Kate BellPolicy Officer

Tackling poverty and making work pay: can tax credits do better?

1. Have the aims of tax credits been achieved?

2. How could the system be changed?

3. What policy changes could be made?

What are the aims of tax credits?•To tackle poverty;•To make work pay; and, as

part of this;•To meet the costs of

childcare.

Are these aims being achieved?• Tackling poverty: between

2002/03 and 2003/04 child poverty fell by 100,000 AHC: but

• Widespread reports of hardship caused by overpayment recovery

Are these aims being achieved?• Making work pay: IFS – tax and benefit

changes 2000 –2003 mean increase in lone mothers working by 3.38 percentage points: but

• Problems with TCs may be disincentive to work. DWP research: “Perceived inefficiency in the tax credit system acted as a disincentive for some in generating extra income through work.”*

*Graham J, Tennant R, Huxley M and O’Connor W (2005) The role of work in low income families with children – a longitudinal qualitative study DWP Research Report No. 245.

Are these aims being achieved?• Meeting the costs of childcare:

Childcare element of WTC being used by 337,400 families: but

• Childcare element difficult to understand – and administer.

• Childcare element doesn’t meet needs of poor children.

• Childcare element may not be way of paying childcare that best drives up quality.

Are these aims being achieved? – in summary• ‘Everyday’ instability of income caused

by current structure and recovery of overpayments compromises theoretical ability to tackle poverty and make work pay; and

• The Childcare element of Working Tax Credit is a complicated way to meet childcare costs that may not deliver the best outcomes for children.

What could be done to alter the way the system works? • Short term:• Limit in-year recovery of overpayments/

in year adjustments to the same levels as for end of year recovery.

• Introduce a right to an independent appeal in tax credit cases to restore confidence in the system.

• Look again at the IT system to minimise errors.

What could be done to alter the way the system works? • Medium term:• Remove the childcare element – to

better meet childcare aims and to reduce the need for responsiveness in the system. (see the following….)

What could be done to alter the way the system works? • Long term:• Consider a return to fixed 6 month

awards: removal of childcare element means less need for responsiveness and

• Ombudsman: “The fundamental question [is] whether, for people on modest incomes who have to budget and plan their finances carefully to manage their lives, such inbuilt instability really works.”

Why remove the childcare element? • Demand for responsiveness but childcare

element not actually that responsive • It’s difficult for the claimant – and for the

Revenue.• IFS Green Budget suggested that:

– It’s not well targeted at poor children – claimants must be in work.

– It’s not well designed to raise the quality of formal childcare.

– It may not be the best instrument to encourage mothers to work.

What could replace the childcare element? • One: convert expenditure on CCTC to supply

side funding to improve quality; More direct funding of free high quality childcare attractive.

• BUT will remain need for some funding direct to parents for e.g. atypical hours.

• Two: as above, plus additional money in either WTC or CTC decoupled from childcare expenditure. IFS green budget suggests extra cash to either all parents (CTC) or all working parents (WTC) to spend on childcare or otherwise.

What could replace the childcare element? • Three: Option one plus a ‘local

childcare allowance?’: System should be less complex than CCTC but some relation to expenditure. Possible model in New Zealand Childcare subsidy .

• Could be operated on a local level – with rates varying – e.g. would be higher in London.

What could replace the childcare element? No. Of Children in Family

The Family’s weekly income before tax

The subsidy (per hour) per child is up to

1 Less than $770 $2.91

$770 to $849.99 $2.03

$850 to $929.99 $1.13

$930 or more No subsidy

2 Less than $950 $2.91

$950 to $1,039.99 $2.03

$1,040 to $1,129.99 $1.13

3 or more Less than $1,110 $2.91

$1,110 to $1,219.99 $2.03

$1,220 to $1,329.99 $1.13

$1,330 or more No subsidy

What more could tax credits do? • Changes in entitlement as well as

structure could help meet aims of tackling poverty and making work pay; e.g.

• Tackling poverty through a pregnancy tax credit

• Making work pay through lowering the hours rule

• Making work pay with a Housing Credit??

Tackling poverty – starting early • Poverty can begin before birth• Food commission: an ‘adequate but

modest’ diet for pregnant women costs £20 a week. Benefits for single person are £56.20 a week.

• Could begin paying CTC during pregnancy? (Pregnancy Tax Credit?)

• Also establishes entitlement and payment before birth of child.

Make work pay – for more claimants • Ten year childcare strategy suggested lowering

the hours rule for WTC to enable more parents to claim childcare costs.

• Good case for doing this on work incentive grounds alone.

• DWP research* – working < 16 hours helps mothers move into work but causes high levels of hardship.

• Income support earnings disregard (for LPs) £20 a week – unlikely to be worth working more than 4 hours.

*Rafferty A (2003) Lone and coupled mothers working less than 16 hours a week DWP.

Make work pay – for more claimants • Could lower hours rule for claiming

WTC to 8 – choice between IS and WTC (as for childminders

• ‘16 hour credit’ if worried about reducing hours.

• Labour Force Survey – measure for 70 per cent LP employment target – measures all work of over one hour a week.

Make work pay – could tax credits meet

housing costs? • Operation of Housing Benefit and

Council Tax Benefit means low income workers face high Marginal Deduction Rates:

• Budget 2005: 165,000 households face marginal reduction rates + 80 per cent, 235,000 + 70 per cent.

Housing Credit? Only one taper applied to income…

Make work pay – could tax credits meet

housing costs? • Tax credits would have to be operating

100 times better –• But could CCTC provide a model? • This may sound perverse – see proposal

to remove childcare costs above!• Not a recommendation now – but worth

considering.

Conclusions?

• Before asking Tax Credits to do anything else they must work better to deliver existing aims.

• More income stability essential.• Childcare costs may be better met elsewhere.Then and only then…. • Tackle poverty before birth with ‘pregnancy

tax credit’• Make work pay by lowering the hours rule.• Consider if Housing Costs could be included in

tax credits.