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Tax credits

The Financial Times reports that from tomorrow there will be

…marked changes to the government’s complex tax credit system. The first reduction is for 850,000 families losing all their child tax credit, worth about £545 a year. The second is up to 212,000 working couples losing their working tax credit – of up to £3,870 a year – if they are unable to increase their weekly working hours from 16 to 24.

Important semantic point: what are tax credits? The HMRC website is unhelpful:

Tax credits are payments from the government.

Wikipedia has a general definition:

A tax credit is a sum deducted from the total amount a taxpayer owes to the state.

So assuming “tax credit” does not mean something else in Britain (and I would not put it past politicians to play such games with words), what we have here is a large tax increase for poor people who nonetheless work.

Here’s a hint to any future chancellor: you get more of what you reward.

Update: In the comments, Paul Marks says that “tax credit” means welfare and that most people who get tax credits do not pay income tax.

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14 comments to Tax credits

  • Paul Marks

    Errr no Rob.

    As with the United States “earned income tax credit” (which is, mostly, not earned and, mostly not REALLY to do with income tax) “tax credits” in Britain normally (but not always) mean “welfare”.

    Most people who get “tax credits” do not pay income tax, or pay less in income tax than they get in “tax credits”.

    Although the situation is no as bad as the United States where half the blinking population do not pay the Federal Income Tax, but still get ……….

    Meanwhile (broadcasting from the Planet Tharg) the media (and academia) teach that the proplem in the United States is that “the rich” or “the one per cent” do not pay their “fair share” (in reality the percentage of Federal revenue that comes from these people has been going UP my entire life). And that the “corporations” do not pay their “fair share” (corporation taxes in the United States are now the highest in the Western world – and most companies do not have the political connetions of the “pets”, such as General Electric, and so have to pay them).

    Back to Britain.

    “So this is good then – a big welfare cut?”

    Sadly not a chance of that I am afraid.

    The amound of money paid out (when all the changes are made) may well go UP.

    Basically this is yet another “move the deckchairs about on the SS Titanic” exercise.

    The government is talking about “intergrating the tax and benefit system” and “intergrating the income tax and national insurance system”.

    Also Ian Duncan Smith is moving towards reducing the number of benefits…

    “Ah at last a real cut”.

    Errr no.

    At least same amount of benefit would be paid out – there would just be fewer benefits (the money would be concentrated in a fewer number of big benefits).

    “You are not saying all of this stuff is about admin changes….”

    Yes, sadly I am.

    Governments love administrative reorganizations – deckchairs on the Titanic stuff.

    Still (who knows) there could actually be some admin SAVINGS out of all this.

    “Do you really believe that Paul….”


  • Paul Marks

    Oh by the way Rob….

    Wikipedia is fine for things like military history (and so on), but be careful not to trust it for anything related to modern political matters.

    Remember “anyone can edit” is a myth – if you trying to counter balance leftist attacks on anything nonleftist you will get a message that your “edit” is “not constructive” and has been removed.

    As for the Financial Times.

    That is even more dodgy than Wikipedia.

  • Quite. “Tax credit” has a sort of obvious meaning to anyone not playing games with words, Wikipedia agreed and I didn’t assign a high enough probability to word game shenanigans.

    I have modified my model of the universe accordingly.

  • Paul Marks

    Sorry to be a nerd…. but the child “tax credit” is interesting (at least to political train spotter types like me).

    Some wealthy people are losing it.

    Other (less wealthy) will find this payment is now subject to income tax.

    The poor? Naught to do with them (actually US – I am poor, although I do not claim any of this stuff and never have).

    By the way – the admin costs (to people and the government) of taxing the child payments will cost more than the revenue raised.

    As for paying out a benefit and then taxing it (handing out with one hand and then taking back with the other).

    That is exactly the sort of “churning” that Ian Duncan Smith was in hope of stopping.

    I suspect that the Chancellor (Mr Osbourne) is a bit overwhelmed by the complexities and size of his responsbilities.

    For example, he is totally misunderstood “tax simplification”.

    For example, the “granny tax” was sold to him as “tax simplification” – no one told him it would explode like a handgranade in his face (and he did not think of this consequence himself).

    The pastie thing is too silly to much comment – other than before doing something it is sensible to first think about it (no doubt this was thought up by civil servants and sold to the Chancellor as “simplification” or “tidy up the tax code”).

    The new 20% tax on church repairs is my “favourate”.

    No doubt he was told that there was an “inconsistancy in the tax code” and signed on without reading (let alone thinking) about it.

    Presently there is 20% VAT on house repairs – which is why so many old (good) houses fall into ruin.

    But it does not apply to churches.

    Now it will.

    A victory for tidy minded administrators.

    And it will (of course) cause chaos – and end up costing the government a fortune.

    Congregations presently pay the costs of church repairs themselves – but with a 20% tax put upon them that will be impossible.

    That will mean the French system.

    I.E. the state (the taxpayers) paying for church repairs.

    “Just let the churches collapse”.

    I doubt the “heritage” people in the civil service will go for that.

  • Paul Marks

    “But who is right about BLACK FRIDAY Paul – will a million poor people be worse off (as Labour)”, or will people be six Pounds fifty pence a week better off (as the government claims)”.

