a burden that could even discourage some from creating new jobs. Employers will be acting as surrogate benefit offices, and will know far more than they do now about the personal circumstances of their employees. And in some families where this matters, the money will be diverted from Mother's purse to Father's pay packet.

Mr Brown had better be right, then, about the effect that it will have on work effort. While his macroeconomic policies have already proved to be a success, he has staked his credibility on welfare reform as the route to an economy that is both fairer and more efficient. The amount of redistribution to low earners still makes the WFTC worth welcoming. We must now hope that the Chancellor will be flexible enough to adjust it when the inevitable practical difficulties arise.