Tax credit reforms are flawed
20 October 2015
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The IEA's reaction to the Commons debate on Tax Credits
Commenting on today’s tax credits debate, Ryan Bourne, Head of Public Policy at the Institute of Economic Affairs, said:
“The Conservative Party is right to highlight the broad need for reform of tax credits – the current system ensnares 4.6 million households, at a colossal cost of £30 billion. The system is complex, having evolved with the competing aims of encouraging work and directly alleviating poverty.
“But rather than completely re-thinking the point of credits, the particular reforms proposed by the government would merely slash the threshold above which tax credits are withdrawn and increase their withdrawal rate. Not only will this make many families worse off, it would reduce the incentive for many to move into work or earn more, as marginal tax rates will be as high as 80 per cent.
“It’s true that it’s impossible to save money without taking from some, but broader reform could have avoided damaging incentives in this way. Instead, the government used populist rhetoric about ‘taxpayers subsidising employers’ and introduced a misguided National Living Wage to mask changes which will discourage work and harm many low paid workers.”
Notes to Editors:
To arrange an interview with an IEA spokesperson, please contact Stephanie Lis, Head of Communications: 07766 221 268, slis@iea.org.uk
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
The IEA is a registered educational charity and independent of all political parties.
“The Conservative Party is right to highlight the broad need for reform of tax credits – the current system ensnares 4.6 million households, at a colossal cost of £30 billion. The system is complex, having evolved with the competing aims of encouraging work and directly alleviating poverty.
“But rather than completely re-thinking the point of credits, the particular reforms proposed by the government would merely slash the threshold above which tax credits are withdrawn and increase their withdrawal rate. Not only will this make many families worse off, it would reduce the incentive for many to move into work or earn more, as marginal tax rates will be as high as 80 per cent.
“It’s true that it’s impossible to save money without taking from some, but broader reform could have avoided damaging incentives in this way. Instead, the government used populist rhetoric about ‘taxpayers subsidising employers’ and introduced a misguided National Living Wage to mask changes which will discourage work and harm many low paid workers.”
Notes to Editors:
To arrange an interview with an IEA spokesperson, please contact Stephanie Lis, Head of Communications: 07766 221 268, slis@iea.org.uk
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
The IEA is a registered educational charity and independent of all political parties.
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