Timing it right? Tax credits and how to respond to income changes, by Peter Whiteford, Michael Mendelson and Jane Millar

Joseph Rowntree Foundation, York, 2003, 34pp, pb, 1 85935 109 3, £11.95. Order this book

In April 2003 the Child Tax Credit (for families with children) and the Working Tax Credit (for low-waged working people) were introduced. This report compares similar credits in Australia and Canada with the British experiment, and especially compares the ways in which the amounts of credit change as a person’s economic circumstances change. In this respect, those planning the British system do appear to have learnt some lessons from the earlier Canadian and Australian schemes, and the report commends the £2,500 disregard which attempts to ensure that overpayments don’t result in too much debt. It also commends the reclaiming of overpayments through reduced credits in the following year and adjustments of credit as changes in circumstances occur (if the claimant wishes) rather than the end of the year, as in Australia – a major source of over- and underpayments in that system.

The high responsiveness of the UK system results, of course, in a heavy administrative burden and in serious complexity, and this, and a related lack of transparency, is likely, according to the report, to result in low take-up rates. (It might have said more than it does about the way in which tax credits enable employers to know more of their employees’ business than they have ever known before: another reason for low take-up). Take-up rates for the previous Working Families Tax Credit, and now Working Tax Credit, have indeed been low, and we have heard recently of considerable administrative chaos. The Canadian system avoids such administrative problems by not making mid-year adjustments as families’ economic circumstances change – the result being that if earned income ceases or drops during the year, then means-tested benefits fill the gap and not an increased tax credit payment.

The major lesson which this report draws is that with tax credits there is always a trade-off between responsiveness and administrative simplicity. The same is of course true of all means-tested benefits (and, let’s be honest, a tax credit is a means-tested benefit). As the researchers conclude:

“Income testing can never be both simple and responsive in practice. There is always a trade-off between a simple system that does not reflect exactly the current circumstances of the recipient and a more complex system that adjusts to the detailed profile of a recipient’s needs. The challenge is to decide when the trade-off is worthwhile. Should the UK instead have opted for the simplicity and efficiency of the Canadian approach at the expense of not responding to current needs? Is the UK courting a smaller version of the Australian difficulties by requiring people to pay back the government? Or has the UK found the optimal compromise between the two? The question for the UK is whether in so compromising it will have created a system that is reasonably acceptable to all, or whether instead it will fail fully to satisfy anyone” (p.27).

The Joseph Rowntree Foundation is to be commended on this report. The researchers had a clear and limited brief, the evidence and the argument are clear, and the conclusions are careful and relevant.