New tax credits: will they tackle child poverty?
Poor people cannot be identified on the basis of their behaviour, or any other observable feature. Their standard of living can only be measured objectively and to understand what is socially regarded as unacceptable, people have to be asked for their views and opinions. At this point, we encounter the first problem with trying to measure poverty, best described by R H Tawney: ‘What thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice a problem of riches.’ Here, Paul Treloar looks at whether the new child tax credit can adequately address the problem, as perceived by both sets of thoughtful people.

Introduction
What is poverty?
Poverty figures
How much will be spent?
The poverty trap
Gross income assessments
Childcare
Payment to the main carer
Conclusion

Introduction
April 2003 will herald the introduction of the new child tax credit and working tax credit. The former will bring together the different strands of support for children currently paid via income support, jobseeker’s allowance, working families’ tax credit, disabled person’s tax credit and the children’s tax credit to create ‘a seamless system of financial support for children, building on the foundation of universal child benefit.’ [footnote 1] The latter will be available for low-wage earners, both with and without children. It is intended that the new tax credits will build on previous government reforms to achieve the twin goals of promoting employment and tackling poverty. But how effective will they be?

What is poverty?
Different views of similar living situations almost inevitably lead to different understandings of what is commonly accepted as the poverty line, which essentially equates to a standard of living that no child should be forced to endure. However, despite holding different views, almost everyone, including all the major political parties, would agree that something must be done about poverty, no matter how it is defined. This commonality of feeling has partly arisen from the growing acceptance that childhood poverty and deprivation have identifiable long-term consequences, including negative impacts on educational attainment, employment opportunities, wages and health. When this acceptance is linked to the Government’s oft-repeated mantra that the best way out of poverty is through work, we begin to see a rationale for the new child tax credit and working tax credit emerge.

Underpinned by child benefit and allied to the national minimum wage, the new tax credits are an attempt to redistribute income to a larger than ever group of people. Indeed, one criticism already made is that an additional burden has been imposed on many people at the higher income levels by requiring them to claim something that was previously given as tax relief. Putting aside such arbitrary analysis, can the new tax credits actually help to do what Tony Blair has pledged, that is to eradicate child poverty by 2020? The answer to this question depends to some degree on the measure of poverty that is used, and to this end the Government has recently issued a consultation document, Measuring Child Poverty.[Footnote 2] The Government says that it wants to be sure that poverty is being measured in a way that helps target effective policies and enables it to be held to account for progress. The cynic might say that it is simply shifting the goal posts.

Poverty figures
We have already seen a propensity for the Government to manipulate figures in curious ways. Until the publication of the latest Households Below Average Income (HBAI) figures, the Government was telling all and sundry that its policies had lifted some 1.2 million children out of poverty. The HBAI figures reveal that the true number of children lifted out of relative poverty is about 500,000. Rather than announce the fact that some progress has been made, although not as much as was hoped for, the Government has continued to insist that 1.2 million actually represents the number of children who would have been in poverty if the Tories had been re-elected in 1997. Instead of presenting a partial but important indicator that the figures were moving in the right direction, Alistair Darling (check), Secretary of State for Work and Pensions, found himself head-to-head with Jeremy Paxman on Newsnight, arguing about the veracity of what the Government was saying.

Regardless of how poverty is measured, the Treasury and the Department for Work and Pensions have made public service agreement targets, set out in the 2000 Spending Review, to reduce by a quarter the number of children in low-income households by 2004 compared with 1998/99. Institute for Fiscal Studies figures [footnote 3] suggest that this could be very expensive to achieve: up to £5.4 billion would need to be spent to provide real income gains for up to 4 million of the lowest income families in the UK, and would see up to 900,000 losers. In this model, almost all the losers would be two-earner couples suffering from the move to joint assessment, thereby potentially losing entitlement to the children’s tax credit of £520 per year. Against this, the figures also indicate that poorer families would stand to gain substantially more as a proportion of their income than richer families.

