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Tax credits and a fairer system

IAIN Duncan Smith's scathing attack on tax credits is as predictable as Ne'erday following Hogmanay.

It is in response to Labour's opposition to the Coalition's decision to cut their value by allowing them to lag behind inflation for the rest of this parliament. In a newspaper article yesterday the Work and Pensions Secretary describes the system, which is overseen by HM Revenue and Customs rather than his own department, as "wide open to abuse" and propping up a culture of dependency. Haranguing Labour for the £171bn spent on tax credits between 2003 and 2010, he says £10bn was wasted on "fraud and error". Of course, he knows that in the retelling this statistic will morph into £10bn of fraud, although that accounts for only a small proportion.

Because tax credits are designed to lift low-paid households out of poverty by providing top-ups when they are required, they rely on claimants predicting their circumstances over the coming year, which creates problems, particularly for those whose working hours fluctuate. Certainly, tax credits have been abused by a minority, though Mr Duncan Smith provides no hard evidence to back his assertion that "fraudsters from around the world targeted this benefit".

What his outburst ignores is the extent to which the low-paid and especially the underemployed (those in part-time work who want more hours but cannot get them), depend on these benefits to keep the wolf from the door. Far from encouraging dependency in the traditional sense, tax credits incentivise the unemployed to take low-paid work. And, along with the national minimum wage, they are largely responsible for taking 600,000 children out of poverty under the last government. Allowing them to wither risks driving more working households back on food banks. Integrating tax credits into the new universal credit, which will be rolled out later this year, is not a bad idea per se but many, including some of his own Cabinet colleagues, fear the new system may prove unworkable.

How can the system be made better and fairer? Mr Duncan Smith complains about the lack of checks on tax credit claims, ignoring the fact that his Government has cuts HMRC staff by 10,000 in two years. Restoring those cuts would help minimise fraud though a far more lucrative hunting ground for inspectors would be the billions lost annually in tax avoidance and evasion by companies and rich individuals.

Raising income tax thresholds, as the Coalition has done, is a move in the right direction. It makes little sense for a government to give with one hand while taking with the other. However, as the Institute for Fiscal Studies has demonstrated, for many of the poorest households, cuts to tax credits outweigh the rise in income tax allowances, if they have two children or more.

Thirdly, tax credits subsidise employers who refuse to pay their workers enough to live on. Rather than failing to uprate the national minimum wage with inflation or to enforce it, the Government should follow the enlightened lead of Glasgow City Council and others and consider introducing the living wage (currently £7.45 an hour). Recent research suggests the Government could save £2bn a year if the living wage was adopted widely, even though its own wage bill would rise by £1.3bn. Why? Largely because far fewer households would qualify for tax credits.

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