Examination of witnesses (Questions 180
THURSDAY 15 MARCH 2001
and MR CLIVE
180. You are searching, are you?
(Mr Macpherson) We keep these things under review
and people do consider it.
181. What about the impact of some of these
VAT reductions, for example, on children's car seats?
(Mr O'Donnell) Do you want the revenue costing of
182. No; I want to know what you think the estimated
impact will be overall.
(Mr Macpherson) We do have a model which considers
personal tax and benefit changes. With things which people spend
a lot onfor example, child careyou can start to
make assessments so that when we introduced the child care tax
credit into the working families tax credit we could form a general
view about the cost and who it would affect. The problem with
very specific, individual items of expenditure is that, excellent
though our model is, it is difficult to really get down to the
level of individual child seats. Clearly, the Customs and Excise
form a view about how many of these are purchased a year and that
must be possible. That will inform the costing, but I think it
unrealistic to provide large scale analyses of quite small measures.
It is important obviously if you are having a child and you need
to go and buy a child seat. It is good news that the level of
VAT is lower, but my guess is that the number of child seats per
year is significantly different from the numbers of packets of
(Mr Gibbs) We have an estimate for the direct cost
of the measure which is in the FSBR, table A11, on page 146. VAT,
item 35, "Reduced rate on children's car seats, -5, -5, -5."
That is based on Customs costing the measure on the basis of assumptions
about its take up and the number of sales of car seats. What we
do not have, I believe, is a piece of behavioural econometric
analysis which tells us precisely how many extra car seats will
be sold, if that was your question.
183. Almost all the lines in this particular
table are either fives or tens. They are all the same for the
next three years. You are just guessing, are you not?
(Mr Gibbs) They are not just guesses. They are the
best estimates that we can prepare based on our assessment of
184. In one of these press notices, you say
you are removing VAT on the purchase of adult cycle helmets to
encourage people to cycle more. What is your best estimate of
how many more people are going to cycle?
(Mr Gibbs) I do not have an estimate of how many people
are going to cycle because I do not think we have the econometric
model of cycling behaviour that can tell you that. What we do
know is that at the margin the people who are deciding whether
to cycle or not often cite safety as a factor in their decision.
What this measure does is to help reduce the cost of what is usually
thought to be a key bit of safety equipment if you are thinking
about riding a bike. I cannot tell you, nor do I think we have
the ability to model, precisely how rapidly that will be taken
185. You are trying to change people's behaviour.
You think this is a good idea, but you do not really know whether
it will work or not?
(Mr Gibbs) We are seeking to use the tax system to
reduce the cost of a piece of safety equipment in response to
some evidence that concern about safety is one of the things which
stop people from cycling.
186. You might also try to encourage people
to wear helmets?
(Mr Gibbs) Yes.
187. At our evidence session last week, Professor
Tim Congdon suggested that the introduction of personal tax credits
was making the tax and benefit systems more complex and therefore
there would be likely to be a low take up. Therefore, the benefits
meant to accrue to the less well off would be less likely to be
seen. It was quite clear that that was based on anecdotal evidence
from him rather than any hard evidence. Are you able to tell us
whether you think the take up of personal tax credits, the working
families tax credit, child care tax credit, children's tax credit
and so on has been satisfactory?
(Mr Macpherson) This is an interesting issue. The
government is committed to making these tax credits work. It is
therefore taking every step to ensure that people get what they
are entitled to. To look at the tax credits you mention in turn,
the children's tax credit has not even come in yet. It comes in
188. Presumably you must be starting to know
whether people have applied or not?
(Mr Macpherson) Exactly. Already, we have made an
estimate that some five million households will be entitled to
it, of which one million will be receiving it through self-assessment
because they are either self-employed or in top rate tax or at
the margins of top rate tax. That leaves four million who will
get it through traditional PAYE. Even before it has come in, we
have received something like 3.3 million applications for it.
I think that is pretty good going because people do not actually
need to claim it now. They could claim it next year or even after
the tax year and they would get it backdated. Things are looking
pretty good there. With the other tax credits that you mentioned,
the working families tax credit and the children's tax credit
189. The child care tax credit.
(Mr Macpherson) The working families tax credit again
is going pretty well. The take up of it is continuing to increase.
The last published figures were for last August when 1.1 million
households were claiming the WFTC which was 300,000 more than
even at its peak were claiming family credit. That was quite a
big shift. New data will come out in due course but it is likely
that numbers claiming the working families tax credit will continue
to increase. Similarly with the child care tax credit. At its
peak, only 40,000 odd families were claiming the family credit
disregard. Already, something like 125,000 families are claiming
the child care tax credit and I think that figure is still on
an upward trend. I am reasonably optimistic that the people who
are entitled to these credits will get them. Nevertheless, it
is not an area for complacency. One reason why we are doing quite
a lot of evaluation is to find out precisely what is going on.
