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Number crunching Broon's tax credits, and the results are shocking – a 70% marginal tax rate.

UPDATED (see the end the post)

A friend has passed on a link to a post by an IT pro he knows of, who filling some slow time in December decided to create a model of just what happens to ordinary Joes and Josephines under the would be Lord Protector’s Tax Credit scheme. As my pal put it, “I actually know of this chap through the [Professional Contractors Group] and he is very sharp. If he has come up with these figures then they can be believed”. If he’s right, all credit to him, if he’s wrong – well, I took it on trust. Broon said this in his 2006 pre-Budget report, “tax credits, the main vehicle that has ensured that, since 1997, 2 million children have been taken out of absolute poverty and almost one million out of relative poverty”. Let’s see what really happens….

So, care of 3Spoken, some real world examples:

Let’s consider a few examples of a hard-working family. Let’s start with the traditional one income family, stay at home mum and a couple of kids. Let’s say he works a full 37 hour week at minimum wage (£5.35 ph).

  • Net family income including tax credits is £15,000
  • The family is already suffering full income tax, full national insurance and £1,877 of the working tax credit has already been clawed back.
  • This family has a marginal rate of tax of 70%.

Now let’s say mum gets the perfect part-time job - 2 x 8 hour shifts that perfectly coincide with childcare again at Minimum Wage (£5.35). Let’s assume that you can actually get childcare for 2 kids at £30 per session.

  • Net family income including tax credits rises to £16556
  • Child care for 4 sessions is paid for with Working Tax Credit (80% WTC - the rest covered by the Child Tax Credit individual element).
  • The marginal rate is still 70%, and the clawback has risen to £3524.
  • Essentially mum has worked the entire day for less than £15 in her hand (£1.87ph) - and that’s before the cost of travel, subsistence and clothing is taken into account.

And it gets worse, much worse:

Now, as anybody who has looked for a part-time job knows, there is no such thing as a job that gives 16 hours in two neat shifts, but which co-incides perfectly with childcare. The more typical case is 20 hours per week over five days and a commute just long enough so that you have to pay for the entire day’s childcare.

  • Net family income rises to £15,275
  • Clawback rises to £3935
  • Mum works for 26p per hour, or £1.06 for the day’s toil.

The blogger has other examples covering other set ups involving variations of income between a couple, but with the same basic disincentive to work applying. Well worth the read.

I presume that Broon and his goons run models as to what happens under various legislative scenarios, and are using something a little more bleeding edge than an abacus or even a ‘it could run a power station’ ZX81. If not, why not? And if they have been running the models, the blogger has not chosen fantasy scenarios designed to make the Chancellor look bad, but rather thoroughly normal ones, so why were alarm bells not going off?

I anticipate serious interest in this, so if 3spoken gets to read this, please let me see your methodology.

The man who did all hard work has e-mailed me his spreadsheet, and this important explanatory note:

"You can alter the ages and hours worked for the adults on the StaticInfo sheet. You can change the Joint household flag to switch the model to single parent mode (make sure the hours worked on the Adult 2 is zero in this case, or the calculation fails).

You can also make changes to Childcare, other income and Children sections. Everything else on that sheet should be calculated automatically.

The actual net income calculations are done on two other sheets. One of which varies the hours worked of Adult1 and the other varies the Adult1 pay per hour. You can model pretty much every scenario of the 'ordinary family' with these two sheets.

The spreadsheet is nothing more than an active model of the rules laid down in HMRC's own manuals here:

http://www.hmrc.gov.uk/manuals/tctmanual/index.htm ".

This deserves to go big, and I would encourage other bloggers to link to the original post (with maybe a mini hat-twitch to me for taking it to a wider audience).

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Anonymous Anonymous said... 6:45 pm

The dreadful truth is that Labour politicians have an incentive to keep their client-groups just where they are - as clients.  

Blogger Rigger Mortice said... 7:12 pm

It takes ann accountant to work the sums out brecause it's so complicated.why not just raise the tax thresholods??

because nick is right  

Anonymous Anonymous said... 7:28 pm

and because the family is in receipt of Tax Credits they are prohibited from claiming Free School Meals available to anyone else if the income is <£14555

Many moons ago I recall the late-Keith Joseph talking about the Poverty Trap of families on Supplementary Benefit who were paying marginal tax rates of 60-80%...........that was back in the mid-1970s

I little expected to see the very same problem exacerbated at great expense in the 21st Century  

Anonymous Anonymous said... 8:06 pm

A powerful analysis of Gordon Brown's failed welfare reforms, which several years ago convinced me that new Labour didn't have the right answers, was a Civitas publication in 2002 by Frank Field. It can be accessed here.

