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Can somebody explain the theory of tax credits to me?

(19 Posts)
fluffles Sun 09-Jan-11 21:40:55

As far as i can understand it, there are two types of tax credit, a working tax credit and a family/child tax credit. is that right?

the family/child tax credit is basically a way of rewarding/supporting people to have children, because society needs families to reproduce and yet that's expensive. is that right?

workign tax credit is basically a rebate on income tax? is that right? if so, why not just have lower income tax for lower earners??

i don't really understand the political ideology behind these and would be grateful if somebody could help me...


Takver Sun 09-Jan-11 21:58:13

Will try and explain briefly but coherently if I can.

OK, so if people are out of work/unable to work, as a society we support them at a basic level. Because basic needs vary by family type, people with larger families / greater needs get more money.

The problem with this is that then if a person with several children, for example, moves into a low paid job then it is very likely that they will earn less than they recieve in benefits. The same is likely to be true even for someone with a small family if they can only find part time work.

This means that without any in work benefits, some people will be actually worse off in work - there is a disincentive to get a job.

Working tax credits - and the in work benefits that came before them are meant to get rid of this disincentive.

Takver Sun 09-Jan-11 22:01:12

Sorry, hit post by mistake too soon.

Just having a lower rate of income tax for someone in that situation wouldn't work as generally they won't be paying any tax at all anyway.

Some of the initial discussions in the late 90s IIRC were suggesting a negative income tax rather than the tax credits - so if you earned over a certain amount relative to your family composition you would pay into the system, if you earned below that amount you would pay out. That history is I think part of why tax credits are administered by the Inland Revenue rather than through the benefits system.

Child tax credits - were designed specifically to reduce child poverty, rather than to encourage people to have more children, I think - although of course they are also likely to have that effect.

fluffles Sun 09-Jan-11 22:05:12

thanks, that makes sense, it's basically to top up the 'minimum wage' to a 'living wage' then? but only when people have dependents as i guess without dependents the minimum wage is supposed to be a living wage...


and it hadn't occured to me that this was for people earning below the income tax threshold anyway... blush

oh, but hang on, WTC can't just be for people with children.. otherwise they'd be CTC.. so basically there's acknowledgement then that nobody can survive on minimum wage??? is that true??

Takver Sun 09-Jan-11 22:16:58

Well, I guess if you have a job at minimum wage but only for say 30 hours a week, that is different to having 40 hrs a week at the same hourly rate of course. If you're a single person on minimum wage working 30 hrs a week you won't get much though - I've just done the calculator on that basis and it suggests you'd get a grand total of £379 per year.

Lougle Sun 09-Jan-11 22:19:55

Yes, a single person aged 25, no children, working 37.5 hours at a rate of £5.93 ph (mw) would get £13.37 pw tax credits.

So, no, a full-time wage at minimum wage is not a liveable wage.

Chil1234 Mon 10-Jan-11 10:45:12

"So, no, a full-time wage at minimum wage is not a liveable wage."

That's the part I struggle with. I've never understood why the last administration opted for state-financed WTC top-ups rather than putting pressure on employers to pay better wages. I thought improving workers' pay and conditions was a fairly fundamental objective of the Labour/Union movement.

I also never understood why, the objective was to reduce child poverty, the threshold for CTC was set at £55k annual income.

LurcioLovesFrankie Mon 10-Jan-11 11:34:29

Bit off topic, but in answer to the issue of why not insist on a living wage. The last government did at least introduce the minimum wage, over the objections of the CBI etc. It's not a living wage (particularly in teh SE), but I think that Gordon Brown (during his time as chancellor) always pussyfooted round issues like this because he felt there were limits to what he could impose on the city/financial sector/business and get away with. As old labour myself, with very little time for Blairite "capitalism-lite" I felt not going for a living wage was wrong.

But I'm aware that in a completely unfettered free market capitalist society, chances are as soon as you set a living wage, other prices then get put up to compensate (profit margins must be maintained, doncha know). I suppose your take on this probably divides people along left-right lines. If you think "well clearly that means wage constraints are inherently inflationary, therefore a bad thing" then you're probably instinctively right wing. If you think "well, the fact that introducing decent wages leads to inflation without any other checks and balances on what firms are allowed to get up to simply shows the system -unfettered free market - is broken", then you're instincively left wing. Having said that, I do think left wingers have an obligation to say what sort of modifications to free-market capitalism could produce decent wages without inflation (and no, I don't favour a command economy).

If I'd been a labour politician going into the last election, I'd have said "decent wages, coupled with a state under-written house building programme" - that way you'd have put some Keynsian strategy in place to boost the construction sector of the economy and avoid a double dip recession (which I think will be the end result of slash-and-burn cuts to the public sector), and counterbalanced the inflationary tendency of decent wages with bursting the housing bubble and removing that source of inflation. But perhaps those more economically knowledgeable than me could comment. (I'm aware that Obama has followed a more Keynsian strategy of fiscal stimulus in the US, and unemployment has gone up massively - though what we don't know is whether things would have been even worse under a Republican administration who went for monetarism).