Unfortunately, it is very difficult to calculate take up at any
point in time. It is only with quite a long lag that you actually
know what family incomes are in a given year. It will only be
at that point that you can begin to get a feel for what is going
on. One of the key things in terms of these tax credits is to
try to reduce the stigma of claiming income related support. We
think there has been quite favourable anecdotal evidence that
people do find dealing with the Inland Revenue a lot easier than
the Benefits Agency. Also, the Inland Revenue are taking steps
to ensure that, as we move from the old style traditional means
testing to a more integrated approach to taxes and benefits, we
try and make the claiming process far more user friendly, either
by enabling people to claim it on the telephone or the internet
but also by reducing the length of the forms. I do not know if
anybody here has had to fill in an income support form recently
but it is incredibly long and asks an incredible number of questions.
This is often because benefits have become excessively complicated,
usually I fear because of the Treasury imposing cuts, which I
am sure had a very good basis for them, but they did make the
system a lot more complicated. A big priority as we move forward
is to simplify these tax credits so that they are more transparent,
easier to claim and, on that basis, I think the system is likely
to achieve its objectives.
190. Are you saying at present the tax credits
are easier or harder to claim than benefits?
(Mr Macpherson) I think that tax credits are already
easier to claim than benefits. They are evolving. With, for example,
the working families tax credit, there was a choice. You could
either create a completely new system in which case you would
have had to develop the IT and recruit new people. You probably
would not have been able to get the WFTC up and running until,
say, 2002; or, you took what you inherited with family credit
and started with the family credit systems which enabled the system
to get up and running by 1999, albeit changed at the margin. Then
you allowed the system to evolve so that the plan is that a new
generation of tax credits will be introduced in 2003. Yes, the
intention here is to make them even simpler.
191. Have there been any particular blockages
identified so far? If so, what is being done about them?
(Mr Macpherson) There are issues around, for example,
how often you have to claim these credits or benefits. In the
case of income support, if your income changes week by week, you
are supposed to notify the Benefits Agency. The working families
tax credit was based on the old family credit system of a six
month claim period, but it was a fixed claim period, so it was
a very inflexible system. For example, there are complaints from
time to time that you claim your WFTC but two months into your
working process you go and get child care. Under the current system,
you cannot get your WFTC adjusted until your six month claim period
is complete. That is inflexible. With the next generation of tax
credits, on which we are going to publish more details over the
course of the summer, the presumption is more that you will move
to an annual basis so that, instead of having to fill in two forms
or making 52 notifications of income changes, as you might conceivably
under income support, you only have to do it once. It is also
more flexible so that a change in circumstances, if you give birth
to another child or you get new child care arrangements, can be
reflected quickly in the level of support a family is getting.
192. Is there any reason to believe that having
the extra size of the baby tax credit makes it more complicated?
That has been suggested but I do not see
(Mr Macpherson) I do not see why that should make
it any more complicated at all. I was struck by some of these
claims about how complicated the system is and I actually got
off the internet the claim form for children's tax credit. It
is only a three page form and it asks very few questions. If you
are a lone parent, it is only a one page form, even better. I
do not see any problem about the baby credit and I do not think
it represents a complication at all. It just means that you get
twice the level of support in that crucial first year.
193. Can I move on to the maternity and paternity
pay package? Has any estimate been made by the Treasury about
the impact on the labour market and the wider economy and, in
particular, whether it will, as those like me have argued, assist
more people coming into the labour market? Have you done any estimating
at all on those impacts?
(Mr Macpherson) We have not yet done a firm, econometric
analysis. Again, this is an area which will be ripe for evaluation.
We have looked very carefully at such evidence as is available.
That tends to suggest that if women, mothers, can stay in contact
with the labour market their wages are less likely to decline.
At the upper end of the distribution, there is very little evidence
of a gender effect on pay at all, even for mothers who have taken
maternity leave. Better maternity provision is likely to keep
mothers in contact with the labour market. The evidence tends
to suggest with mothers that, the longer they are out of touch
with the labour market, either their skills decline because inevitably
the technology is going to move on so when they come back after
a long period they cannot offer the same amount of productivity;
or, if that is not the case, that somehow they cannot command
as good a wage in the labour market for other reasons. It could
be discrimination or whatever. It is absolutely clear that keeping
mothers in contact with the labour market will be good for them
and also for the economy because the chances are their productivity
will be higher. Output as a wholeI am not a macro economistI
would hope would be higher.
(Mr O'Donnell) We are reaching a point where, as unemployment
levels go down and reach relatively low levels historically, we
need to look at enticing more people back into the workforce.
It is the inactivity issue that we think is one of the key points,
looking forward. That is exactly the point Nick is making about
trying to keep people with temporary spells outside the workforce
engaged with the workforce as they come back in.
(Mr Macpherson) I think we call it "unpaid employment".
194. How would the evaluation be done on tax
credits? Is it going to be as comprehensive as we have had on
New Deal and are you similarly going to be having independent
(Mr Macpherson) There is a study which is already
in progress on tax credits. It will be published; it will be independent.
