The Sun’s (£) daily dose of its campaign on tax credits, which it aims to continue until George Osborne backs down on his plan to cut them, is delivered as usual today.  The paper reports that three million lower-paid households “will lose around £1350″ (each, presumably).  Such claims are a classic illustration of the advantages and disadvantages of calculations based solely on changes to benefits and wages.

The Institute for Fiscal Studies and the Resolution Foundation have offered a £1300 figure, based on examining what the Minimum Wage (now re-badged as the Living Wage) gives on the one hand and the tax credit reductions take away on the other.  The Treasury argues that such assessments can never show the whole picture – failing to take into account, for example, the effects of the increase in the personal allowance, the Government’s childcare offer and rising wages.

On the one hand, this riposte is correct.  On the other hand, its critics’ counter-riposte – that some of those who lose out from the tax credit changes will be single, and thus won’t gain from the childcare plan, or won’t benefit from the higher Minimum Wage – is also right.  The long and short of it is that £1300 is a lot of money, and that not all of the people who lose it will gain in the ways that the Treasury sets out.  If the readers of the Daily Telegraph or the Daily Mail were set to lose over a thousand pounds a year, and see havoc wreaked to their marginal tax rates into the bargain, both would be generating just as much heat as the Sun.  But most of their readers don’t get tax credits, so little has been heard on the matter from either.

Others on the centre-right are more engaged.  Ryan Bourne is concerned about those marginal tax rates (“now to be as high as 80 per cent”); Tim Montgomerie makes the same point and is worried that the concentration of the reductions on the less well-off will reinforce the Conservative Party-of-the-Rich problem.  Were the Chancellor to discuss his tax credit changes with the Sun, he would presumably say much as follows: “Look, first you complain that welfare spending is out of control.  Then you complain when we try to get it under control.  That’s not fair, surely?  But if you really want these changes reined in, could you kindly offer other ways of cutting the deficit that you constantly complain is too high?”

He would have a point.  As no less central a figure to the last Labour Government than Alistair Darling has conceded, Gordon Brown’s tax credits have “had the effect of subsidising wage levels, which is not good for public spending”.  In its first year, the system cost about £1 billion.  It now costs £30 billion.  Osborne is right to rein it in.  The question of how far and fast is more debatable.  The changes could be phased in more slowly.  Or he could move the threshold above which tax credits are withdrawn back up.  Or, more attractively, he could complement the benefits cap with a tax credits cap, and save £3 billion by barring all households with an income of more than £20,000 from getting them at all (though this would push those marginal tax rates up the income scale and hit more Tory voters).

There are other ways of assisting those who will lose out.  One of the pluses of replacing tax credits with the Universal Credit is that its withdrawal rates will be less steep.  Those who receive it will also have other help – work coaches, for example, to help people to get and keep work.  But it is the Department of Work and Pensions that does the Universal Credit and the Treasury that minds tax credits.  The latter could fund some work coaches for those on working tax credits – which would be relatively small beer.  Of course, not all tax credits are working ones, which is why it’s time the child tax credit was rolled into child benefit, or vice-versa (depending on one’s view of universality for family allowances).  There’s no point having two payments for the same purpose.

Ultimately, however, we on the Centre-Right cannot have our deficit reduction cake and eat it.  Any slowing-down of a spending reduction must be made up for by the speeding-up of another – or of new cuts in the rate of spending increase elsewhere, or in tax rises.  How much would be needed would depend on the rate of that slowing-down, and the Government has ruled some potentially juicy savings out.  According to the Taxpayers’ Alliance, it could save well over £4 billion over the course of the Parliament by scrapping HS2, £4 billion by abolishing the Business Department, over £3 billion by means-testing winter fuel payments, and £560 million by the better targeting of free bus passes.  Most of this has been ruled out by the Conservative Manifesto and none of it is likely to happen.

We have one suggestion that could make a modest contribution to any slowing of the Chancellor’s changes.  As the row over Theresa May’s Conservative conference speech has reminded us, Disraeli’s two nations are alive and well.  One is our great immigration-friendly, culturally-vibrant, liberal-minded capital city; the rest is much of the country outside the M25.  The great ramp of property prices in Greater London is making it more and more costly for ordinary families to live there.

There must be new ways of plucking more feathers from the plump geese from abroad who buy up high-end property as an investment or a hedge and don’t even live in it.  On this site, Mark Field has suggested a council tax reform that divides up Band H: as he wrote, “there is a vast difference between a £2 million flat in Pimlico and a home valued at £60 million at One Hyde Park”.  In other words, a mansion tax that, unlike Vince Cable’s middle-class-crushing proposal, is a real mansion tax.

Sure, it is local councils, and not central government, who would gain.  But the latter supplies the former with grant, and a shift from national funding to local taxes is exactly what local government needs – as the Chancellor has recognised with his business rate proposal.  “The fundamental purpose of residential property is to house people,” Field said recently. “It is a precious resource and should not routinely be locked away as part of an investment portfolio.” We say amen to that.

55 comments for: Tax credits – and why it’s time to raise property taxes on high-end owners from abroad

Leave a Reply

You must be logged in to post a comment.