In the 2007 Budget Gordon Brown, then Chancellor of the Exchequer, announced that the 22p tax band would be reduced to 20p in the pound as of April 2008. In addition, the 10p tax band was to be abolished. The aim was to create a simplified and fairer tax system and raise some much needed revenue for the government – they expect to make £3.7bn from the changes. A year has passed since then and the planned tax system changes have been implemented but only now are we beginning to understand the implications of these changes. As the tax band changes have the effect of ‘making poor people poorer’ (to quote Labour MP David Anderson) Brown is facing a substantial backlash from backbench Labour MPs, other political parties and the general public.
In essence, what the tax band changes amount to is a reduction in the tax paid by higher earners and an increase in the tax paid by those on the lowest incomes. Let me repeat that. A Labour government, which is intent on tackling poverty, has implemented a change to the tax system which sees the better off in society gain money and the poor lose money. As The Times put it, it amounts to a robbing Peter to pay Paul type of situation but in this case Peter was notably poorer than Paul in the first place. It has been estimated by the Institute of Fiscal Studies (IFS) that 5.3 million households will be negatively affected by these changes with poor households losing out by up to £232 per year. This is shameful enough but when this is juxtaposed against the fact that the tax changes mean that everyone earning above £41,435 will have an extra £297 a year in their pockets there is little wonder there has been a substantial and sustained backlash.
The Government’s position on the emerging tax rebellion has changed several times in the last few weeks from outright denial that the changes will negatively affect anybody to some form of commitment to do something about it somehow in the future. For now, Gordon Brown and the current Chancellor of the Exchequer, Alistair Darling, are attempting to stave off criticism by pointing to the role of the tax credits system in making up any short fall in household income. Admittedly this would be an effective mechanism if the tax credit system was infallible and was available to all workers and if homo-sapiens became homo economicus – the optimum economic being – but this is not the case. Current estimates suggest that around only half of those eligible for Working Tax Credit actually claim it. In my work with working poor households in Manchester I found that many households did not claim tax credits because of (i) a perceived stigma around being seen to claim benefits despite the fact that they were a form of in-work support and (ii) because of the complex nature of the system. In addition, the recent problem of tax credit overpayment had dented the confidence of many low income households in the system and has put many off from claiming. In the last three years nearly £6 billion has been overpaid to hundreds of thousands of households. The government’s attempts to claim this back from low income households has exacerbated the experience of poverty for many recipients. Some claimants have even been forced to sell or re-mortgage their homes to (more…)