Tim Worstall

Those Tax Credits

Is this number actually correct?

His most telling conclusion is that a single mother working 16 hours a
week, after tax credits, gains a total income of £487 a week, while a
two-parent family on the minimum wage has to work 116 hours for the
same income.

That part time working (very part time in fact) can be topped up to £25 k a year? If median household income is £21,700 (here) then aren’t we in fact being over-generous with such aid? Even within the declared aim (geting everyone up to 60% of median income) that looks too much.

If it is true then aren’t we in danger of actually spending too much on poverty reduction: but spending it badly?

In

13 responses

  1. Matthew Avatar
    Matthew

    The article points out that it’s £24,900 for a household with two children.
    I’m a bit confused as to what his figures mean – the minimum wage is 5.35, isn’t it? So 116 hours would be nearer 600 pounds a week, so I presume he is taking off direct taxes? It’ll be interesting to see the calculation.
    Tim adds: Sorry, but I don’t see that £24k number in that article at all. OK, but let’s say it was there. What is he size of that household? Two adults two children? Or one and two? Makes a hell of a difference.
    Yes, the numbers should be post tax. All discussions of poverty should be using post tax, post benefit numbers.

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  2. Mark Wadsworth Avatar
    Mark Wadsworth

    Scroll down to Table 1.3d, page 52 of the DWP’s Tables (quicker than working it out). Says here, if single mum, two kids, 16 hours @ NMW, childcare costs £150 has net income (before housing or childcare costs!) of £434 per week (2006-07 figues). For her to get up to a net income of £487, she has to earn £410 per week gross (top line of next page), methinks he has buggered up right royally here!
    Nonetheless, it illustrates the point that single mum/two kids has marginal withdrawal rate of 84% up to what is close to an average wage of £21,000.
    I don’t think it is as much as 116 hours per week, I’d guess it’s more like 100 hours (50 hours each – oops! Working Time Directive!) for a couple to have net income of £434, but thank God for Frank Field in any event.

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  3. Matthew Avatar
    Matthew

    Not sure what browser you use, but ctrl-f in most brings up a ‘find’ box, and you can search for text.
    Here’s the paragraph
    Adjusting for such differences, median income after taxes and benefits is about £10,500 for a single childless adult, £17,200 for a childless couple and £24,900 for a couple with two children
    Also using the tables Mark links to, surely Field is talking bollocks. The 16 hour a week single parent gets 433 before housing costs and 207 after. Table 1.6b shows it is impossible for a married couple with two children to get that little. If they work as long as he says, they would get £400 after housing costs, or nearly double.

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  4. Matthew Avatar
    Matthew

    You know what I think he is doing – I think he is comparing the single mother, 16 hours a week on benefits, to a couple on minimum wage with two children, who don’t claim any of their benefits. As you say, that’s surely nonsense?

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  5. Mark Wadsworth Avatar
    Mark Wadsworth

    Matthew, Table 1.6b actually assumes that only one partner works. If you look at page 92 (same link as above) and interpolate between the lines for £530/£540 a week gross (i.e. a heroic 100 hours at NMW, like I said above), the pre-housing costs income is £435.
    So household income is the same, but four people sharing £435 is not the same as three people sharing is it? (We’d have to re-do this in terms of equivalised income but then you risk your brain imploding).
    Admittedly, if both worked, they’d use two personal allowances and so on, so they’d save £40 a week in tax (or whatever), but then they might have child care costs and it all gets very tricky.

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  6. Matthew Avatar
    Matthew

    Is that 1.6c? Where does it say that’s two incomes?

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  7. Mark Wadsworth Avatar
    Mark Wadsworth

    No, I used Table 1.6b, the page is numbered 90 at the bottom (in the pdf document) but it’s page 92 of the whole document (the number in the box on your computer screen – dunno the technical term), if you see what I mean.
    If one partner works 100 hours at NMW, gross wages £535, and so on.
    AFAIAA, all these tables assume one earner per household.
    NB Table 1.6c is the same household but “private tenant” (not LA tenant), slightly different rules apply here.

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  8. Matthew Avatar
    Matthew

    I’m feeling a bit weak now. I don’t think we can really get any further without a table that shows a two-income household, becauase presumably Field’s killer point has something to do with differences in benefit for two incomes as opposed to one (I can’t really see how it would make such a difference).
    I stand (for now) by my second comment though, that after housing costs the income of the couple would be twice that for the single person in Field’s example (but with the caveat about two incomes compared to one).