Pages 35 and 36 echo the findings on the marginal rates of taxation (benefit withdrawal) that you cite in your commentary: scarily, Field claims that marginal rates of up to 95% are possible when all possible benefits are thrown in...  

Anonymous Anonymous said... 8:31 pm

this is what Pollyannabloody Toynbee ought to be expending her efforts on instead of kneeling in front of Broon  

Anonymous Anonymous said... 8:47 pm

I have heardthe figure 70% before and took it own trust.The impact is much greater when you see real examples though.This isn`t the only problem of course. Very few peopl get into the brackets you describe which has a steep inlcine just to the poor side in terms of actual reward .Leaving a Mortgage or rent out of the equation and benefits mis represents the true problem. I f you were to chart the income affect from zero up it would show quite clearly why we have large areas reduced to human wastelands

The effect of subsidised housing and benefits kicking in slightly lower down makes this only the slight incline at the top of a precipice.You would almost think theyu designed it to trap then enslave with no escape

Good stuff today C  

Anonymous Anonymous said... 8:53 pm

You can have:

universal benefits - obviously prohibitively expensive unless at a very low level of provision.

selective benefits - cheaper but not universal as available only to e.g. over 65 and under 16.

subsidies - on housing, food, transport, education, health, and here you get excess demand, leading to shortages and queues, and to waste due to greater demand than would exist if the full cost had to be paid.

means testing - yielding a disincentive for people to lift themselves from the benefit-qualifying categories, the prime instance of moral hazard.

The best choice is selective benefits targeted solely by category other than income - the old, young, pregnant, sick. If some within those categories benefit who have no need then there is progressive taxation. These benefits are affordable, effective, and have no adverse side effects.

Brown has sustained and introduced two kinds of inefficient subsidy: Soviet-style (or old Labour style) price subsidies, and New Labour style means tested income subsidies to the poor.

What is wrong is not the marginal tax rate of 70% because that is the other side of the coin of large- scale support for the poor. What is wrong is targeting income brackets rather than objective need categories.  

Anonymous Anonymous said... 9:03 pm

HG, you are assuming goodwill / good intent on the part of the benefit designer.

In amongst some genuinely altruistic lefties trying to design benefits (I sort of imagine) and some inevitable pig-ignorance, I fear there is also some clearsighted (& self-interested) malice at work.

In several categories:
- deliberate dependency-fostering
- Trot-style 'impossiblism'
- civil service dumb-insolence anarchy / nihilism ("if that's what you want, Minister...")  

Anonymous Anonymous said... 9:04 pm

And as Nick Drew said in the very first posting, Brown doesn't want just the old, the sick, the underage and the pregnant as his clients; he doesn't care if he makes all of us poor, he wants all of us as his clients.  

Anonymous Anonymous said... 9:07 pm

ND, I wasn't assuming anything other than self-aggrandisment and pure malice actually; couldn't agree with you more - I hadn't thought of dumb insolence and anarchy.  

Anonymous Anonymous said... 9:34 pm

just to complete the set, (as I should have remembered) there is that subtle mad-hattersleyian motivation, see the Hatters thread a few days ago –

"I refuse to believe that any teenaged girl would ever get pregnant to obtain a council flat. And even if I am wrong about this, it is to my credit that I do not believe it."

With logic like this (which I think Blair often espouses) what hope is there?  

Anonymous Anonymous said... 9:36 pm

what a good thread. What is the solution? I think the universal basic income has some merits. As too does a huge raise in the basic allownace for all. This would take many of the poorest out of tax and then there is no need for nannny tax credits.  

