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Lord Higgins moved Amendment No. 12:

Page 2, line 2, at end insert--
("( ) The Treasury, in making regulations under any functions transferred to it under subsection (1) above, shall ensure that payments of the tax credit are not made to individuals who have an income, or to couples who have a joint income, in excess of the income at which the higher rate of tax would be payable by an individual.")

The noble Lord said: The amendment raises an important point of principle. One of our main complaints against the changes proposed by the Government is that they will increase dependency on the welfare state. The Government's intention, we understand, is that that should be reduced rather than increased. The effect of the proposals is that people who, by normal standards, would be regarded as fairly well off will benefit. I may not be popular in proposing the amendment. We suggest that the figure should be capped. However, one cannot consider the issue without also having regard to the taper and the effect on other income groups.

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In reply to a Question for Written Answer in July 1998, Ms Dawn Primarolo stated that some families with incomes over £38,000 would receive support. She stated that a family with two children and maximum eligible childcare costs of £150 would still be receiving some working families' tax credit with family incomes of £31,000. However, the highest possible level of income would be supplemented by the working families' tax credit depending on the number and age of the children of the family. For example, if the family had five children under 11, rather than two, it will receive some working families' tax credit with family incomes around £38,000. Members of the Committee may feel that someone with five children requires an income of £38,000. Be that as it may, the effect of the Government's proposals will bring people into benefit (or tax credit if the Minister prefers that expression) at that level of income. That seems a remarkable situation.

Perhaps the Minister can tell us how many people who would not otherwise depend on welfare she expects to be brought into welfare benefit as a result of the Government's proposals.

The increased cost of the working families' tax credit is £1.5 billion. Some of that will go to individuals and couples with higher incomes. The amendment suggests capping at the level where people begin to pay the higher rate of income tax. It does not seem appropriate that they should receive such benefit.

I have suggested that we should consider the issue in relation to scales elsewhere. The Institute for Fiscal Studies has done some fairly elaborate analyses of the effect. Taking 10 quartiles, it is suggested that those in the group I described still receive some increase in the average percentage change in their disposable income. But that does not apply in the same way throughout the scale. Those in the lowest quartile, the poorest people, receive a lesser percentage change. Those in the next quartile receive significantly more. From then on the figure declines. Perhaps we may have some indication why the proposals do not help those at the very bottom end and, after a large increase, the figure declines somewhat.

There is a number of issues we wish to examine. I have not always agreed with Professor Patrick Minford in the past. I recall one of my colleagues on the Treasury committee saying that his views gave monetarism a bad name. Monetarism is now so unfashionable that perhaps I should not be so unkind to Professor Minford. In other respects, he has made some important contributions.

Lord McIntosh of Haringey: I cannot resist intervening. After years of opposing Labour economic policies, Professor Minford has now come round to the view that our economic forecasts are, if anything, a little pessimistic rather than optimistic.

Lord Higgins: We could have a long debate on the accuracy of economic forecasts. I believe that he has expressed that view. Perhaps I was right in my original remarks. He gave evidence to the Select Committee on Social Security that in trying to deal with the unemployment trap by bringing some 750,000 people

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into higher marginal rates of tax--between 50 and 60 per cent--the Government have worsened the poverty trap. Perhaps the Minister will comment on that. It appears that at the top end of the high tax rate scale there has been a reduction. However, there has been a increase in the number of people paying more than 60 per cent and we are concerned about the increase in dependency. As one works up the income scale of the Government's proposals, the overall effect is curious, to say the least. Therefore, on grounds of reducing dependency, cutting public expenditure and making the system more rational, there is a strong case for considering the amendment.

The Child Poverty Action Group, quoting the Institute of Fiscal Studies, points out that as regards the increase in net income with working families' tax credit, a family receiving £75 a week does not benefit. I referred to that point in an earlier debate and it seemed to puzzle the Minister. At £100 a week, they receive £8.05; at £150 a week, they receive significantly more at £15.55; at £200, they receive £23.05; and at the top of the scale, £250 a week, it is only £3.15.

The basic pattern introduced by the Government's proposals is strange and difficult to justify. No doubt the Minister will attempt to do so.

Lord Desai: Before the Minister replies, perhaps I may help the noble Lord on one issue. There is a curious pattern in that when one tries to alter incomes, the lowest decile always receives less than the next two further up the scale. I fell foul of that some years ago when I proposed a basis income scheme, as I have done many times. Whatever I proposed did the maximum damage to single people in the lowest decile. I then discovered that the lowest decile includes many anomalous people; some are locked into it and cannot be helped through any tax credit scheme. Therefore, it is always difficult to reach those in that decile through tax credits and so forth which are paid through the income scheme.

That is the pattern which we are again witnessing. Those in the lowest decile are difficult to help if one works through earned income, employment and so forth. One has to help such people in other ways. It is a standard result of almost every Budget I have known.

Lord Goodhart: I have considerable sympathy with what was said by the noble Lord, Lord Higgins. It is anomalous that means-tested benefits will go as far up the scale as £31,000 for a family with two children and £38,000 for a family with five children.

