Tax Credits as Tax Cuts

So I just watched PMQs and the discussion of it afterwards on the Daily Politics, which you can see again (today anyway) here. The interesting thing to note here is not the u-turn itself, it is the bizarre situation the government have put themselves in regarding the whole issue of taxation.

Andrew Neil was busy putting a lovely, liberal argument to Patricia Hewitt about just not taxing people rather than making them fill in a form to get their money back. I can’t be arsed to transcribe it, but here’s the conversation stripped down to its core meaning:

Neil: My cleaner pays more tax under this system. You are making her pay more tax, then fill in a big form to get some of it back.

Hewitt: The tax credit system has transformed the lives of poor families.

Neil: She doesn’t have a family, she isn’t entitled to most of the tax credits.

Hewitt: Which is why we introduced the working tax credit for single people without children. But yes, some people still don’t qualify for it, so clearly what’s coming is an extention of tax credits.

Now, pay attention at the back! The argument on this stuff has gone basically as follows since Brown first announced the abolition of the 10p rate in his last budget:

Government: We are abolishing the 10p rate.

Opponents: But that leaves many people, mostly poor people, worse off.

Government: But not all poor people. Look, pensioners, people with children, etc. are fine, because we’re giving it back to them with tax credits and the like.

Opponents: Yes, but what if you’re on a low income and you don’t have children. Then you will lose out.

Government: Lalala, I’m not listening.

Opponents: Well, our constituents are, so we’re going to keep this up and possibly destabilise you.

Government: Oh all right then. But we aren’t reversing the decision.

Opponents: Then you’d better think of something else to make it all better then, hadn’t you?

Government: Got it! We roll out more tax credits and winter fuel allowance to make sure nobody loses out.

Opponents: Hmm. That’s a pretty wide net of tax credits, then.

Government: Oh, don’t worry, it will be.

The point has to be made here that tax credits are supposed to be a redistributive measure, smuggled in by Brown to allow him to feel like a Labour chancellor whilst seemingly not doing too much redistribution. And fair play, there is an argument to be made there; after all, if you want to make judgments about how much of their own money people should be allowed to keep based on something other than their income (eg. whether or not they need to look after children with it), this is one way to do that.

But they’re only justifiable as long as that’s what they are, a specifically redistributive thing, designed to allow the government to effectively tax some people more than others depending on whether or not it approves of their life choices. As liberals we may not like that, but you have to admit that it’s got some ideological underpinnings.

Now look again at what the government and its surrogates have done in conceding the argument to the opponents that there must be no losers from this budget, but maintaining that the way to correct this is not to reverse the original decision (or to do something else to the tax system – say, adopting Lib Dem policy). They have made a mockery of the tax credits system. If, as Hewitt and others are suggesting, the point of the tax credits system is simply to roll it out until nobody is any worse off, then we are going to end up in a situation where everyone on a low enough income is eligible for some tax credit or other, and no fiscal difference has been made to anyone. All that will have changed is that now, people are filling in more forms to stay in the same situation as they had before.

This is bonkers. So in addition to simply pointing out who the people who still lose out from this are, can our response start to take a slightly broader perspective too? Please, Mr. Vince?

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