The real problem with UK tax credits

In my previous post I was very critical of the argument that Tax Credits are simply a form of ‘corporate welfare.’

However, I want to flag up one very good point raised by Deborah Orr where this claim is quite probably true. Tax credits utilise a working-hours threshold (of 16, 24 or 30 hours depending on family composition) which will have unwanted effects.

This could be seen as a form of corporate welfare where companies will be able to more easily (and potentially more cheaply) hire two part-time staff to do the job that could be done by one.

This might not be an entirely detrimental outcome—tax credits may have been one of the factors why the downturn in the UK economy as a result of the global financial crisis caused mass underemployment rather than mass unemployment. Employers might otherwise prefer one full-time employee to two part-time employees and there will no doubt be someone out there (possibly one of the part-timers) who would prefer to do the job full-time.

But the hour working threshold will still have unwanted effects. There are no doubt numerous cases where both worker and employer would prefer to have more work hours in a week in the absence of the threshold.

A further problem with the hours threshold for tax credits is that it means that these are not doing as much to assist low-paid workers who work very long hours, for example two minimum wage jobs.

But what is the alternative to the working hours threshold? The logical extension is to take account of the actual amount of hours people have worked and give people more support if they a) work longer and b) work at a low wage.

My hourly averaging proposal does this. It therefore represents a much more effective form of earnings subsidy. It is targeted at those who have a low lifetime average income and gives an incentive for people to keep working full time in order to generate more income.