With maternity, I am pretty certain we will want to adopt the
same approach. A lot of these measures do not reflect some great
ideological view. They are based on what works and you learn from
that. If you do not learn, you cannot improve policy. New Deal
for lone parents is another very good case in point, where you
want to find the most cost effective interventions. We will be
195. One specific point on the assistance to
employers in administering it. Is there any argument for tapering
the small employer relief or even providing it to a wider range
of employers so that they are not tempted potentially to not increase
staff if they are just going over the 40,000 limit?
(Mr Macpherson) Clearly, we looked at the different
options in terms of tapering and so on. As ever with these things,
ultimately you want to choose a system which is relatively simple.
There was this doubling of the small employer relief in terms
of the national insurance liability from 20,000 to 40,000 pounds.
As a result of that measure, my understanding is that 60 per cent
of all firms will be covered by the small employer relief. It
is worth remembering that the small employer relief has an implicit
subsidy. You are in effect being paid 105 per cent of the maternity
pay. Assuming they can administer it reasonably efficiently, those
firms might be making a bit of a turn on this and that might encourage
them to take on more potential mothers. We will keep it under
review. Tapering is a potential option but we have come forward
with the present proposal for the moment.
196. With potential mothers in mind, I am tempted
to ask about the behavioural assumptions you made in estimating
the cost of child care tax credit. My question really is when
is a tax credit not a tax credit? The working families tax credit
is very different from the children's tax credit. You are calling
all these things tax credits and you are having serious policy
discussions about tax credits, but they are very different animals
in the way they operate and in the way they are organised. Is
this not complicating the debate? Out there and even in this place
people are thinking, "What do people really mean by tax credits?",
because they are all very different beasts.
(Mr Macpherson) That is an interesting point. It is
one reason why the government is proposing that from 2003 it brings
all the systems of support for children together in one integrated
child credit which will sit on top of the universal child benefit.
The problem we have faced over the last two or three years is
the tension between getting something in place quickly and at
the same time modernising the delivery. Like a horse's blood line,
if you were trying to trace the children's tax credit antecedents,
it came from the system which existed with the married couple's
allowance. The married couple's allowance in its latter years
was in effect a credit. It was payable at a flat rate. Similarly,
the WFTC blood line comes back through family credit, through
to Keith Joseph's family income supplement in the early 1970s.
Child benefit's antecedence I suppose was the old children's tax
allowances which existed until about 1980. You have these different
systems; you want to get things in place quickly to get money
into the pockets of people who need itin this case, families
with children who, over a long period, have done a lot less well
than the rest of the population. The next stage is to bring these
things together, to try and create a seamless system of support
payable on a common basis. For example, there are issues around
payment periods. There are issues around assessment, whether it
is a household assessment or individual assessment. This is going
to be the challenge for the next two years with the government
committed to introducing an integrated child credit in 2003. From
that point onwards tax credits will look less disparate and there
will be a far clearer framework. There is also a proposal for
a pension credit which I suspect will have many features in common
with the approach to children. I recognise that at the current
time things may seem complicated but one of the reasons for wanting
to introduce these plans is to make sure the system evolves in
a way that we can simplify it.
197. Are there any plans to introduce any clawback
of tax credits once they are paid out?
(Mr Macpherson) In what sense?
198. If you have been getting the working families
tax credit over a whole year, you come to the end of that year
and your tax return shows that you were not entitled to it for
nine months, are you proposing that that will be clawed back?
(Mr Macpherson) That is exactly the sort of issue
that we need to consider and address in the next generation of
tax credits. WFTC is not clawed back at the moment. If I were
to claim a children's tax credit today and add to the 3.3 million
forms, if I were a top rate taxpayer, it would be clawed back
at the end of the year. I might be able to get the Inland Revenue
to put it in my PAYE coding but at the point I fill out my tax
return as a top rate taxpayer it would be clawed back. Clawback
does exist in the current tax system. The issue is, as you bring
these systems together, whether you do claw things back. There
are tensions between getting things 100 per cent accurate and
causing quite harmful effects on low income families. The challenge
with the new system will be to provide for mechanisms where you
might have a pretty good income for half the year but suddenly
you lose your job and your income falls through the floor. I do
not think we want to have a system where we are chasing people
for repayments of tax credits when they do not have the wherewithal
to repay. The objective of these new tax credits is to help families
not to harm them.
199. That implies that you would be interested
in some sort of clawback mechanism.
(Mr Macpherson) No. It is an issue you have to consider
as you introduce new tax credits. Your colleagues in the social
security select committee have been doing a study of the new tax
credits. We recently gave evidence to them and no doubt they will
have views. We are going to bring forward more detailed proposals
fairly shortly which will expose further thinking on this. Again,
it is an area where you do not want to suddenly impose a set of
decisions. This is a classic area where debate and consultation
is helpful and we regularly meet organisations like the IFS and
the Child Poverty Action Group to talk these things through.