Widespread concern over the financial impact of the Government’s planned tax credit changes on Britain’s poorest workers is understandable. Although the intentions of the plans – to reduce the deficit and to move to a high wage, low welfare economy – are commendable, they fail to achieve a fundamental principle: to ensure work pays.
As originally set out, the Chancellor’s plans to lower the withdrawal threshold and increase the taper rate would have exacerbated the existing high marginal tax rate faced by the lowest paid. This high marginal tax rate has remained the fundamental flaw in the tax credits system since its introduction by Gordon Brown, as it undermines the incentives of recipients to increase their income.
The Government must now make sure that those workers whom tax credits are intended to help are not discouraged even further to aspire to earn more. As the Chancellor now returns to the drawing board he should use the opportunity to fix Britain’s broken tax credit system once and for all.