The great tax swindle

In the week when the meaning of austerity hits home for many, the one big coalition giveaway comes in the form of the rapidly rising personal tax allowance. Any criticism about cuts to tax credits or benefits is met with the same ministerial retort: just look at the size of our tax reductions for those on low and middle incomes.

And this month’s hike in the income tax threshold is far from the summit of current aspirations. The Lib Dems have already made clear that, at enormous expense, they want to go beyond next April’s £10k allowance to reach £12.5k in the next parliament – all done in the name of helping the low paid. Not to be outdone, Grant Shapps let it be known that the Conservatives will be joining the bidding race. And Labour has entered the tax-cutting fray with its pledge to reintroduce the iconic 10p tax band that Gordon Brown abolished.

Yet none of these proposals are what they seem. Tax cuts are about to lose some of their sheen. To understand why, we need to consider how these plans fit with the towering change that is being made to the benefits system withuniversal credit. As a new report – Will Tax Cuts Reach Struggling Families? – by welfare expert Donald Hirsch makes plain, these two flagship agendas are on course for a nasty collision. Oddly, no one seems to have noticed.

The reason is that universal credit – unlike the current system – is assessed on post-tax income. So if taxpayers who also claim universal credit receive a £100 tax cut, they will automatically lose £65 of benefit. As one policy visibly gives, the other stealthily takes. Consequently millions of the working poor will only get a third of the gain going to their better-off counterparts, and tax cuts become a singularly ineffective means of supporting low-income households (even more ineffective, you might say, seeing as even under today’s system most of the gains already flow to the better-off). Given that nearly half of households with dependent-age children are expected to be on universal credit, we can, if things don’t change, lay to rest the well-worn notion that tax cuts are a good way of helping “hard-working families”.

Some will see this as a conspiracy to short-change the working poor. I doubt that. Tax reform and universal credit have been developed by different parties and Whitehall departments. There is plenty of scope for mishap. What is true is that nobody involved has an interest in outing this issue or confronting the cost of remedying it. And there has been silence from Labour, as the same problem exists with its proposal for a 10p tax band.

It is, however, fixable. As Hirsch makes clear, this would require an important and progressive policy tweak: committing to increase the amount that someone can earn before universal credit payments are reduced each and every time there is a tax cut. That sounds fiddly – and indeed it is precisely the fiddliness of this whole issue that has kept it out of public view. Yet it wouldn’t represent a fundamental challenge to universal credit; it just makes cutting taxes more expensive and fairer.

Nor is this the only issue. The more generous tax allowance policy is creating other unintended consequences that need to be tackled. The decision to restrict new pension rights and more generous childcare support to those earning enough to pay income tax means millions of the lowest paid – mostly women – miss out.

People can come to different views about the priority given to raising the income threshold, or indeed Labour’s proposed 10p tax rate. But surely we can all agree that if the public are going to be sold tax cuts on the basis that they offer help to those who are struggling then all parties should have the decency to ensure that the money reaches them. Otherwise it’s mis-selling.

Next time politicians trumpet plans for tax giveaways let’s hope they are taken to task. The 2015 election mustn’t be characterised by populist ideas for cutting income tax that overlook the very group politicians claim they most want to help.

This article originally appeared on The Guardian