‘Successes’ of tax credits

Tax credits have not had the effect of forcing down wages for low-paid workers, according to a think-tank report. Overall, tax credits have had a number of successes and are popular with those who get them. But the new universal benefit system, coming in from 2013, means the purpose of tax credits needs rethinking.

The report looks at the direct and indirect impacts of tax credits introduced under the previous Labour government.

Key points

  • Wage growth has been no lower in the part of the earnings distribution where people get tax credits – contrary to some critics’ predictions.
  • Other encouraging outcomes include both the direct effects on poverty reduction and support for in-work incomes, and the indirect impacts on employment levels among target groups.
  • The coming years are likely to see a ‘paring back’ of the scope and ambition of the policy – caused by cuts in spending on tax credits, their incorporation into the new universal credit, and the government’s focus on raising the income tax personal allowance.
  • At the same time the nature of the poverty problem has altered, with an increasing proportion of families below the poverty threshold being in work. The evidence points to wage growth among mothers far outstripping that among fathers, and a particular problem is developing for in-work families relying on the traditional male breadwinner.
  • This raises the question of whether policies to encourage further increases in employment among mothers should be balanced by new forms of income supplementation for single-earner households.
  • It also raises questions about the appropriateness of universal credit – with its strong work disincentives for second earners – for meeting the welfare challenges of the next decade.

Source: Paul Gregg, Matthew Whittaker and Alex Hurrell, Creditworthy: Assessing the Impact of Tax Credits in the Last Decade and Considering what this Means for Universal Credit, Resolution Foundation
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