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Lord Goodhart: We on these Benches have not tabled an amendment to the same effect as that of the noble Lord, Lord Higgins. That is because, on the whole, we feel that if the Government wish to give a benefit an inaccurate name that is their affair and we are not in the business of correcting them. Nevertheless, having said that, I believe that the noble Lord, Lord Higgins, is absolutely right to say that this is not a tax credit but a benefit. We take up the matter in a number of places, starting with our intention to challenge the Question that Clause 2 stand part of the Bill.

What is the difference between a tax credit and a benefit? The purpose of a tax is to raise money to meet government expenditure. Income tax starts with the taxpayer's gross income. But it is recognised that simply basing the tax on the gross income could be unfair to those with lower incomes, so one cuts their tax liabilities by treating their taxable income as less than their actual income. This applies not only to those on low incomes but throughout the income scale. It is done by means of reliefs and allowances against tax--the personal allowance, the first £5,000 or so of income, the married couple's allowance, now rightly about to be abolished,

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and relief on pension contributions. A similar result could be achieved by a genuine tax credit. One calculates the tax liability on someone's full income but one then says "You do not have to pay the first x pounds"--whatever the figure may be--"of your nominal liability." One can go beyond that to negative income tax by saying that if a taxpayer's liability is less than the notional figure of x pounds the Inland Revenue will pay the difference to the taxpayer.

By contrast, the purpose of a benefit is to provide financial assistance out of public funds. In the case of means-tested benefits, the amount of those benefits is based not on the needs of an individual but of a household. For years people have been saying, "Let us have a single integrated tax and benefits system based on the idea of negative income tax." That is the philosopher's stone. Like the stone, it never actually works. From a distance it looks like a marvellous idea, but the more one looks at the details the more one sees the obstacles. That is my experience. It is an issue on which I have changed my mind over the years. That also seems to have been the experience of the committee set up by the Labour Party before the last election, chaired by the noble Lord, Lord Borrie, to study the reform of the welfare system.

The same thing has happened with the working families' tax credit. The Government originally considered trying to deal with the working families' tax credit through the PAYE coding system. They found that it could not be done. The main reason for not being able to integrate tax and benefits is that tax is based on the income of the individual and benefits are based on the needs of the household. It might have been different in the days when the income of husband and wife were aggregated for tax purposes and when couples rarely lived together without being married. Nowadays, that is simply impossible. One needs to know who is in the household for the purposes of calculating the working families' tax credit, as indeed one does for any other type of benefit. Is it a single parent family or is it a couple? If it is a couple and both are earning, then the income of both has to be taken into account for the working families' tax credit but not for tax. Taking it into account for the purposes of income tax liabilities would be inconsistent with the principle of separate taxation of husband and wife, which is now well established and politically irreversible. In the case of a couple where only one of them is earning, one still needs to know that they are a couple because one cannot claim child care credit if one has a non-working partner.

There are other aspects of the working families' tax credit which cannot be reconciled with the principle of a tax credit, as properly so called. For example, a claimant with a certain amount of capital is disqualified from receiving the working families' tax credit even if such capital produces no income. Assets not producing income would be irrelevant for the purposes of income tax. The working families' tax credit does not reduce the tax liability of employed claimants in the way a genuine tax credit would. Employees are still liable for tax through PAYE and national insurance contributions just as before. The employee or his partner receives

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benefit just as before. The only difference is that the employer, who until now has been the collecting agent for the Inland Revenue through PAYE, will now become the paying agent for benefits. In the case of the self-employed, where there is no employer, the payments will continue to be made as they are now, tax being taken with one hand and working families' tax credit being handed back with the other. As the noble Lord, Lord Higgins, with his long and detailed experience of public finance, pointed out, working families' tax credit is, for accounting purposes, a benefit and not a credit. The Government, as I understand their position, have accepted that European accounting principles require them to show the working families' tax credit as public expenditure. What we have here is window dressing. The noble Lord, Lord Higgins, was telling no more than the truth.

3.30 p.m.

Lord Skelmersdale: My Lords, the noble Lord, Lord Goodhart, revealed all sorts of things. I blush to say this because my noble friend Lord Lawson was a former boss of mine. The noble Lord explained, as did my noble friend Lord Higgins, the reasons that this is not a tax credit. However, he started from the most extraordinary position. As the spokesman for an opposition party, he said in effect, "We are not in the position of correcting the Government". What on earth are oppositions for?

To me, a tax is either a levy on income or a charge on potential income. In this case, there is absolutely no relationship between the tax system and the credit. Of course it is a credit, and later amendments deal with how we as parliamentarians can identify that credit in various government accounts, such as the Red Book. One thing is absolutely certain. By no stretch of the imagination is this a tax credit. The arrangement that the Government are putting in place will, where tax is due, tax the individual, then give a lump sum. It bears no relationship to the tax that the individual has paid. It simply bears a relationship to the original wages. I cannot see that as logical.

Baroness Carnegy of Lour: The amendments seem to go far beyond the terminology that the Government used when they describe publicly funded earnings supplements as tax credits. I cannot agree with the noble Lord, Lord Goodhart, any more than can my noble friend Lord Skelmersdale, that this is not our business. It seems very much Parliament's business.

We are discussing another example of the Government's growing habit of saying one thing and doing another. At the outset of the Government's term of office that habit was more or less accepted by the public as intelligent public relations and the spin that goes with modern politics. But developing now is something that is not public relations. It is not all that far from public deception--letting people think that one thing is happening while something different and perhaps less popular is being done. That will have a serious effect as time goes on, because it will lead to greater cynicism than that which the public feels already

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about politics and politicians. That should concern us all because it is dangerous for democracy. The amendment points up that danger.

The Government want, rightly, to reduce the evil of the poverty trap and for people to experience that families with children and disabled people, if they work, can be better off, not worse off. That is a wholly laudable objective. It is clear that the Government would like to achieve that through the tax system but they failed to find a way for a number of reasons--some of which we know, although perhaps we do not know all of them. Instead of the Government doing as they said, they are pretending by continuing with enhanced benefits--which is a good thing--but paying them via the Inland Revenue and calling them tax credits.

Likewise, there is no honest admission of increased spending on social security in the Chancellor's account to the nation. That would have been tactless. He had promised to reduce it. Instead, the increase appears as part of the tax system in one place and as an increase in Government expenditure in another.

The Government's reason for those discrepancies and misdescriptions were helpfully explained by the Minister on Second Reading and on pages 2 and 3 of her subsequent detailed letter. Those reasons are doubtless the case. People who receive the credit in their wage packet will, whether or not they pay tax, tend to see it as part of their take-home pay. That is a wholly good objective, but should it be called a tax credit when it is not? I think not and for the sake of the nation, I suggest that the Minister should think not. The amendments would render the Bill a lot more honest and I support them.

Baroness Turner of Camden: I simply cannot accept the amendments. I do not support them at all. I support the Bill, which is founded on the assumption that something must be done about poverty--particularly family poverty. That is the Bill's objective, and for that reason a number of organisations to which the noble Lord, Lord Higgins, referred--such as Child Poverty Action Group--have supported the Bill as it stands. It would not be a good idea to remove the word "tax" from the Bill. The idea that people will receive the extra amount through their wage packets, via the Inland Revenue, is a good one. It is entirely appropriate that the Bill should be worded in the way that it is. I urge the Committee not to support the amendments.


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