Tax debits

We are informed today of some bizarre effects of the complicated tax credit system. Generally, it has ensured that it pays more to stay at home than to go out to work. In some cases, up to half of the extra income (from tax credits etc) is clawed back when the recipient gets a job. As the new job is unlikely (in the case of lower paid workers) to compensate for the reduction in income, some recipients conclude that they are better off staying at home and keeping the tax credits.

This finding was contained in a report published today by the Institute of Fiscal Studies. According to one of the authors of the report,

“Two strategies that governments have to help people on low incomes – providing them with financial support directly, and encouraging them to earn more – generally conflict. There is no easy solution to this trade-off. Ultimately, governments need to decide how much they want to redistribute income to low-income families, and how much they mind if people work less as a result.”

Good point.