How the government could avoid tax credit cuts

The Resolution Foundation published a paper on tax credits yesterday. Just in case anyone is still in any doubt, it showed that the combined effect of tax cuts, the National Living Wage and cuts to tax credits will pivot at somewhere around the 50th percentile in the household income distribution. The richest half will be better off and the poorest half worse off. For the poorest third, the income loss is likely to be severe.

Tax credit winners & losers

None of the fudging options will compensate for this, says Torsten Bell. Extra tax cuts, increases in the minimum wage or phasing the cuts over a longer period won’t make much difference. The brutal arithmetic of this means that, eventually, a lot of lower-income households will get very badly hit.

Last week I said that the government has nowhere to go on tax credits if it is to keep to its pledge to eliminate the deficit without increasing taxes. Maybe I was wrong though. The Resolution Foundation reckons there might be other ways the government can find the money. For example:

Res Foundation Savings

Reversing the rise in the thresholds for paying basic and higher rate income tax would save £6.2 billion, more than enough to avoid having to cut tax credits at all. This would also have the advantage of not taking any money away from people. Slowing down increases in tax thresholds is the nearest governments get to a fiscal free lunch. People only cross tax thresholds when they get pay rises. They might be a bit disgruntled if they pay a bit more tax than they envisaged and, over time, if too many people who don’t consider themselves rich find themselves in the top tax bracket, things can get a bit awkward. But nowhere near as awkward as taking away large amounts of cash from people who were not earning very much in the first place.

Which is why I would not be surprised if, eventually, the government does something like this, perhaps not abandoning tax credit cuts completely but easing off on both the tax credit cuts and the tax threshold rises at the same time.

On Conservative Home last week, Andrew Grimson remarked on the work of the Resolution Foundation in providing the critics of tax credit cuts with “high quality ammunition”. He concluded:

The Resolution Foundation intends to think not only about fairness now, but about living standards for future generations, which takes it into the question of how to make the British economy more productive and thus more prosperous. It will have the freedom to range very widely over Government policy, and to comment much more authoritatively, and at times much more damagingly, than Jeremy Corbyn and John McDonnell seem likely to do.

During the last parliament, the think tanks often scored more direct hits on the government than the opposition managed. High quality ammunition is only any use if you have people in your army who can shoot straight.

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2 Responses to How the government could avoid tax credit cuts

  1. Pingback: How the government could avoid tax credit cuts | Flip Chart Fairy Tales | sdbast

  2. P Hearn says:

    The Think Tanks are going to be the only opposition the government has to worry about for the next few years. Important they do a good job.

    The Adam Smith Institute has had some interesting things to say on the matter too http://www.adamsmith.org/research/reports/free-market-welfare-the-case-for-a-negative-income-tax/ It’s clear the government needs to think again about this. Surprising how they can get into such a mess, so quickly, over something so obvious.

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