How much will be spent?
In his Budget for 2002, the Chancellor announced that an extra £2.5 billion more than is currently spent on benefits paid for children will go towards the new tax credits. But how much of this will really go to those who truly need it and how much will go to people on incomes much further up the income scale, in order to hold back the wrath of middle England? To compensate potential losers of the children’s tax credit, high upper earnings thresholds have been set which mean that couples will be able to earn up to £50,000 a year whilst retaining an equivalent amount, payable as the family element of the new child tax credit. Combined with the tapering on net incomes, this means that entitlement to child tax credit will not be totally exhausted until income reaches £58,000 and will result in around 85-90 per cent of families being entitled to some element of child tax credit. And if a family has a child under the age of one, entitlement continues for as long as their income remains below £66,000, due to the higher child element paid for children under one year.

85-90 per cent of families [will be] entitled to some element of child tax credit

So what about those at the other end of the income scale? Research by the Institute for Fiscal Studies suggests that, for the lowest four income deciles, average proportional gains among households with children since 1997 have been between 8 and 12 per cent, as against 1-3 per cent for the top four deciles.[Footnote 4] Increases to the child additions of income support, together with additional help whilst in work through working families’ tax credit, have clearly helped effect a real reduction in child poverty, as reflected by the HBAI figures. The Government’s own figures suggest that for families in the lowest income decile, gains of almost £50 per week have been achieved since 1997.[Footnote 5]

With the new tax credits, the payments made towards children in the lowest income families will effectively be rounded-up in the sense that the rates of benefits for out-of-work families will be equalised with those benefits or tax credits for in-work families. Child benefit will be ignored as income for income support purposes, with the result that for the first child, an approximate net gain of some £6 per week will occur (see box). As noted earlier, the child element will be doubled for children under one year, and the amount of £54.25 per week for a first child is guaranteed for all families with an income of less than £13,000 per year. A welcome step is the disregard of all child support maintenance as income when assessing entitlement.

The poverty trap
Previous reforms do appear to have reduced the effects of the poverty trap caused by very high marginal deduction rates as the result of tapered reductions in financial support when a claimant’s income rises. In 1997, almost 750,000 families faced marginal deduction rates in excess of 70 per cent, whereas this number has now fallen by almost 500,000.[Footnote 6] However, there will be an increase in the numbers facing marginal deduction rates of 60 per cent due to the extension of working tax credit to childless claimants who currently are unable to access any financial assistance unless they are disabled. Additionally, the interaction with housing benefit and council tax benefit can exacerbate these issues, as can being an owner-occupier, who receives no recognition of her/his housing costs once s/he moves off income support or income-based jobseeker’s allowance. Professor Wilcox of the University of York has said: ‘Owner-occupation has expanded to a point where half the poorest households now live in homes of their own. They are more likely to be in low-paid work than low-income tenants, and their ineligibility for housing benefit means they can be worse off in work than unemployed, despite the introduction of working families’ tax credit. This is clearly at odds with the Government’s ‘welfare-to-work’ and ‘making work pay’ policies.’[Footnote 7]

For the new tax credits, the marginal deduction rates will be affected to some degree by the decision to disregard the first £2,500 of any income rise in any particular tax year. This innovation means that recipients will not see their tax credits reduced as soon as their income rises, so further reducing the marginal deduction in any one tax year. This most welcome feature of the new tax credits, along with the provision for awards to be reassessed on any fall in income, does seem a very positive move on the part of the Treasury, fulfilling many different objectives:

• reducing immediate marginal deduction rates;
• providing incentives to claimants to increase earnings year on year without losing out immediately;
• reducing administrative burdens and intrusiveness;
• reducing the likelihood of overpayments, penalties and interest for low-income claimants.

Gross income assessments
Another development is the move from assessing entitlement to tax credits on the basis of net income to the consideration of gross income. There should be two main outcomes of this. Firstly, low-paid workers’ entitlement to tax credits will be shielded from changes in the rates of income tax or national insurance. Second, there should be increased incentives for non-working partners to move into paid work due to reductions from 55 per cent to 37 per cent in the tapering of their tax credits as their income rises – ie, for every additional pound earned, a claimant will be able to keep 63p in the pound with the new tax credits compared with 45p in the pound under the old system, although these gains will remain subject to tax and national insurance.

In line with the assessment on gross income, it is important that the new tax credits are uprated annually, at least in line with rises to average national earnings, to ensure that they continue to act as work incentives rather than causing wage stagnation. It is vital that the national minimum wage is similarly uprated for precisely the same reasons.

