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Tax credits and wage floors: battle lines drawn for a new 10p tax-rate moment?

June 23, 2015
I’ve been involved in a revealing debate via the IEA on the respective roles of wages and tax credits in supporting wages. The issue isn’t new (I published a book on it with Fran Bennett in 2001, referring to echos of the Speenhamland episode of the early 19th century!), but the success of the Living Wage campaign and the questioning of tax credits by the present government are having interesting effects on the shape and  politics of the debate.  Essentially it seems to be creating four camps, each represented on the comment string on the IEA site:
1) a simplistic view that capitalists mustn’t be subsidised into low pay by the state (some Living Wage advocates);
2) a welcoming of the role tax credits play in allowing employers to pay low wages and therefore improving jobs growth and profitability without impoverishing people (IEA);
3) a simplistic view that the state should just stay out of everything, so if you want to improve the wage at which people will work, cut out-of-work benefits don’t increase in-work benefits (traditional right-wing view);
4) the sensible view that tax credits are an important way of protecting family in-work income and providing work incentives, but since they can sometimes allow pay to be at levels below what employers can afford (especially in certain sectors), movements such as the Living Wage can help rebalance the respective roles of the state and employers in providing income, and indeed make it more affordable for the state to maintain adequate tax credit protection for those who need it (me; JRF response to cuts proposals)
How loudly will parts of the right defend the second view if the Budget slashes tax credits? Could the injustice of such cuts to hard-working families and attacks from his own side make this Cameron’s “10p tax rate” moment? Which would be ironic, since Gordon Brown’s removal of that lower rate and subsequent unpopularity represented the opposite of what the present government is arguing. Brown compensated a small tax rise with a greater boost in tax credits for families that needed it most. Cameron’s arguing that fewer tax credits will be compensated by taking low earners out of tax. As I’ve argued, his logic doesn’t work.
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