Labour cannot allow the Tories to claim their regressive changes to Britain’s tax credit system help to redress economic imbalance, writes Ella Crine
I love a good national statistic, or a graph. But when economic issues strike me most, is when they unexpectedly impact my decisions. The things I, as a relatively new taxpayer, decide to do with my money.
This week I was buying a bike. The cycle to work scheme is a fantastic idea: it encourages healthy exercise, is good for the environment, and reduces traffic congestion. By offering a monthly payment scheme which allows a bicycle to be bought in monthly instalments on pre-tax income, it means that individuals can buy a bike in an affordable way using their salary pre-tax.
This is great. But there are implications: because higher earners are taxed more, they save more. The incentive for someone who pays the lowest income tax to use the scheme is less. The incentive for someone who earns below the threshold even less than that – they save nothing on the bike itself, though they do benefit from paying for it in monthly instalments.
The scheme is more commonly applied to new bikes, and therefore expensive ones, and the more expensive the bike the greater the saving. So if you cannot afford an expensive bike and are on a smaller salary, it starts to seem less helpful. In the end, I decided that rather than buy a £300-400 new bike with a £70 or so saving, I would buy a cheap secondhand bike for under £100. So far, so what?
The scheme has the purpose of encouraging people to cycle to work and by and large it does that, albeit not for me. But what about tax credit schemes which are aimed – or claim to be – at helping working families, or addressing imbalances. Schemes such as childcare vouchers sound great, allowing parents to make salary sacrifices in return for vouchers, but we should not ignore the truth, that actually it is higher earners who get the biggest payback. The changes due to come in this year, though, for tax-free childcare with a flat payback of 20 per cent, sadly do not solve the issue. Following the introduction of the 30-hour childcare entitlement, tax-free childcare, and universal credit, CentreForum expects a two parent family on the national living wage and earning £19,000 per year to receive 20 per cent less childcare subsidy for a child aged three or four years than a two-parent family with annual earnings of £100,000. The scheme benefits those spending more on childcare and those who have more children, while also being closed to those who have one parent not in work. If you pay the basic rate of tax and spend under £9,336 on childcare, you will be worse off than on childcare vouchers, but those on a higher rate of tax only need spend £6252 to save on the previous scheme. Meanwhile, tax-free childcare is not open to those claiming childcare tax credits, meaning you have to give them up in order to apply. If we want truly progressive policies, we need to think of ways to address these issues.
The policies we introduce should do what they aim to do, and should certainly not do the opposite, by benefitting higher earners more than those they are intended to help. Cycle to work aims to get people cycling. Fine – it is great. But if other tax schemes aim to help those on lower incomes, redress economic imbalance, make going back to work possible for parents, we should be conscious not to end up giving the highest earners the biggest payout. More importantly, we must not allow the government to claim that they are helping to address inequality with such policies.
Ella Crine is a member of Progress. She tweets at @EllaCrine
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