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  9. unity Avatar
    unity

    Matthew/Mark: (resists temptation of obvious biblical gag).
    No, you’re entirely on the right lines in noting that Field is basing his ‘killer’ point on piss-poor analysis of an apples and oranges comparison derived from policy-based evidence making.
    It really is a load of bollocks, not least as Field complete misses (or maybe ignores) the fact that the big disincentive is the high marginal tax rate effect of covering only 70% of childcare costs, which for the single mum with two kids on £489 a week runs at 91%, leaving her with a net gain in income of £11.70 a week.
    By contrast, a two-parent family with two kids, one wage earner working on the same basis as the single mum (16 hrs p/w minimum wage) and no childcare costs would come in £140 p/w better off than the single mum after claiming tax credits, even if you factor in a 30% increase in earned income to cover the costs of two people not quite living as cheaply as one.
    http://www.ministryoftruth.org.uk/2007/06/14/hes-not-the-messiah-hes-a-fuckwit/

    Reply
  10. dsquared Avatar
    dsquared

    (crossposted at Unity’s site):
    Right, let’s get this squared up.
    The figure we should be started from for the single mum is £288.74 per week. This is from table 13a of the DWP tax ‘n’ benny tables and refers to a “Lone Parent, 2 children under 11, LA tenant, No child care costs”. That’s surely to got be the baseline.
    Frank Field’s number is on table 1.3g of the DWP tables and refers to a “Lone Parent, 2 children under 11, Private Tenant, Child care costs £100pw”. It’s actually £486.59 but give me a break here.
    Unity has the big picture right here in that the big difference between the baseline £288.74 and Field’s £487 comes from a) £100 of childcare that goes straight out the door rather than being available for the mum to spend and b) the difference between LA and private rent. If both of these were provided by the government as benefits in kind they would not show up here, and I think we can *all* agree (comity!) that the government’s decision on public versus private provision shouldn’t be driven by an accounting treatment.
    Finding Field’s number for the married couple working 116 hours (and thus getting gross pay of £620), is harder to find. On table 1.6b they have net income before housing costs of £491, which is close and is the first line of the table where the NIBHC figure is more than £487. Actually they get this on 1.6c and d too as they are out of the WTC and HB systems at this point.
    But if we’re going to compare the private tenants (to get sort of like for like with Field), then we have to take into account the effect of housing benefit by looking at post housing costs. The single mum on table 1.3g has after housing costs income of £212.52 and the couple on table 1.6c have £309.18.
    So the extra 100 hours that the couple work gets them £96 of extra post-housing-cost income, a pretty nasty average-marginal deduction rate of 81% between the two, but this is the effect of more or less entirely getting out of the benefit system, and the couple’s marginal deduction rate from this point on is 33%, falling to 23% if they get up to £650/week and exit the benefit system entirely. So I’d say they’re in a much more hopeful place than the single mum.
    In other words, Field’s rhetorical point comes completely from the fact that the government has found it more efficient to provide childcare and housing via the benefit system rather than via nationalised provision, so it shows up in the income tables. Yuk.
    I’d also question how realistic it is to assume that a couple earning £620 gross in these tables is getting it by working 116 hours at minimum wage. I daresay it happens all the time – I know some absolute Stakhanovites out there – but I bet it’s not typical at all.
    Tim adds: So, as I also pointed out over at Unity’s: housing costs are at least a part of it.

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  11. dsquared Avatar
    dsquared

    No, the housing costs are almost exactly the same (obviously the lone parent pays slightly less council tax per week). The rent assumed is the same (£160.60) in both tables. It’s just that the “after housing costs” column is “after housing and childcare costs” for the single mum (you can tell this because her after-costs figure is £277 lower than her before-costs figure) because childcare is a hypothecated benefit like housing benefit.

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  12. unity Avatar
    unity

    >>> Tim adds: So, as I also pointed out over at Unity’s: housing costs are at least a part of it.
    For the purposes of making precise calculations, yes, but for exploding Field’s rhetorical arguments they are not essential because, as Dsquared notes, both childcare and HB function as hypothecated benefits.
    One can simplify the calculation for illustrative purposes by treating them as a single hypothecated benefit and still demonstrate the outcome, a high marginal tax rate.
    Field’s rhetoric still falls over because he’s utilising an invalid and rather tendentious comparison to make his point rather than presenting evidence derived from a comparison of like-for-like scenarios.
    Re-reading his paper, it would appear his primary intent to incentivise conventional two-parent family structures (and by implication marriage) rather than simply address child poverty – there is an underlying political/moral judgement in there which he fails to make explicit or argue for on a rational basis, even though its a perfectly arguable point and one that can be factored for in socio-economic terms by considering the social costs and consequences of different family structures.
    That’s the slightly bizarre thing in all this. If he came straight out with the argument that we should use the welfare system to incentivise the two-parent model of the family on social cost and even moral grounds rather than couching his arguments in terms of notional discrimination within the existing system, he’d get no real shortage of support, especially in Tory ranks, and would not have to resort to shonky data/arguments.
    That suggest to me that he’s as much fixated on attacking Brown as the architect of the tax credits system as he is on trying to advance a credible set of welfare reform proposals and that rather undermines his credibility – you don’t have to demolish the existing system in order to put forward a better one, simply demonstrate and evidence that you have a better system.

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  13. dsquared Avatar
    dsquared

    To be honest, what jumps out of Field’s numbers is that the childcare credit shouldn’t be restricted to single parents. Or perhaps, that there should be a lot more publicly-provided childcare.

    Reply

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