Green Budget: Barriers to work - Devil in the detail of family tax cred it changes

Gordon Brown called yesterday for an informed debate on tax and benefit policy. But his own preferences were sketched out in insufficient detail for people to be able to contribute effectively, a result perhaps of the Government's difficulties in designing a reformed welfare state.

Tackling the barriers to taking work is a key objective of this Government and the Chancellor announced a series of tax and benefit reforms designed to reward work. He went further, proposing a plan to integrate taxes and benefits "involving action at every level".

A working family tax credit paid to families on low incomes directly through the wage packet was the most radical proposed change. Mr Brown claimed it would have a high take-up because it is delivered through the tax system rather than as a welfare benefit and it would provide a clear link between financial rewards and work. This sounds attractive, but, as ever with tax policy, the devil is in the detail.

To start with, there are four questions that still need answers.

First, will the working family tax credit replace or supplement Family Credit? If it is a supplement to Family Credit, it will be expensive and the Government will have two policy tools designed to do a similar thing. If it replaces Family Credit, we need to know how it will link with other taxes and benefits to create a simpler and more easily understood system

Second, how will the Government ensure children receive adequate support? Employees within families will receive the new credit, not the mothers, as is the case with Family Credit today. This will transfer resources from women to men within families, as men are usually still the breadwinners in a family, and will reopen the debate over whether it is better to subsidise the wallet or the purse. The chart shows this effect. It models the average gain/loss in net income for women and men if Family Credit was simply paid to the earner rather than the mother. Men would gain unambiguously at the expense of women by over pounds 5 per week for all couples with gross earnings between pounds 50 and pounds 150 per week. Women lose a corresponding amount.

Third, on whose income will the credit be evaluated? The Government will have a choice of evaluating entitlement to working family tax credits either on individuals or families. If it were to chose individuals, it would be easy to administer in the tax system. The problem with individual assessment is that it would divert resources to low income individuals in rich families and these people do not face problems of low financial rewards of work.

The Government could assess entitlement on family income. This would target low income families but would make administration within the income tax system extremely difficult. Imagine the tax authorities having to compare incomes across a married, or even cohabiting, couple, each time it spots a low wage individual in the system. This could be solved by asking families to claim in order to get the new tax credit but then there would be little difference to the current Family Credit scheme.

Fourthly, over what time period would it be assessed? Income tax is annually assessed and benefits designed to support low income families are assessed fortnightly. This sensibly reflects a desire to minimise administrative costs of income tax and ensure that families are always guaranteed a minimum income. If a tax credit is simply included in the income tax system, there have to be end-of-year adjustments to ensure the correct amount of credit was paid. This will mean many more families than now will have to file tax returns and low income families might even be presented with a tax demand at year-end they cannot afford.

Ultimately, there does seem to be a fundamental choice facing the Government. Either introduce the tax credit in the income tax system and face up to these four problems, amongst others, or keep a separate administration, income tax in name only, and accept the new credit might not feel that different to Family Credit for claimants.

There were other tax and benefit measures announced yesterday. Mr Brown announced possible reforms to the structure of National Insurance Contributions for low wage earners, which would be very welcome but could be expensive. Similar reforms in 1989 cost over pounds 3bn and the cost of a full-scale reform to employer contributions would be higher now.

He also repeated his commitment to introduce a 10p starting rate of income tax when possible, reduce the rate at which means-tested benefits taper off to reduce the poverty trap and introduce a minimum wage. Yet the centrepiece of the tax and benefit measures was the working family tax credit, and many questions there remain to be answered.