Anonymous Anonymous said... 9:41 pm

HG I thought of you today as I read the Scientific proof produced by Prof Devendra Singh (Univerity of Texas ) that men “lust after curves” . I recall you saying that you were thin. Oh dear the indisputable proofs of “science” are ranged against you. I shouldn’t worry overly……

Anyway what do you mean that 70% marginal rates of taxation are not the problem?Not the whole problem perhaps but they are certainly a problem. In my view this sort of low income trap is dwarfed in its affect by the subsidised housing and rents paid. Nonetheless the marginal rate cannot surely be irrelevant. What you can say is that it is inevitable at some point but it reaches up far to far.
Your summary of types of benefits is useful and I would be interested to know if this comes from a specific source .

I mentioned before that it has been noted that due to the housing market everyone above this level is highly geared and therefore behaves as if incentivised when it was predicted they would not . Now fear takes the place of reward and so the bovinity of the population goes a long way through all income brackets.

The idea is somewhat contained in the concept of disincentives but not only are people unable to escape from poverty but they will actively seek neediness because the rewards of it are so much greater than marginal independence .
Additionally while I wouldnt want to bring back the "undeserving poor" as a policy assumption we tend to forget that those on the same income and working are sacrificing , not only grey economy income but also may simply be lazy. It does not take a morally corrupted soul beyond imagination to prefer to not work for very nearly the same income as working ata dull and unrewarding occupation.

Something my father ( On Council St. Albans and Harpeneden )mentioned is that you cannot say something that everyone knows. Those on benefits create a mental world wherby they are not only entitled to what they are given but are furious at any short fall. In that mind set to start to work is to accept appalling truths about what you have become.The view i have called. "The world is full of stuff and some of it must be mine". I actually do not think this was incorrect at certian times and certainly approve of the activities and the Labour party early in the century. Now we seem to be stuck in so many ways in a dispensation appropriate to just after the second world war

Add all of this together and you have , in my view , a large slice of the problems facing us today . Education , Crime , Health are dancing round the central Maypole of dependency , delusional entitlement and its attendant corrruption of community and soul

BTW- Most interested in your thoughts on unequal economic development. Did you see my post adding the voting patterns tht are connected with this development.

On the deliberate creation of such dependencyI do not think such a thing exists nationally . It does exist locally though perceived as
1 Maintaining the existing population when the market has forced prices beyond some iof them ( Why ? I have to move)

This is vital for Labour`s hold on the inner citys and explains , to me why houisng policy , set nationally , is dispersed through levels of local governement.

The worst offender is the GLA at my least liked man Ken L.

Voyager points out that we are actually going in exactly the wrong direction.
Lastly , New Labour , at Local level is not , usually very new.The type of absurd fairy land Marxism so entirely dead as a serious philosphy is alive and well and feeding into the "Working Class" the trick has been to get them to ignore the fact they are n`t working. Easier than it sounds in my experience.

Sorry for spelling and grammar. I need Ruth Kelly to send me to a posh people hot house.  

Anonymous Anonymous said... 9:49 pm

Nick I have used that quote twice since you mentioned it. In fact I had begun to belive that I mentioned it to you  

Blogger Croydonian said... 10:13 pm

I think it was Friedman who proposed amalagamating the tax and benefits system, although I could be wrong.

Among other things, this shows the bankruptcy of the Left - an idea is trumpeted, which sounds 'virtuous' and 'nice' with no consideration as to whether it enables people rather than enslaves them. If not thought through it is cruel, and if not thought through, verging on evil.

Work should always be be a better option than welfare, and to allow it to be otherwise is a great wrong.  

Anonymous Anonymous said... 10:28 pm

He is certainly associated with such thinking C .I picked this up in his obituary. In fact I can`t resist quoting more than is strictly necessarry given the education theme to the news recently.

"He was opposed to welfare in all its manifestations, proposing instead a system of negative income tax (partially adopted by Lyndon Johnson) to provide cash for individuals in poverty while doing away with the expensive and inefficient machinery of direct welfare provision. He also disapproved of America's public (state) school system, arguing that, as a socialised monopoly, its product was the educational equivalent of East Germany's Trabant car.

In California (a state which was, he said, "governed by the bureaucrats for the bureaucrats"), he campaigned for education vouchers as a first step towards the ideal of a private education industry competing vigorously to offer parents a choice of schools to support"

I must say in the UK now what you see around you screams out such a conclusion. I thunk it all myself.  

Anonymous Anonymous said... 10:42 pm

CityUnslicker, how right you are: working class income should be taken out of tax, not by raising threshholds but altogether; labour income is simply the reimbursement of lost leisure. It shouldn't be taxed, any more than the cost of a product, made of things like steel, textiles, electricity .