Childcare
Of course, the ability to enter work for non-working partners in families with children, as well as lone parents, will be dictated to some degree by the availability and affordability of suitable childcare. The amount paid towards childcare expenses will remain the same as for working families’ tax credit – ie, 70 per cent of the maximum sums allowable, although the scope of allowable childcare has been broadened to include approved childcare undertaken within the claimant’s home. Whilst acknowledging that this extension goes some way to broadening parents’ choices about the type of childcare they opt for, it is disappointing that consideration of non-formal childcare charges remains firmly in the cold. The Daycare Trust produced a report [footnote 8] last year which argued that government policies to abolish child poverty and reduce the number of workless families will only succeed with much greater public investment in affordable childcare.

The most significant change in relation to child tax credit effectively tackling child poverty is that payments will be made to the main carer of the children as a matter of course. In the vast majority of cases, this is expected to be the mother

Payment to the main carer
Perhaps the most significant change in relation to child tax credit effectively tackling child poverty is that payments will be made to the main carer of the children as a matter of course. In the vast majority of cases, this is expected to be the mother. A study [footnote 9] in 1986 of women in families revealed that many experienced poverty, and over half of those who then separated from their partners felt they were financially better off on their own, even when their income was a state benefit, due to their ability to control expenditure on the children. This was reinforced by later research which found that whereas family credit (the forerunner to working families’ tax credit) was predominantly claimed by the woman in couples and spent on the family, income support and jobseeker’s allowance were usually claimed by the male partner and regarded as his money.[Footnote 10] The concept of the main carer will be broadly similar to that currently used for child benefit, but it is intended that the single main carer for all the children in a family will be identified using the everyday meaning of the person who usually cares for the children. Where disputes arise, the Inland Revenue will consider the facts of the case and make a decision as to who is the main carer, using guidance on various factors.

Conclusion
There are many attractive features of the new tax credits, but as with all new systems, there will be teething problems as people become used to the new ways of claiming financial support for their children. How the Inland Revenue, alongside Jobcentre Plus, handles these problems will be vital to the public perception of the new tax credits. Various figures have been bandied about regarding the level of take-up for working families’ tax credit, with most estimates hovering around the 70 per cent mark. How the publicity campaign grabs the attention of potential claimants, how advisers grasp the new concepts when explaining the system to their clients and how the Inland Revenue guides claimants through the complexities inherent within the new system will be essential to whether the new tax credits truly improve the lot of the 2.4 million children still living in poverty in the UK.

The need for completing what it is essence an annual tax return will be for many claimants a completely new and unknown concept. Families living in the lowest income households, used to surviving on a week-to-week basis, tend to have very sophisticated budget management skills – they need to be because they live on a financial knife edge.[Footnote 11] The design of the new system does seem to have been developed to allow as much flexibility as possible for such families, but we will have to wait and see the effect on their overall incomes. Whatever happens, we hope that the debate concentrates on whether real financial gains are made, rather than spinning into a statistical dispute that does no-one any favours.

Paul Treloar is a welfare rights worker at CPAG

Footnotes
1. New Tax Credits – Supporting Families, Making Work Pay and Tackling Poverty: a consultative document, Inland Revenue, July 2001 [back to text]
2. Measuring Child Poverty: a consultation document, Department for Work and Pensions [back to text]
3. A Dilnot, C Emmerson and H Simpson, Green Budget 2002, Institute for Fiscal Studies, January 2002 [back to text]
4. M Brewer, T Clark and A Goodman, The Government's Child Poverty Target: how much progress has been made?, Institute for Fiscal Studies, Commentary 87 [back to text]
5. The Child and Working Tax Credits: the modernisation of Britain's tax and benefit system, Number 10, HM Treasury, April 2002 [back to text]
6. See note 5 [back to text]
7. P Kemp, S Wilcox and D Rhodes, Housing Benefit Reform: next steps, Joseph Rowntree Foundation [back to text]
8. The Price Parents Pay, Thinking Big: Childcare for All, Briefing Paper 3, The Daycare Trust [back to text]
9. H Graham, Caring for the Family, Research Report No. 1, Health Education Council, 1986 [back to text]
10. J Goode, C Callender and R Lister, Purse or Wallet?, Policy Studies Institute [back to text]
11. P Meadows, The Integration of Taxes and Benefits for Working Families with Children: issues raised to date, Joseph Rowntree Foundation, 1997 [back to text]

Poverty 112, Summer 2002