Saturday, 19 June 2010

More lies and disinformation from yesterday's Evening Standard

Exhibit One:

Families on middle or low incomes could lose more than £2,000 a year under government plans to slash child tax credits, it emerged today... More than five million families get the credit (1), Labour's flagship benefit intended to help working people pay for childcare and other costs... Those on annual incomes of £25,000 get £2,850 a year for one child (2)...

Mr Balls... said the Government was preparing the ground for a “savage Budget raid on the tax credits of millions of families on middle and modest incomes. Families with children where both parents go out to work, but earn a modest income, will be among the biggest losers.(3)”

1) I somehow doubt that this is true (see below) but let's go with it. 'Families' implies 'households with children'. According to Table 2.2 of Social Trends 39 - 2009 edition there are 5.25 million couple households with dependent children and another 1.75 million lone parent households with dependent children. So why not say 'most of them'? (And if it is a nigh-universal benefit, why not make it universal, and save all the admin hassle and means testing? For higher earners, it would be like a small tax rebate, and I see no harm in that.)

2) The basic entitlement for a family with one child is £2,845 (Family element + one Child element from HMRC), but if your income is £25,000 you do not get £2,845. The amount is reduced by 39 pence for every £1 you earn above the First income threshold of £6,420, so if your income is over £13,728 you get precisely £nil (there may be other wrinkles to this, but you get the gist). If you had three children, your basic entitlement would be £7,445, which would be tapered to nil at a gross income of £25,509.

3) As it happens, the bulk of tax credits are paid out to lone parents who are not working, which makes a mockery of the claim that they are "intended to help working people". As to "childcare and other costs", see Exhibit Two. So not only are the Lib-Cons starting at the wrong end (there are very few savings to be made at the upper end), Ed Balls is lying through his teeth when he says it will affect low or middle earners.

Exhibit Two:

Labour leadership frontrunner David Miliband... also suggested... that private schools should lose their £100 million-a-year subsidy from the state, as part of a wider deficit reduction programme.

Actually I agree that the corporation tax exemption (it's not really a subsidy, is it?) for private schools is daft - it only applies to schools which manage to fit into the new definition of 'charity', which means that the Charities Commission can boss them around; it only applies to the tiny amount of a school's income that is not paid out as salaries or other expenses (which are taxable in full), and of course it discriminates against 'the circling sharks of international edubusiness' - but most importantly, that £100 million works out at a paltry £150 per private pupil per year on average (and the tax break is hugely regressive - the richer the school, the more the tax break is worth), which is a heck of lot less than the amount that the taxpayers saves by not having to fund a state school place for them.

In any event, in the print edition, the article was directly below one about Michael Gove's 'free schools', which is a modest step towards education vouchers; these would be worth about thirty or forty times as much as the laughable £150 corporation tax break. Vouchers is the way forward, and to hell with the £150 per pupil tax exemption.

Further, we do not need to pontificate on how and whether vouchers would work, as we already have them for nursery places for children aged 3 to 5. It is a fairly simple, non-means tested system (there's nothing that can't be made simpler, of course), so we can bin the Childcare element of tax credits (which is enormously fiddly) and bin the Employer nursery vouchers nonsense (why have three or four separate subsidies when one will do the job?) and just hike the nursery vouchers accordingly, which then dovetails nicely with education vouchers generally.

Exhibit Three is a fine example of muddled thinking (it would be a tad harsh to call this lies or disinformation as her heart seems to be in the right place):

[Child Benefit] is a benefit that from the start should have been means-tested and gone only to those parents who really needed it. Now the Government simply cannot afford to hand out £50 a week to people like me, who have benefited from both the housing market and the longest economic boom in modern history. For anyone over 40, even our higher education came free.

Quite clearly, Child Benefit (being the best kind of benefit, non-contributory, non-means tested and non-taxable, with tiny administrative costs and practically zero fraud and error) is, from the point of view of the better off, a straightforward tax refund, which is fine by me.

