The flaws in Brown's moral vision
Thursday 27 November 1997
The combination of the intended 10p starting rate of income tax and the introduction of a working families tax credit for the low-paid announced in Tuesday's statement forms a central element in the reform of the welfare state. Along with the minimum wage, they will ensure that people can support themselves rather than relying on state handouts.
The fact that this is a moral crusade rather than just a matter of getting money into people's pockets explains why the Chancellor appears so determined to ditch Family Credit, the benefit paid to low-income families, and replace it with an "earned income tax credit" (EITC).
There will be more details later today when the Treasury publishes a paper on the proposals. But the general idea of this import from America is that it is a tax rebate that would be paid through the PAYE system. The amount of the credit would taper off as the recipient's earnings rose.
It sounds a great idea. This is certainly what Ed Balls, the Chancellor's economic adviser, would have been told by his former teacher Robert Reich, the Labor Secretary during President Bill Clinton's first administration.
In the US, it was a great idea, because nothing like Family Credit existed there beforehand. The EITC was launched against the background of a blank canvas. As a tax break, it commanded support from Republicans, and the cost does not fully show up as government spending.
Replacing Family Credit with an EITC in Britain is fraught with disadvantages, however. The Chancellor's proposal is grounded in the highest of principles but it will run into all sorts of practical difficulties.
The objections all hinge on delivering the money through the tax system rather than the benefits system - which is, ironically, exactly the reason Mr Brown thinks his proposal is superior. The Chancellor wants to get away from the notion of handouts. Just as important, Family Credit shows up as social security expenditure, and his own spending limits will not allow any expansion of the scheme.
One catch is that tax is administered by employers, not the Benefits Agency. A family-based tax rebate will require employers to collect a lot of detail on the financial position of other members of the household, not just the person who works for them. Not only is this intrusive - requiring companies to ask, for instance, whether their employees are cohabiting - it is also a big administrative burden on employers.
The Conservatives' attempt to introduce an EITC in 1985 was defeated in the House of Lords after vigorous lobbying by small businesses who did not want to do the government's work for it. The cost of administration is an important issue in the design of taxation, and it cannot be side- stepped by pushing the cost on to business.
Just as bad, the switch to delivery via tax and pay packets would also give the Inland Revenue a vast amount of new information about claimants. This information is currently held separately, by the Benefits Agency, and is not shared. There are clearly civil liberties worries about concentrating all this personal information in one department - and its information technology supplier, the American-owned corporation EDS.
A tax credit based on household income would also require a return to joint taxation. The Chancellor has been known to dismiss this as an objection made only by middle-class women, but he will find that even if that is true, abandoning individual taxation for the sake of a tax credit for low earners would prove extremely unpopular with a key political constituency. This is one of the perils of having an all-male team drawing up welfare- reform proposals. Besides, joint taxation certainly reduces the incentive for the second person in each household (usually the woman) to work by taxing their first pound of income, and would end up reducing labour supply.
Another gender-related objection is that Family Credit is paid almost entirely to women. Even though women are the main earners in about two fifths of low-income households, according to the Institute for Fiscal Studies, the tax credit will go to men in the other three-fifths. As the IFS showed in its analysis for The Independent yesterday, the proposed working families tax credit could be a straight transfer of money from women to men.
Perhaps Mr Brown is simply unaware how much this matters in households, especially when money is tight, and how much difference it can make it can make to the welfare of children. If so, he ought to make it his business to find out.
The outcry about his pre-election notion of cutting child benefit for the over-16s should have warned him, though. It is certainly true that middle-class families gain unduly from child benefit because it is not means tested, but for the women who receive it, it is often the only money of their own they have. The distribution of income within households does matter, and it is also a question of fairness.
There are other practical questions too. For example, the US version of the working families tax credit has turned out to be riddled with fraudulent claims. About 110 per cent of the families thought to be eligible actually claim the EITC. This indicates the need for a careful design.
The weight of academic opinion is either against the Chancellor's proposal or thinks the case still needs proving - it has almost no supporters outside the Government. The advice from Treasury officials and other advisers, too, is to tread cautiously on this.
Mr Brown's office shrugs off the criticism, however, by going back to the point that claiming a benefit like Family Credit bears the stigma of dependence. This Government wants people to feel that they have earned their money by receiving a proper reward for their efforts.
Indeed, the take-up of Family Credit is relatively low. But this probably has more to do with the mind-numbing administrative complexity of claiming it than with any sense of stigma. Switching from the job seeker's allowance to Family Credit, and perhaps back to JSA if you lose your job, is a nightmare involving many forms and weeks of delay.
The Chancellor would do better to focus on streamlining the benefits than ploughing ahead with what will turn out to be a messy and unpopular switch for reasons that have more to do with intellectual purity than common sense.
If he wants low-paid jobs to be more worthwhile, he should just rename and expand Family Credit. After all, Family Credit was named Family Credit rather than Family Benefit or even Family Handout for precisely that reason.
The two measures achieve exactly the same object, but one of them is already working, while switching to the alternative is going to anger and alienate millions of people. It is hard to shrug off the suspicion that the only reason for replacing the existing Family Credit scheme is the fact that this would need an increase in the social security budget, a cost that could not be hidden as a change in the forecast of tax revenues in the public sector accounts.
The paper from the Treasury today will have to answer a lot of hard questions about the merits of the proposal in order to give real force to the Chancellor's moral vision.
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