BTW, for the record, I receive child care tax credits, didn't vote Tory (as I said to our Tory candidate on the doorstep, that would have been like a Turkey voting for Christmas) but didn't vote labour either (massive assaults on civil liberties, illegal war in Iraq). Voted Green and take some satisfaction in my vote having played a part in pushing the BNP into last place in my constituency.

Takver Mon 10-Jan-11 12:14:44

Sounds fair enough to me Lurcio. When I've got a little more time I was thinking of starting a 'What economic policies would you put in place?' thread for lefties, would be interesting to have that discussion, I think.

darleneconnor Mon 10-Jan-11 14:12:52

pre-1999 there was something called 'family credit'. I dont know much about it, so correct me if I'm wrong (I didn't work in the system then), but I think it was a flat rate payment to low income, working families. However it didn't make up for the loss in benefits if people returned to work.

So in 1999 Gordon Brown brought in WFTC (working families tax credit) which was much more generous and included a childcare element. However it was paid through employers which wasn't popular. Also it didn't cover childless low-income workers.

So in 2003 HMRC (who had never administered benefits before) started paying out WTC and CTC. People just on benefits stopped getting their DCs included in their income support payments and had to claim CTC, just like working parents. This was supposed to ease the transition to work.

Tax credits partly came about due to the changing structure of families (read massive increase in lone parents) and the realisation that there was a huge poverty trap for anyone who had to pay for childcare to go to work.

Child tax credit wasn't designed to encourage 'breeding'- increasing child benefit would have been a better way of doing this. Under the 1979-1997 govt the relative value of cb was vastly reduced. CTC has brought up the value of cb+ctc up to the level it used to be.

WTC isn't a rebate as often people (including me in the past) got more than I was paying in IT.

We dont just have lower income tax for low earners because a lot of these are second (or third) earners in their household. An age old problem with the tax/benefits problem is that people are taxed as individuals but benefits are calculated per household. Tax credits have gone some way to squaring this circle but the system is still inadequate for modern society.

granted Mon 10-Jan-11 17:46:08

Basically, w have tax credits, because, as a previous poster has said, Gordon bottled out of actually getting employers to pay a living wage. As without a living wage, workers would die - or at any rate, sleep in tents and dress in rags, if not actually starve to death, and people want to pretend we're not heading back to the Victorian era, Labour introduced tax credits - that way, (a) the families wouldn't starve, and (b) they'd always be incredibly grateful to the Labour party for giving them these lovely benefits (= client state), and vote Labour - forgetting, of course that tax credits is just the taxpayer paying to sub the wage bill for companies.

Tax credits (and housing benefit) have allowed employers to pay shit wages, house prices and rents to shoot up, thus meaning our wages to go even less far and we have to work even longer for said employers.

Personally, I'm left wing but v v against tax credits - I'd have liked to see far higher tax thresholds eg no tax on any individual earning below about 12K at least, and for tax rebates for families earning above that. That way, people would be encouraged to work, thus aviding the benefit trap - and resultant burden on all taxpayers, and families could get by. But feeling it was their own efforts that were paying their way, not 'the state'.

Obviously, I'm in favour of benefits for those who can't work, and I'd like to see better maternity benefits r transfrable tax allowances, so those with v young children (up to age 2 at least) could afford to look after them.

I'm open-minded about the need for a higher minimum wage - certainly, all the employers claimed it would cost jobs when it came in, but there is no evidence of that.

LurcioLovesFrankie Mon 10-Jan-11 21:06:53

Takver - "lefties, wwyd?" thread sounds like a brilliant idea. Darlene and Granted sound spot on with their analyses.

Takver Mon 10-Jan-11 21:16:36

Thread started

usualsuspect Mon 10-Jan-11 21:25:27

Family income supplement was introduced in 1971 ,it changed to family credit in 1988 and later to wtc its been around for 30 years in one form or another

KatyMac Mon 10-Jan-11 21:33:11

"all the employers claimed it would cost jobs when it came in, but there is no evidence of that." for me it would cause childcare costs to rise; which wouldn't really help anyone?

Takver Mon 10-Jan-11 21:40:17

Childcare is a bad example as you can't raise productivity per hour there of course, but I believe over the economy as a whole there wasn't any decrease in employment, and was some evidence of increased productivity when the minimum wage came in. (And I think that would be consistent with experiences elsewhere in the world.)

huddspur Mon 10-Jan-11 21:45:11

I think the posters who are blaming employers for not paying enough are being a tad unfair. Over the last 10-15 years house prices have increased at an enormous rate particulary in the south-east and London. Wage rates simply couldn't keep up as house prices were increasing in real terms by around 10% a year, companies simply can't afford to give such pay increases and remain in business.

siasl Mon 10-Jan-11 22:11:34

What I've never understood about tax credits is why you can still receive them when earning way above the national average family income.

It seems you can still receive some sort of tax credit on incomes up to £58k, when the average household income is more like £35k. This seems a dreadful waste of scarce resources. Surely the money would be better spent elsewhere?

This article _id=506452&in_page_id=2 implies that 90% of families are eligible for tax credits. Total insanity - the govt taxes with one hand to give it back in another form.

Have the cuts in tax credits talked about in this article been acted upon?

usualsuspect Mon 10-Jan-11 22:19:54

It was always paid to higher income earners, it was called the Children’s Tax Allowance and was paid in your wages

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