Wednesday, 8 May 2013

Will future tax cuts reach struggling working households?

a briefing paper by Donald Hirsch published by Resolution Foundation Publications


All political parties today say they want to help working people on low to middle incomes who struggle to make ends meet. Under the last government, in terms of direct financial support, this was achieved mainly through in-work tax credits. Today, the emphasis is shifting in favour of cutting taxes in ways that have the objective of helping low earners. Tax cuts, however, will not, in large part, reach low to middle income working households under the government’s flagship welfare reform Universal Credit (UC) as UC is calculated on the basis of net income, meaning that any tax cut that boosts a household’s income also reduces their UC support. Put another way, any tax cut will give with one hand and take away immediately most of the gains with the other.

This briefing looks at how exactly tax cuts interact with Universal Credit and quantifies how little low to middle income working households will keep from a higher personal allowance or a 10p tax rate under UC. It also suggests a simple way in which the Government could ensure that the benefits of tax cuts do flow through to the pockets of the three million taxpayers who claim UC. Any party proposing tax cuts that does not adopt this or an equivalent policy cannot claim to be targeting low to middle income households by cutting taxes.

Full text (PDF 16pp)

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