    No doubt both sides are telling the truth (or both sides are lying – it depends how you look at it).

    A million poor people may well be worse off after “Black Friday” – if one counts people like the Duke of Westminister as “poor” (and we are all poor in spirit in the eyes of God – so technically there is no lie by Labour here).

    I am not being (entirely) sarcastic – I have just heard one talking head saying that people on “just over 26,000 a year” are facing a “cut”. I have never earned anything like that in my life (and never will) and I rather doubt this cut in benefits will prove to be real.

    As for the government’s claim that people will be six Pounds fifty pence a week better off……

    Well this does depend on things like “claiming back” tax paid.

    I do not do that (never have) – and I will not in future.

    And, no, I do not want any help in “claiming back” stuff.

    I would rather upend a petrol can over myself and set myself on fire, than fill in government forms.

    To people who think that I am alone among the working poor in having this attitude…..

    You are wrong.

  • Antoine Clarke

    House repairs in France are taxed at 5.5% and donations to churches are tax deductible, I know as I’ve done both in recent months.

    The good thing about the tax credits change is that it simplifies the necessary reform to come. A bit like leaving the door off the latch.

  • Antoine Clarke

    I have never had a “your edit is not constructive” message when I’ve edited Wikipedia pages. I didn’t know this had come in.

  • Mises

    Yes, they are not tax credits they were inspired by Friedman’s “negative income tax”, but of course his suggestion was supposed to replace all existing welfare and operate in an environment free from minimum wage. Instead Gordon Brown tagged his “tax credits” on entirely separately from the existing tax system meaning they were incapable of ascertaining who was really eligible for them. Literally you just had to call up and ask for them, answer the questions correctly and they were yours, resulting in widespread fraud. Eventually they started checking against the tax system but plenty of cash was given away for years first.

  • Andrew Duffin

    Paul, the “pasty tax” was not suggested to the Chancellor by his civil servants – it was required of him by his masters in Brussels.

    Probably Osborne was well aware of how it would play out, but when the EU says jump, all you can do is ask “how high” – if you’ve sold your country out to them years ago.

  • Laird

    I had to google “pasty tax” to find out what you were all talking about. As far as I knew, a “pasty” was something worn by strippers, and I wasn’t quite sure how that was to be taxed (or why it was of widespread concern). Now I know.

  • RRS

    Sound as if there has been a shift from goring oxen to goring rabbits.

  • Lee Moore

    It’s fitting that this thread comes directly below the one on 1984, as “tax credit” is part of a pretty successful Newspeak operation, designed to reduce the electoral disadvantage for lefties of being seen to be in favour of higher taxes.

    First – call your new welfare benefits “tax credits (hat tip Gordon Brown)

    Coming soon, across the Atlantic – call gas price increases “tax hikes” (hat tip Obama)

    The second one is particularly brilliant – it not only allows you to demonise oil companies (and any business that increases prices, ie any business at all); it also allows you to dilute the opprobrium of your real tax hikes in a sea of fake “tax hikes”; and it allows you to paint your right wing opponents as hypocrites for caring only about government tax hikes, but not caring at all about the “tax hikes” imposed by their friends in big business.

  • Rich Rostrom

    There are different kinds of tax credits.

    In the US, most (AFAICT) tax credits are deductions against income tax for an expenditure deemed socially beneficial.

    For instance, one may receive a federal income tax credit for various “energy efficiency” improvements in one’s home: up to $300 for installing an electric “heat pump”, improved water heater, or improved central air conditioning, $150 for an improved furnace or boiler, $50 for an “Advanced Main Air Circulating Fan”, 10% of cost (up to $500) for insulation, roofing, windows, doors, and skylights, and so on.

    Much larger tax credits have been offered for the purchase of a hybrid or electric vehicle.

    These credits are not “refundable” – that is, they can reduce one’s tax bill, but will not be paid out if they exceed the tax bill.

    Other tax credits are refundable – notably the “Earned Income Tax Credit”, a benefit for low-income households with “earned income” – i.e. wages or salary. EITC outlays were $58B in 2010.

    So it is not correct to say flatly that “tax credits are welfare”.

  • Paul Marks

    The E.U. factor – of course, I should have guessed (VAT being an E.U. tax).

    Of course France by chargeing 5% on house repairs is breaking E.U. rules – which state that VAT must be either zero (they allow for zero rating) on a good – or at least 15%.

    However, as Antoine will tell us – France does not treat E.U. rules as the word of God (as the British government does).

    Negative income tax thing – yes Nixon tried it.

    Milton F. ended up testifying AGAINST his own suggestion – when he found that Nixon wanted to add the scheme to all the existing schemes.

    With the later “Earned Income Tax Credit” that is exactly what was done.

    Never suggest an alternative to the state – as they may well do what you suggest AND carry on with everything they are already doing.

    These welfare state changes making it less difficult to hit the weldare state later?

    We have run out of time Antoine, we (including in France) have run out of time.

    That is why (for example) I smile when something like the CATO institute says they are working for “long term reform”.

    There is not going to be a long term. Bankruptcy is going to happen a lot faster than the clever “experts” think it will.

    As will become obvious in 2013.