In other words, Child Benefit (which 'costs' around £10 billion a year) is more or less the opposite of Child tax credits (which 'cost' around £15 billion a year, but the exact figure are hard to track down). The redistributive impact of Child Benefit is probably minimal - what it does is smooth your income over your lifetime and it doesn't really influence people's behaviour. Child tax credits OTOH are not only redistributive, they redistribute in a very bad way as they encourage women with low earnings prospects to become an unemployed 'single' (officially at least) mother instead.

The knee-jerk hair-shirt idea put about by 'the middle classes' that they don't need Child benefit has some superficial appeal; but so does the idea that instead of giving our columnist £50 a week in Child benefit we were to give her and her husband extra personal allowances for their children which would save them about £50 a week in tax. The two ideas cancel each other out, and as Child benefit is administratively far simpler (we would end up with two parallel systems that achieve exactly the same thing, only there'd be loads of form filling when your income goes above or below whatever arbitrary cut-off point we choose), why not just stick with it?


Witterings From Witney said...

Nice spot MW and well reasoned (as usual)
- have linked

bayard said...

Put your Labour goggles on, and exhibits 1 & 2 make perfect sense. Both systems fill the criteria of a) being very complicated, therefore justifying the employment of the maximum no of civil servants and b) appearing to give money to those people most likely to vote Labour. (It works - a friend of mine thinks that Gordon Brown is wonderful because he introduced tax credits which bring her all that lovely money every week.)
As to Exhibit 3, the silly cow could simply not claim the bloody benefit if she doesn't think she needs it. If the system was changed back to the mother having to go in person to the Post Office to claim the benefit, people like her probably wouldn't bother, but that got done away with in the Gov't war on the Post Office, sorry "efficiency drive".

Mark Wadsworth said...

B, good comment re people waiving Child benefit, but I do not see the point of making people pick it up in cash, that doesn't really help anybody (apart from sub-postmasters).

James Higham said...

what it does is smooth your income over your lifetime and it doesn't really influence people's behaviour

How so? Because it's not felt?

Mark Wadsworth said...

JH, consider:

1. In cash terms, the largest cost of having children is the loss of the mother's earnings (not just nappies and food and toys and stuff).

2. If an activity is subsidised, but the subsidy is less than the cost, then there is very little distortion. it is only if the subsidy exceeds the cost that things get wildly out of control.

3. For a woman with average earnings potential, the cash cost of having children is (say) £5,000 a year in future lost earnings. So giving a woman £2,500 a year (Child benefit) for three children softens the blow and accords with my mildly feminist and pro-family instincts.

4. For a woman with low earnings potential, the cash cost of having a child is (say) £2,000 per year. So giving such a woman £3,000 a year PER CHILD (Child benefit plus Child tax credits) means that she will have as many children as possible (plus free council house etc etc).

5. Even worse, Child tax credits get withdrawn if the mother or the father has any earned income, so it discourages work and discourages marriage and official, stable relationships.

6. OTOH, we were all children once, and we know that our mothers all got Child benefit for us, however rich or poor. When we grow up, we repay that through our taxes to the next generation, which makes it fair even for people who don't have children themselves.

7. And if we have children ourselves, then Child benefit is cash neutral, it's just an income smoothing exercise (with modest net transfers from high earners to low earners).

8. It is children of women who claimed a lot of Child tax credits who are least likely to be in work and hence repaying that debt to the next generation - it is not cash neutral, it is not an income smoothing exercise etc (with massive net transfers from high earners to low and non earners).

bayard said...

Mark, the point about making people pick up a benefit in cash is that it means those who don't need it, generally don't bother, it's "needs testing" without the paperwork and intrusion. It's also a way for the gov't to help the Post Office provide a service in rural areas that doesn't cost anything.

Steven_L said...

bayard is right about it working. A few years ago in a nightclub a single mother tried to smash her bottle of Smirnoff Ice over my head when she overheard me railing on about how I hoped the tories would abolish CTC.

Smirnoff Ice? £3.30 a bottle for 275ml of alcoholic lemon squash! They're getting far too much!