Politics: Treasury on defensive over tax credit

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The Chancellor was forced on the defensive yesterday over his plan for a tax credit for low-paid families. The Treasury insisted that it would not necessarily cost women money, as critics charge. Diane Coyle, Economics Editor, explains the controversy.

Gordon Brown is not committed to ending the independent taxation of women nor to abolishing family credit, a senior Treasury adviser said yesterday.

Both steps had been seen as an inevitable result of the introduction of the "working-families tax credit" which Mr Brown signalled in his Green Budget earlier this week. This allowance would reach low-income tax payers through their pay packet. The Chancellor has portrayed it as a better incentive to work than a benefit payment such as the existing family credit.

However, critics have long argued that a tax credit could not work in practice because it would require needs to be assessed on the basis of household rather than individual income. Otherwise, according to the Institute for Fiscal Studies, higher earners would benefit disproportionately.

That would mean a big tax increase for second earners - mainly women - who would start paying tax on their first pound of earnings. In addition, if the working-families tax credit, which would go to the main taxpayer, replaced family credit, which is received mainly by mothers, it would involve a transfer of cash from women to men.

Even Treasury officials and advisers have been warning the Chancellor of these potential drawbacks of the scheme, as The Independent reported last week.

Yesterday, Ed Balls, a senior economic adviser to the Chancellor, said that the details of the new tax credit would not be decided until after the report of the commission on tax and benefit reform, headed by Martin Taylor, chief executive of Barclays Bank. This is due ahead of next March's Budget.

Mr Balls said: "We are not necessarily going to end the independent taxation of women. It is not an inevitable consequence of the working-families tax credit." The idea of introducing it alongside family credit had not been ruled out.

He attacked the Institute for Fiscal Studies for "setting up an Aunt Sally". Their assessment was based on an "extreme and absurd" version of the plan.

Andrew Dilnot, Director of the IFS, said yesterday: "We were trying to set out the consequences of going down a variety of different paths. There are lots of choices, and each direction throws up problems of different types."

The Treasury published a paper yesterday on the background to the Chancellor's proposals to make work pay. Along with the working-families tax credit, the minimum wage and the pledge to introduce a 10p income tax rate, when prudent, are intended to raise take-home pay for the poor.