Why the ‘welfare merry-go-round’ is just spin

We pay taxes for the NHS in case we need healthcare - why should welfare be any different?


In its search for justifications for saving money on welfare, the government has placed much emphasis on limiting out-of-work benefits in order to avoid perverse incentives.

But cutting the welfare cap only produces around 1 per cent of the £12 billion cuts required. A reduction in Child Tax Credit (and ultimately in the child element of Universal Credit) requires a totally different rationale.

This is because it goes to people in and out of work, so reducing it harms ‘hard-working families’ as well as those without jobs. It’s hard indeed to see how a large cut in these credits is compatible with Universal Credit being presented as a flagship measure that will help families work their way out of poverty.

This helps explain why David Cameron has put so much emphasis on the supposed illogicality of a system of in-work top-ups that coexists with income tax, so that the Treasury takes in income tax with one hand and pays out in tax credits with another, sometimes to the same families.

This ‘merry-go-round’ is made to sound just like a bureaucracy for recycling money.

Nothing could be further from the truth. First of all, the majority of adults in families receiving tax credits pay no income tax at all – they earn too little to do so (or nothing at all).

Second and more importantly, income tax is based on individual earnings, while tax credits are based on family income. So unless the individual basis for income tax were unravelled (something nobody is proposing), cuts in income tax matched by reductions in tax credits will cause low-income working families to suffer big net losses, not matched by tax cuts.

This all sounds quite complicated but there’s a simple way to think about it. In very broad terms, there are six times as many taxpayers as families receiving tax credits.

So if you cut tax credits and so were able to cut the amount each person paid in tax, there would be enough to reimburse about £1 per taxpayer for every £6 cut per tax credit family. The minority who actually are on the ‘merry-go-round’ (families receiving tax credits that contain a taxpayer) would still lose £5.

The neediest families, too poor to pay tax, would each lose £6. Only those too well-off to qualify for tax credits would gain.

But is the very existence of the merry-go-round illogical?

No – in-work credits and income tax are doing different things. One is a social programme to help people who risk hardship as a result of low income. The other is a simple means for individuals to contribute a proportion of their earnings to meeting the cost of the state.

We don’t think it’s illogical that some people’s pay income tax that funds the NHS to treat them when medical need arises. Neither should we worry that some people paid just enough to contribute some of their earnings to the state should get something back based on their family’s needs and the income of its other members.

Donald Hirsch is the director of the Centre for Research in Social Policy at Loughborough University.

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11 Responses to “Why the ‘welfare merry-go-round’ is just spin”

  1. Torybushhug

    The more irresponsible you are, the higher your state rewards. Such a system is a far cry from Bevans dignified safety net. Endemic welfare entrenches irresponsibility and fecklessness, above all else it dims horizons. Nothing like Healthcare by the state

  2. dnspncr

    The more irresponsible you are, the higher your state rewards. This is certainly the case for multinational security companies, the nuclear industry, the banking industry, rail companies and numerous “privately funded” projects which end up costing tax payers millions.

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  4. Mike Stallard

    Far too often, the Labour Party defends the indefensible.
    What is needed is a simplification of the incredibly involved tax system. You know it is ridiculous. We know it is ridiculous. We also know that, following Mr Brown’s reforms, HMRC is creaking.
    Until Labour learns to think big and to offer credible alternatives where the really poor get a hand up and the rest of us are left alone, but taxed fairly, the country will struggle. If you think the present system (which excludes the very poorest – the immigrants) is fair, then I cannot agree. The deserving and the undeserving poor are there still, undifferentiated.
    Allow me to remind you of Singapore where there is an enormous influx of immigrants from PRC. The tax stands at 15% even for very rich people. The way the rich pay for the poor is purchase tax. That means that rich people cannot escape. And the poor pay for what they use.

  5. Nazia Ali

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  6. Harold

    People working in proper jobs, not low hours and raising wages is one way of ending the issue, I was lucky enough to have well paid employment which means I do not need to claim, other then what I received for my children, I have always paid my tax and am happy to do so, indeed if VAT was reduced I would happily pay more Income Tax. But until opportunity and wages rise to a realistic level, then the people at the bottom of the pile and consequently most needing support will be vulnerable to attacks from the right. With most people on low wages not belonging to a Trade Union and many not voting, a position they have been encouraged into, little will change. Strangely when the Government hands out money to railways, outsourcing firms, PFI and the cheap sell off of Royal Mail, no one makes much of a fuss, or at least it does not grab the headlines. There is a definite equality there.

  7. stevep

    Yes, the more irresponsible you are, the higher the state rewards. Sounds like the banks can breathe a sigh of relief again now we`ve got that one out of the way.

  8. stevep

    If we lived in a society where profit for a privileged few wasn`t the be-all and end-all of everything and the perceived measure of “success”, we could create work for all it`s citizens, whatever their abilities. If everyone who could work had a role to play and a living wage, the benefits system would be reserved for the unfortunate few who couldn`t work through no fault of their own.
    It is worth remembering that it was the privileged wealthy few that coined the notion of the “lazy masses” to stigmatize anyone not wishing to participate in what amounted to slave labour.
    It is still the same today with the privileged few owning the means of production and the capital needed to fund it and much less labour needed to make their profits for them. So potential workers are invited to participate in “job-seeking”. With far less jobs than people this amounts to a sick version of “musical chairs”.
    When the music stops, the seated potential workers get their reward: If they are “lucky” and “educated”, a lifetime of servitude, ass-licking and toadying in a “better” job. If they are “unlucky”, a crap job, uncertain hours and a poverty wage. The unseated ones get branded as “scroungers” for not trying hard enough to unseat someone else and being a burden on the state for needing benefits to live on.
    Wow! aren`t we lucky to live in a capitalist society.

  9. dnspncr

    It isn’t just the billions that were extracted from taxpayers pockets for the initial bailout – irresponsible behaviour from the banking sector led to mass unemployment within retail and manufacturing, job loses were not confined to the square mile… without the safety net that “torybushhug” is bleating about, these workers would have fallen into destitution.

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