Wednesday 21 October 2015

Tax Credits Mini-Shambles: A Reader Writes

Our excellent (and numerate) oft-times energy commenter 'rwendland' has come up with the goods in the comments to answer yesterday's throw-away line on the tax credit cuts.  Deserves to be above the line, so here it is: 
The MSM seem to have covered the Tax Credit issue very poorly. For many families the reduction will be over £2k, and when the letter drops on the mat they will be very shocked. The formula to calculate the drop is very easy for people at work, and is a simple function of Joint Income, so why has no MSM seemingly printed the table of reductions: 
Joint_Income    Tax_Credit_Reduction 
£12,000                   £1,624 
£14,000                   £1,764 
£16,000                   £1,904 
£18,000                   £2,044 
£20,000                   £2,184 
£22,000                   £2,324 
£24,000                   £2,464 
Obviously the reduction is limited to the total amount of the Tax Credit the family gets, so not all working low-income families will see the full fall given in the table, but I think most 2+ families will see the fall given if their joint income (post pension contributions) is in the table above. NMW for 37.5 hours a week gives an annual pre-tax income of £13,065, less any pension contributions - so if a 5% pension contribution that is £12,411. The classic "hard-working parents" on near-NMW could easily earn a joint income of £20k from one full and one part time job, giving them a £2,184 tax credit cut. I think they will notice that. 
The explanation for the average £1,300 fall given in the MSM is that there are a large tail of higher income families where the withdrawal taper has reduced tax credits to a small amount - they will lose all the small amount, but they make the average reduction repeated in the MSM smaller. But lower income families will be hit much harder than that average suggests. The simple formula is: If a family's joint income is above £6420, the drop is roughly £1233 plus 7% of income over £6420 (obviously only up to the amount of the Tax Credit the family gets). Why hasn't the MSM told us that clearly? I wonder if all politicians actually know that formula, and have seen the implications? Did Osborne and his SPADs even understand it? 
The 7% is from the increase in withdrawal rate from 41% to 48%. The £1233 reduction is from the reduction of the deduction free threshold from £6420 to £3850 - 48% of that reduction is £1233. Letters hitting mats time will be a shock to many, and I guess many of those once voted Tory, but perhaps not next time.  - rwendland
How bad is this for Osborne?  No lesser *ahem* authority than Polly Toynbee doesn't think this is a Poll Tax moment.  But the back-benches are uneasy, and Boris is stirring.  Early days ... let's wait and see. 



MyBackToTheFutureName ;) said...

Good post.

If it is as rwendland (hit-tip to you sir/ma'am) says this is an unmitigated disaster for the Tories. Either they shaft the bulk of their own voters or the Chancellor has to back down on one of his big savings measures.

Either way Osbourne is holed and listing badly.

I suspect Boris spies an opening here, knowing Kermit is leaving, and realises there is still room at the top.

Personally, this is a 'wow' moment - havent seen a government fuck up this badly in a generation.

Cui bono said...

It has an ideological appeal in the same way that many of Theresa May's ideas have ideological appeal. Problem is always in the execution.

Tax Credits are a multi-billion subsidy to UK plc who should be paying a living wage so the idea of moving UK plc away from subsidy as opposed to the so-called "scroungers" is sound.

Perhaps some of the froth is coming from those large retail companies who don't want their cheap labour taken away from them.

Cui bono

Electro-Kevin said...

It is a Poll Tax moment - but that didn't mean that the Poll Tax was wrong.

Brown dun this lot up like a kipper. But this issue MUST be tackled. Cui Bono says the rest.

Electro-Kevin said...

I feel sorry for those bothering to get out of bed for NMW. This will bring them even closer to those who don't try at all but welfare is a canker and is much abused.

Who'd have thought that it would ever reach the stage where being too fat to work qualifies for full benefit ?

James Higham said...

This party supports middle-class families, does it?

Sackerson said...

GRIND those faces of the poor!

andrew said...

even osbourne is not that stupid

i think he is gambling on short memories and a mini boom and balancing the budget and the hopelessness of the labs or if they are not hopeless, blaming them somehow.

rwendland said...

