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Tax credits 'discourage unemployed from working'. By Dan Martin
Gordon Brown's flagship tax credit scheme means many people prefer to remain unemployed rather than get a job, new research claims.The Institute for Fiscal Studies (IFS) said the initiative is acting as a disincentive to move into employment because the financial rewards of working time full time are not much more than the income people receive from means-tested credits and other benefits.
"Labour's reforms to date have acted to weaken both incentives to be in work at all and incentives for those in work to increase their earnings," the report said. "On average, tax and benefit changes since 1997 mean that someone choosing to work harder gets to keep 2½p less of each extra £1 they earn."
IFS added that the poorest have the lowest incentives to work. It said over two million people would lose more than half of their earnings if they returned to work because their benefits would be cut while their tax payments increased.
Stuart Adam, one of the authors of the report, said: "Two strategies that governments have to help people on low incomes ' providing them with financial support directly, and encouraging them to earn more ' generally conflict.
"There is no easy solution to this trade-off. Ultimately, governments need to decide how much they want to redistribute income to low-income families, and how much they mind if people work less as a result."
The IFS research is the latest to criticise the government's tax credit scheme. Since its inception it has been dogged by controversy including overpayments and claims of fraud. Last month, the BBC said the requests of two-thirds of families to have tax credit overpayments written off have been denied even though HMRC was responsible for the errors.
Number of comments: 4
AccountingWEB.co.uk 6-Oct-2006
Categories: Business News, Tax News, Finance
Times read: 9053
As an IFS member who has actually read the full summary of this report, I have to say that this article is not an accurate representation of its contents. (The comments critical of the research are correspondingly off target).
"Gordon Brown's flagship tax credit scheme means many people prefer to remain unemployed rather than get a job, new research claims."
The report does not say this in any way - in fact it does not deal with actual behavioural response AT ALL - it is an analytical report on the incentive effects of the tax & benefit systems as a whole since 1979.
"It said over two million people would lose more than half of their earnings if they returned to work because their benefits would be cut while their tax payments increased"
No it doesn't - it says that two million PEOPLE IN WORK face effective marginal tax rates of over 50%
"The IFS research is the latest to criticise the government's tax credit scheme"
No it isn't - it doesn't criticise it at all - in fact your own quote shows that IFS acknowledge there is a trade off between anti-poverty and work incentive effectiveness, which the report then discusses in some detail.
In fact it is impossible for tax credits alone to discourage the sole earner in a household from working - the effect is mainly on second earners in couples with children (stereotypically the mother). A much bigger problem is housing benefit withdrawal, which has been exacerbated by the growth in rental costs in recent years.
I'd be the first to agree with Jenni. Our Country's better with a Welfare System. However, as a Taxpayer, I'm fed up with millions being spent on Consultants who produce absolutely worthless research.
This case is particularly annoying. Whilst what they say may be true in part, it's not the real story.
I suspect the situation is more likely to be that the healthy, long-term unemployed ( as a sizeable percentage ) may be far worse off by working by maybe as much as 10K - 20K.
They haven't got riches, but the one thing being unemployed does give them in abundance is ... time. What do they do with it ?. They can either lounge around home watching Sky all day, or get a nice little earner helping Fred the Builder down the road. £200 a week ` cash in hand ' is £15K to you and me. Add this to the net £10K they're getting off the State, and you're looking at the equivalent of £30K gross.
So, your ` unemployed ' person in this situation has to get a job which starts at £30K just to stay on the same level of net income. As this figure considerably exceeds the average starting levels for Blue Collar, unskilled employment this would be an enormous disincentive to finding normal employment.
I must add that those who physically cannot work or those in temporary limbo have every right to be supported by the State. However, there IS a problem with the system and it may well be that a realistic analysis of the reasons behind the disincentive to the long-term unemployed is the Black Economy and the Government’s failure to control it. Not just Gordon's Tax Credits as the report suggests.
We know this situation exists on a large scale. But whether you believe it to be very much in the minority or not, one cannot doubt that it IS a factor in evaluating disincentives.
Therefore, why wasn’t it mentioned in this
( probably very expensive ) report ?.
Edward Steiger has clearly never been in the unenviable position of being unemployed and on benefits, and then having to make the transition of moving to work, only to find that your net income is much the same - except you have to work 39 hours more for your money.
It is true that with JSA, housing and council tax benefits conbined, walking into a minimum-wage-or-thereabouts full time job does make you poorer.
The system is flawed, but I don't have an answer for it!
...discourages people from working?! I don't know who funds The Insititute for Fiscal Studies but I would suggest they got about as much value for money from this research as the tax paying population get from the tax credit system in general.
Edward
