Leading article: What our system needs above all is simplicity

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The sum reported by the National Audit Office was truly mind-boggling. An estimated £1.5bn in tax credit payments – and, yes, that's billion, not million – was lost to fraud, accidental over-claims and other errors in the financial year 2006-7. But it is not just the figure in pounds that is so shocking. At around 8 per cent of the overall sum paid out, what might be described most kindly as losses place the tax-credit programme far and away at the top of the league for documented government wastage.

The only consolation is that this figure is fractionally lower than it was for the previous year. Yet, as the head of the NAO, the comptroller general, said: "Levels of tax-credit error and fraud are significant when compared with the expenditure on the scheme." And what is the Government doing about it? The Treasury's best estimate is that only 5 per cent of tax credit payments should be lost in these ways by April 2011. A mere 5 per cent? By April 2011? For a government so identified with targets, 5 per cent by 2011 suggests extreme poverty of aspiration.

Perhaps, though, the modesty of the target is simply realistic. The tax credit system is one of those things that must have looked wonderfully elegant in theory, and surely appealed to the small-town accountant that lurks deep in Gordon Brown. Households on low wages, with children, would benefit, and they would be spared the absurdity of paying out taxes with one hand, while claiming state benefits with the other. The system, it was also thought, would also be more responsive to changing circumstances.

The practice, however, has turned out to be rather different. While many families are better off as a result – and an initial dent was made in the rate of child poverty – it proved far more complicated than was surely envisaged to co-ordinate the tax and benefits system in this way. In so saying, we give the then chancellor the benefit of the doubt. If the full extent of the complexities were envisaged at the time, then no sane government or chancellor should have touched it.

As it stands, the tax credit system is an invitation to fraud and error. Overpayments have been an endemic problem and hard to recoup from households that are by definition hard-pressed. Meanwhile, underpayments – quite rightly – have to be made up. It has also proved hard to recalculate payments as quickly as recipients' circumstances change; waste is almost inevitable.

We recognise that a time of economic stringency, when even more belt-tightening is in prospect, is no time to abolish a programme that, however clumsily and expensively, helps many people. This experience – which has the Prime Minister's love of tinkering with the fine detail written all over it – should, however, offer a lesson to any government in how not to reform the tax system. Just as Arthur Laffer's curve tracked how lower taxes tended to produce a higher take for the government, so Labour's tax credits might be used to illustrate how wastage grows in direct proportion to complexity. The guiding principle for any future tax reforms, by any government, must be simplicity.

Addressing the CBI yesterday, David Cameron said that cutting taxes was what the Government ought to be doing to give a fiscal stimulus to the economy, adding that it could not because its cupboard was bare. Given Mr Cameron's own caution about tax-cutting, this was somewhat disingenuous on his part. His remarks suggest, though, that the tax system is in political play in a way it has not been for some time. To hope for lower taxes across the board is probably vain; but a simpler tax system that is less wasteful and costs less to administer should surely be within the realm of possibility.

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