Error by design

The Public Accounts Committee says £5.8bn was overpaid in tax credits in the first three years of their operation.
This will be interpreted as evidence of the Treasury's bad administration. But this is only part of the story. Over-payments of tax credits are not due merely to incompetent management. They are an essential part of the system.
Tax credits are paid on the basis of a family's past income. This means that if their income rises, the credit will be overpaid, unless the family immediately reports its change of circumstances, which it won't.
In the Treasury's report that advocated the introduction of tax credits, Martin Taylor wrote (pdf):

The tax system works by looking back on the whole year and it could only be made to respond to in-year changes by using estimates of entitlement with adjustments after the end of the year, and support would sometimes have to be claimed back [because it was overpaid in the first place]. (para 3.22)

And because the low-paid often have quite volatile incomes, such changes will be common. Back in 2003, the IFS's Mike Brewer estimated (pdf) that 750,000 families would be overpaid credits because their income rose.
So, what's the solution to this? The Treasury's answer has been to increase the amount of the rise in incomes necessary to trigger a claimback to £25,000; this will cost taxpayers £100m this year. And it's increasd the number of staff working on tax credit compliance, to 1400.
But there is another answer, isn't there?

Comments

[ChrisC]

Of course there is.
But don't expect Brown to do anything about it!

[Mark Wadsworth]

Thanks for putting the link the CI website.

[pommygranate]

i dont know why but someine came to my blog from this site via a post you wrote in april 05 on CBIs (?). very interesting post btw.

interesting because thats what we (the LDP) are proposing to the Australian electorate in the forthcoming elections via a 30/30 policy.

[Mark Wadsworth]

Pommygranate, can you elucidate or attach a link to aforementioned policy?

[pommygranate]

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2005/04/the_case_for_ba.html

[Mark Wadsworth]

Pommygranate, I meant a link to the LDP's 30/30 policy (I read somewhere flat tax of 30% on incomes over AUD 30,000) but that doesn't explain the CBI bit.

[pommygranate]

Ah. yes.

http://www.ldp.org.au/federal/policies/tax.html

It is a negative income tax policy, whereby the first $30k of earnings are tax free and thereafter one only pays 30%.

for those without any earnings or who earn below $30k, they receive money as follows;

if you earn nothing, then you receive 30% of $30k, ie $9k.

if you earn $10k, then you receive that $10k tax free plus an additional 30% of $20k (30-10) or $6k - a total of $16k.

it is a way of reducing the bureaucracy of the welfare state and reducing dependance on it.

[Zmajrpg]

http://pornxdance.info x