Thursday, 22 October 2015

Adam Smith Institute says tax credits best form of welfare.

Opposition and criticism of the governments proposed cuts to working tax credits is coming now from across the political spectrum.

It has been widely reported in the newspapers that he right-wing think tank, the Adam Smith Institute has criticised the governments proposed cuts in tax credits.  In a press release the ASI said:

"Working tax credits are the best form of welfare we have, and cutting them would be a huge mistake. The government has long claimed to want to make work pay for everyone, but cutting tax credits would disincentivise work and hurt those at the bottom of society.

"Contrary to the government’s claims, the National Living Wage will do little to help those affected by these cuts and, according to the Office for Budget Responsibility, it risks adding insult to injury by pricing tens of thousands of workers out of the labour market altogether.

There is little evidence that tax credits ‘subsidise’ employers, except to the extent that they make more people willing to work in the first place, creating a larger pool of workers. The politics of this looks dangerous, too: when it’s working families at the bottom of the income distribution that are being hit hardest, it’s hard to say that we are ‘all in this together’. We urge the Chancellor to rethink these cuts and find savings elsewhere instead."


The ASI further recommend that the best way of providing a 'living wage' would be to raise income tax and national insurance allowances to the level of the full time, full year, minimum wage. This the government could do immediately. 

The ASI also challenge the view that working tax credits 'subsidise' employers.  In a working paper published this week they claim It isn’t greedy employers, but greedy government, that is keeping people in in-work poverty; without tax on low earnings even workers on the 2015 minimum wage would earn a living wage. 

The main critisism of the government strategy on cuts in working tax credits is that it puts the cart before the horse.  Mr Cameron put the argument in his reply to the Leader of the Opposition at PMQs that the cuts a mitigated by the move to a living wage and increase in tax thresholds, but it assumes that those who gain on the roundabouts and also those that lose on the swings.  Figures from the Institute for Fiscal Studies demonstrates that the poorest will lose most even taking account of other changes. 

Now the Adam Smith Institute argues that instead of imposing a mandatory National Living Wage, it would be  better to for the Chancellor to  remove taxes from the lowest paid, giving workers a similar level of post-tax income while forgoing the 60,000 higher unemployment and £1.5 billion lower GDP that the Office for Budget Responsibility predicts will accompany his plans. 

The ASI say that government should not have as its objective cuts in working tax credits, but to cut poverty. the title of their briefing is provocative  Abolish the poor.  

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