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Mr. Ruffley: For the record, did I hear the hon. Gentleman say that he wanted to lower the threshold for the top rate of income tax? If so, will he tell us what effect that would have on the average earner of more than £25,000 a year? I am thinking of those whose incomes, in terms of thousands, are in the late 20s and early 30s. Many such people are nurses, sergeantsand police sergeantsand other public sector workers.
Mr. Webb: It would have no effect whatever. Because we would raise the personal income-tax allowance, those people would gain an average of £15 a weekthe sort of sum they would receive through working tax credit. I hope that the hon. Gentleman is with me so far: it is a straightforward proposition. When the tax allowance goes up, nurses, doctors and everyone else in that bracket will get £15.
Assuming that we want this to be a targeted measure to support the low-paid, we reduce the starting point for higher-rate income tax by an amount that will take away £15 at that end. The net effect will therefore be nil. In other words, the effect will be neutral for those on higher incomes because they are gaining from the tax-allowance rise and losing from the higher-rate threshold fall. Those who gain will be those receiving working tax creditthe low-paid, whom we are targeting. That, then, would be an alternative way of lifting burdens from business.
There is another problem, which has also been mentioned already. The proposed integrated system adds couples' incomes together. Whereas children's tax credit is currently assessed on the basis of individual incomes, the proposed child tax credit will be assessed on the basis of joint incomes. Let me return to an example given by the hon. Member for Bury St. Edmunds (Mr. Ruffley). At present, a nurse married to a teacher, with children, receives the full children's tax credit because neither earns
When we raised that with the Paymaster General, her response was essentially, "Wait and see." She said that the thresholds and allowances would not be announced today. I understand that, but this is the position: either the Government must find £600 million to prevent people from losing out, or some families who are receiving the current benefitsthey are not necessarily filthy rich; I gave the example of a nurse married to a teachercould lose significant sums.
That brings me to a key point. Those of us who are potential members of the Committee that will consider the Bill would like to see regulations before we deliberate. We would like to know what we will be talking about. It would be helpful to have some idea of the ball-park figure that the Government are thinking of. I appreciate that we cannot pre-empt the Budget, but is it unreasonable for the House to know whether we are talking about a measure that will take up to £520 off 1.4 million constituents, or one that will cost no one anything? We simply do not know. For the Committee to have an informed discussion on those issues, some idea of how the system will be delivered and of the framework within which the threshold rates will be set would make a big difference.
The right hon. Member for Birkenhead made some points on fraud and how we may respond to it. The nub of the fraud problem is payment through the pay packet. That makes matters so much worse because the money benefits the employer before it is handed on. The fact that the employer has a stake in the process makes collusion potentially much worse.
If the money goes directly to a recipient and the employer is not involved, it is not a problem. That is another compelling reason not to have a working tax credit at all and to put tax allowances up to deliver the money to the low paid. In that way, the employer will not get his grubby hands on the money, the good employer will be happy because he will not have to administer the thing and the bad employer will be denied the opportunity for fraud. Again, that could save the Government money. The scope for fraud could be substantial; it could run into hundreds of millions of pounds.
Mr. Webb: The vast majority of people whom we are talking about are income tax payers. The working families tax credit is currently paid above certain bands. The children's tax credit goes to people beyond the higher rate threshold. [Interruption.] The hon. Lady makes a fair point. I do not know how many of the people whom we are talking about are not taxpayers. For those with children, there is no problem. We can deliver the credit through other mechanisms.
The childless non-taxpayer earns about £80 a week. As I have said, I am not convinced that there is an incentives issue for the childless non-taxpayer, but the hon. Lady makes a fair point. I do not know how many people we are talking about. My suspicion is that it is very few. I would be interested to know what the figure is. If the Financial Secretary to the Treasury has an idea of the order of magnitude, I will be grateful to hear it.
There are a few other concerns. One aspect of the proposal that has had little attention and debate so far is annual assessment. Trying to line things up with the tax system and reducing the bureaucracy of frequent reassessments is an interesting idea. However, in one respect the system will not line up with the tax system. It will go in the opposite direction: from a single assessment with the children's tax credit to joint assessment for the child tax credit. Therefore, in one important respect, there will be a move away from integration with the income tax system.
If we were not to go for annual assessment, I hope that the Government would not say, "We cannot support that because that is not in line with income tax." In respect of the unit of assessment, the Government have rejected the income tax approach and have gone for a social security approach. Therefore, I hope that they will consider the issue of annual assessment.
If we do not tackle the problem of people in fluctuating circumstances, we will face it in our advice surgeries for years to come. The Institute for Fiscal Studies has examined fluctuations in family circumstances using the labour force survey. It says that 225,000 couples with children break up in a given year and 200,000 lone parents start to co-habit in a given year: nearly 500,000 families with children experience a change that would affect their entitlement. One million families with children change employment status within a given year, so there is an awful lot of change. [Interruption.] Indeed, it was an IFS report I was quoting from, my former employer.
The key question is: how should the system respond to that? Obviously, there is a trade-off. If the system responds to every last little change, it will be all over the place, administrative costs will be enormous and we will gain nothing. If the system is rigid, it will not fit people's individual circumstances.
The problem is asymmetric. In other words, when people's circumstances change to their detriment, we want a substantial response. People should not have to go for prolonged periods without change. For example, if someone loses £10 a week because of a loss of overtime, the system should respond quickly. However, if they gain a tenner a week through doing overtime, it would probably cost the taxpayer an equivalent sum to recalculate the entitlement. For that reason, the taxpayer has no incentive to worry about upward changes, but we would need to worry about equal downward changes.
Contrary to the Government's views in their consultation paper that we must have a symmetric threshold for reporting, we should be more worried about downward than upward shifts. That is not just because the wishy-washy Liberals want to throw money at everything, but because the taxpayer might not gain by trying to spot small upward shifts in people's incomes. Conversely, we would not want to leave people who have experienced a downward shift in the same position for 11 months. I hope that the Government will consider the suggestion that the threshold should be different for those who get worse off compared with people who get better off. I think that the Paymaster General is nodding.
I hope that we will be able to explore in Committee whether a year is the right timescale. At the moment, the period is six months, but that is a rigid time with no opportunity to re-assess income. If we change to a system of 12 months with scope for re-assessment in that time, I wonder whether we will have missed a step. Perhaps six-monthly assessments could be considered. I appreciate that that would involve twice as many notifications to employers, but given how often people's circumstances change, there will be lots of reassessments anyway. My worry is that some people who need a reassessment might not realise that they could have one and might try to get by with the wrong amount not just for six months, but for a year.