Furthermore, there is a problem with the proposal of a cap. It means that for an extra £10 of income over the cap one loses more than £10 in benefits. Therefore, one has the anomaly of the marginal tax rates of more than 100 per cent. The Government ought to re-examine the taper and consider whether something could be done with it. For example, above the upper earnings for national insurance contributions the marginal rates fall by the 10 per cent that one is paying by way of NICs. Perhaps that opens up a greater level of taxable capacity and the Government might consider a slightly higher

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level of taper past the upper earnings limit. That might have the effect of reducing the startling upper level at which the means-tested benefits continue to be paid.

6.45 p.m.

Baroness Carnegy of Lour: I, too, believe that the Government should consider the amendment. I raised the point on Second Reading, but together with others the Minister was unable to reply. I spoke in terms of a sense of unfairness which might be felt by a not at all well off widow paying tax on a small pension. She might consider that a benefit is going to parents with an income of £38,000 because they have a certain number of children.

After reflection, I still believe that that will be a perception. Although when the tax credit is paid through the wage packet it may not be seen so easily as a benefit, most not particularly well off widows will know some people who are receiving the tax credit directly and will see it as a benefit, despite the Government's hopes.

Cannot something be done in another way for such people? I am picturing the mother with five children doing her weekly shopping in a supermarket on an income of £38,000. I can see that it is not an enormous combined income, but surely this is not the way to deal with such people. The point of the tax credit system is to encourage people to see that work pays. Nobody needs encouragement to see that work pays if they are earning together, or singly, £38,000 a year. The whole purpose of the tax credit goes to people on such an income and I believe that they should be helped through the tax system and not by this means. I believe that the Government should look seriously at that.

Baroness Hollis of Heigham: I do not believe that Amendment No. 12 would work. Therefore, even if I agreed with its basic premise, which I do not, I am afraid that I would have to ask the Committee to resist it.

The amendment appears to refer simply to limiting the opportunity to pay applicants WFTC, which implies that everyone above the higher rate threshold would remain entitled to an award but could not be paid. This seems a rather odd approach to take.

The amendment also attempts to link the award--and the award is based on a snapshot of current circumstances--to a ceiling which can be set only by reference to circumstances--for instance, the applicants' tax allowances--which cannot be finally known until after the tax year ends. So this could in practice mean that the Inland Revenue would need to hold back payment until after the year end, when the figure can finally be worked out and, in fact, until after the submission of the applicant's tax return. At this time, the applicant's circumstances may have changed.

The amendment aims to set a limit which, unfortunately, is not a single set figure but will differ from person to person, depending on a number of factors. There is no single higher rate limit which can be used in the way in which the amendment envisages; particularly in the way that it is intended to apply it to couples. It must be remembered that some would be

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eligible only for WFTC and the childcare element. It is that element which takes the figures up into the higher limit because both parties are working. Any change in the relative income of either one would then affect the payment to be made through the tax system.

Not only would the amendment not work; it would introduce a cliff edge that would be undesirable and harsh. For instance, a family with three children, two under 11 years and one over 11, claiming the WFTC and getting maximum help with childcare costs whose net income was £1 below the basic rate limit would receive £12.20 through WFTC. So the proposed amendment would, if we used the basic rate limit instead, make them £11.20 worse off for that extra £1 of net income. That would seem a pretty severe incentive to earn that extra money.

I see and understand that there is some concern about money going to those on higher incomes. But the combination of rates, threshold and the taper addressed that point. The WFTC will spread further up the income scale, particularly where the family has more than two children, or four or five children, as in the examples given, where there is a joint income of more than £30,000 and the family is paying for childcare. Indeed, we want that to happen to help more low and middle income families. But--and it is important to remember this--the WFTC tailors the amount available to their circumstances and the threshold and the tapers together make sure that the amount which they can receive reduces gradually as they earn more. It avoids the problem of producing a situation in which it is no longer an advantage to earn more.

Within social policy, where one is dealing with tapers, one has a choice. One may have a very sharp taper with very high deduction rates as the money is clawed back. That has been the case in the past with family credit which had a deduction taper rate of 70p in the pound. Therefore, that may produce tax rates of 100 per cent when that is related to housing benefit and so on. Alternatively, one may have a much shallower taper and a more gentle clawback of a tax credit or, as in the past, family credit. In this case, that is 55p in the pound. Therefore, it makes it more advantageous to work. But, by definition, because the taper is shallow, it goes much higher up the income scale before it is withdrawn. There is a straight choice between those two and there is no right answer. One tries to make an appropriate judgment.

However, the higher earning taxpayer would receive the credit because there is a large number of children and a high childcare bill. In a two-earner family with four or five children, one person may be earning £20,000 and the other £15,000. As both are in work, they are entitled to childcare credit. They would have a joint income of more than £30,000 but neither would be a higher rate taxpayer. Indeed, we estimate that only 5,000 people who earn more than £500 per week or £25,000 per year will be entitled to the WFTC. Those people will receive quite small sums.

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Therefore, it may be possible for those who have joint earnings of £30,000 plus to qualify for the second element; namely, the childcare credit. That goes right up the income span. It will be extremely rare that one of two parties is already a higher rate earner.

The amendment will not work and we should not wish to see the system which it envisages imported into tax credits. Moreover, the number of people affected is very small indeed. In the light of that, I hope that the noble Lord will feel able to withdraw his amendment.

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