Unfortunately a citizen's income is expensive. And if Brown would like to modernise his economic education, he might learn from the work of James Meade, who had a very fine scheme for providing one.  

Anonymous Anonymous said... 10:58 pm

HG Labour isn`t just the reimbursement of lost leisure it is also the application of skills but I assume you mean low level workers.

Interesting that you attach an economic measure to leisure which mirrors what I was trying to say.

For reaopsns connected with the M Friedmnan idea of benfits and tax being a continuum I cannot see how a tax allowance alone will solve much of the problem . If you maintain thre befits and Services currently avaiable those the disincentive will only come ata slightly higher level

Or won`t it , you seem a bit of an expert ?  

Anonymous Anonymous said... 10:58 pm

Newmania, dancing round a maypole of dependency is the saddest of images of England. So was the the image of this government farming the people like a herd of cattle though perhaps that wasn't you; the specific source for the summary of types of benefit was me and others here contributing during dinner.

ND's first post still nails the real problem. As JT suggests, Frank Field does all this best; he was really in the wrong party and at the wrong time.  

Anonymous Anonymous said... 11:05 pm

HG-the specific source for the summary of types of benefit was me and others here contributing during dinner.

Well its all filed away for future use now .Thanks.  

Blogger Croydonian said... 11:08 pm

Poor old Frank got a very raw deal - turns out that 'think the unthinkable' meant kick it into the long grass.

Meanwhile, higher threshholds and a flat rate, with a scrapping of the complications and minor taxes would be a major step forward for everyone, apart from those who wish to have a serf class, tax lawyers etc...  

Anonymous Anonymous said... 11:12 pm

BTW Sorry to have developed a tourettes problem on this thread but Frank Field was appointed in 1997 to ‘think the unthinkable"

Do we recall who was active in organising back bench oposition to ditch the project.?

A certain Gordon Brown.......  

Anonymous Anonymous said... 11:29 pm

newmania - feel free to quote Hatters with my blessing and encouragement (well you obviously do anyway, ackn or no ackn to the Learned Source) because his face should be soundly and widely rubbed in it  

Anonymous Anonymous said... 11:35 pm

HG - I am increasingly bothered about the dumb-insolence anarchy / nihilism strain of civil-service behaviour (including Police, and, I sometimes think, the courts). I have encountered it first-hand, & reckon you can see signs of it all over.

Probably comes from years of being beaten around the head by politicians (possibly starting in ... the 1980's, whisper it softly) who aren't in the mood to hear 'no' for an answer.  

Anonymous Anonymous said... 11:51 pm

Given the astonishing erudition and eloquence of HG...perhaps Patrick Moore`s remarks were a little unfair today.


"...BBC's decision, ……... Obviously, she doesn't like us."
Earlier anniversary editions of his monthly tour of the heavens were accorded much greater prominence, he said. "But in earlier times the BBC was run by men," said Sir Patrick, of Selsey, Sussex.
However, he admitted that he did not know for sure that the decision to put The Sky At Night on late had been a feminine choice. "It must have been a woman, simple as that," he said.
In fact, the programme scheduler for BBC 1 is George Dixon, who, as his name suggests, is not a woman."

I shouldn`t laugh....  

Anonymous Anonymous said... 9:55 am

A belated happy new year..  

Blogger Croydonian said... 10:05 am

N - he really can be a silly old fool, can't he?

Tejus - and to you. Good to have you here again.  

Anonymous Anonymous said... 12:39 pm

I think it was Friedman who proposed amalagamating the tax and benefits system, although I could be wrong.

If any of you have not read it, Free to Choose, is a prescription for putting everything right that is currently wrong in our beknighted country.

Well thought out proposals to bring choice into all public services.

The fact that these ideas have been around so long, without being put into action is depressing.  

Anonymous Anonymous said... 4:59 am

As CU said - what a good thread. Really interested to see how 70% is worked out in detail.

Googled James Meade - guess UK would need to shed a lot of govt. to turn nat debt into nat asset and that begs the question of how it could be protected from all sorts of asset strippers at Westminster, Whitehall, Brussels, etc.

O/T Dunno what happened to mine on HMC&E thread of 0454z but, C, tks fer gen ref html.  

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