Andrew, you may be right that short memories and a mini boom will mitigate this as an election issue - yours is the same point Polly Toynbee makes. Though Polly seems to have taken the "fall by an average £1,300 a year" message on board, without realising it hits many families much harder which will make their memories much longer lasting.

On the other hand this starts 1 year in, and the pain will rise as family debts build slowly and/or outgoings cuts are applied. So max pain may well be at the 2 or 3 year point post election. So there are only 2/3 years for memories to fade, not the full 5. I don't really understand why Osborne didn't do this more gradually as his NMW increases were brought in, so there would not be this big hit before NMW really climbs to mitigate it.

BTW I notice the otherwise pretty good House of Commons Library briefing paper for the debate didn't state the immediate reductions as bluntly as my table above does, only in a hard to follow graph in the full report. It does say there are 2.28 million in-work families working >30 hours receiving tax credits, so about 4 million potential voters there. It seems about half of those are in the £14k-£25k income band who will be hardest hit - around 2 million voters then.

Also note there is a good intellectual argument to Tax Credits. As even The Economist notes:

"The irony is that minimum wages are a bad way to combat poverty. ... The richest 10% of British households will benefit more from the higher rate than the poorest 10%, because many low-paid people are their family’s second earners. ... If the cost is passed on to consumers, the minimum wage turns into a subsidy funded by a sales tax — a revenue-raiser that, again, falls heavily on the poor.

Better tools are available. Tax credits (income top-ups for low earners) are a much more efficient way for governments to help the poor — about three-quarters of the benefit ends up with employees. To the extent that firms benefit, they are encouraged to employ low-skilled workers rather than automate jobs. Minimum wages have a powerful emotional and political appeal. But governments should deal in evidence not sentiment."

john miller said...

What it's like is Gordon Brown 2007, when he abolished the 10% starting rate band for income tax. Nobody in Parliament or the MSM noticed or cared. Until the pay packets were hit and Brown jacked up the tax credits.

Then, Brown was Teflon on matters economic and financial and it was, in the end, of no consequence.

Osborne does not have that luxury. When it becomes so obvious that even the MSM and MPs notice, all hell will break loose. It might make even Corbyn look good, that's how bad it will be.

rwendland said...

NB Since writing and calculating the above, I have discovered that the Low Incomes Tax Reform Group of the Chartered Institute of Taxation has also tabulated the reductions, but in a more extensive table over a wider income range, and for those not-working (CTC-only) and without children (WTC-only). I only cover working families above (WTC+CTC).

The Institute of Taxation calculation is the same as mine above. Phew, no mistake in something ND elevated into an article!!

So for a more authoritative cite to quote if you need one, see:

Sebastian Weetabix said...

Polly doesn't think it is a poll tax moment because she is innumerate and hasn't figured it out yet. This is going to be poll tax on steroids.

Cui bono said...

"To the extent that firms benefit, they are encouraged to employ low-skilled workers rather than automate jobs"

Given the exhortations to encourage innovation and efficiency - to raise national productivity, such subsidies to employers are self-defeating. How many of the "screwdriver plants" encouraged to locate to the regions have actually survived waves of recession.

Cluttered political thinking and poor economics. Osbourne knows what to do he just needs to have the will to do it.

Jan said...

You'd think the Treasury would've had a sophisticated model to work out what the changes would mean for all circumstances so is there a hidden agenda or is it really incompetence? Maybe the plan all along was to wait for the inevitable squeals and then backtrack somewhat for those likely to become a lot worse off so as to be a caring Tory.

Dan said...

Haven't these fools learned anything from Gordon "Goldie" Brown?

The way to phase in changes like this is via fiscal drag; cease index linking the tax credits, and instead freeze them, along with pushing up the tax-free allowance ahead of inflation. If there isn't any inflation happening, then create some; for heavens sakes it isn't difficult.

The trick here is to reduce the extent to which low income people are touched at all by government. Taxing them then paying it back is inefficient; taking them out of income tax altogether means that the taxpayer no longer pay the bureaucratic costs of taxing them, which is a saving in and of its self.