The regulator of premium-rate telephone services, ICSTIC, is investigating television companies which dangle prizes before viewers’ eyes and then make it extremely difficult to claim them. When it has finished with that, perhaps the watchdog might turn its attention to a similar scam: Gordon Brown’s tax credits. In last month’s Budget, the Chancellor held out the promise that 5.3 million people who will be left worse off by the abolition of the 10 pence starting rate for income tax will be able to offset some of their losses by claiming enhanced tax credits. What he didn’t say was that tax credits are so fiendishly complicated that millions fail to claim the money to which they are entitled. In the case of Child Tax Credits, for example, two million of the seven million who could claim failed to do so — a large number of them towards the bottom end of the income scale. No wonder the number of children living in poverty — as defined by the government — rose last year.
There is little hope that take-up of tax credits will improve. Indeed, last week a Treasury official admitted to the Commons treasury committee that no allowance has been made in the Budget for the possibility that more people might take up their entitlements. Can it be possible that Brown dreamed them up in order to give the impression of being generous without actually having to hand over the cash? No wonder the Treasury believes it can count on the poor not to claim, when there are so many horror stories of people caught up in the Kafkaesque world of tax credits.
One self-employed claimant was told that not only would she have to fill in a long form every year, but that she would have to contact her tax office every week to tell them the precise number of hours she had worked in the past seven days; drop below 30 hours, she was warned, and she would lose her money altogether. In another case a mother suddenly received a demand for £5,000 which HM Revenue and Customs claimed she had — like thousands of others — been overpaid by mistake. After many months arguing with her tax office that she would end up bankrupt, HMRC finally agreed to write off the money. Then bizarrely, like a dysfunctional cashpoint spewing tenners into the street, it sent her another £4,000 without explanation —money which it would try to reclaim at a later date.
Needless to say, the system of tax credits is horrendously expensive to maintain. The administration of pension credit alone requires a staff of 18,000. If tax credits were abolished, everyone would be able to enjoy a significant tax cut purely as a result of the elimination of thousands of parasitic jobs in the tax-and-benefits industry.
Of course, Gordon Brown won’t do this because he claims that finely tuned tax credits achieve what insensitive tax cuts could never do: target help at the most needy. But what is the truth of this? The needy for whom tax credits are designed are working people on low incomes (Working Families Tax Credit), parents (Child Tax Credit) and pensioners (Pension Credit). It doesn’t take too much effort to devise a tax cut which would benefit each of these groups far more directly and efficiently.
As for working people, why not slash (and one day abolish altogether) National Insurance contributions? The ‘national insurance fund’ into which these contributions supposedly go is entirely fictitious: NICs are simply income tax by another name. The sole difference is that they are only levied on working people, not those who live off investments. The tax system of 30 years ago discriminated against unearned incomes, but bizarrely, Labour now runs a system which discriminates against earners. Slash NICs at the lower end of the income scale and you have a ready-made working families’ tax credit — at zero administrative cost.
As for Child Tax Credit, there is a perfectly simple alternative: why not transfer to parents part of the tax-free allowance their children would be entitled to if those children had income of their own? If you are earning £10,000 a year and have two children, for example, how about transferring £1,000 of each child’s tax-free allowance to the earning member of the household? Instead of paying income tax on £5,000 a year, the earner would then pay tax on only £3,000 a year — a saving of £400 a year. Again, an instant Child Tax Credit requiring no extra staff at HMRC. For Pension Credit, the answer is just as simple: higher tax-free allowances for pensioners.
The Conservatives cannot commit themselves to detailed tax cuts before they know the state of the economy which they will inherit, but the simplification of taxes and benefits is one thing to which they certainly can commit — albeit at the possible expense of a parliamentary seat or two in Nottingham, where HMRC is based. David Cameron is always going on about ‘sharing the proceeds of growth’. He ought to say a little more about sharing the proceeds of shrinkage — of the public sector.