Examination of Witnesses (Questions 400
WEDNESDAY 24 APRIL 2002
400. But a million people have now been dragged
into the higher tax rate band by your Government.
(Mr Brown) I think you could look at it another way:
that there are a million people earning far higher wages and salaries
as a result of the success of themselves and the success of the
401. But three million people are now going
to be clobbered by your National Insurance increase?
(Mr Brown) I would not put it that way at all. A one
per cent rise in National Insurance across the board seems to
me the fairest way of dealing with the provision of the public
services for future years, and it is well understood by people
that the Health Service is available to all. A one per cent additional
contribution to the public services of this country is something
that I think people will understand, and in time I think people
402. I am a sort of sorbet between the courses,
Chancellor! I wonder if you could just tell me what percentage
of the working population potentially will be covered by the tax
credits as they will be in April 2003?
(Mr Brown) April 2003 is the introduction of the working
tax credit and the introduction of the child tax credit. What
we are doing is splitting the working families tax credit into
two, one for the work tax credit and one for the children's tax
credit. As far as the work tax credit is concerned, we are including
single persons and couples without children, and I will give you
the exact figures as I find my notes for that. As far as the children's
tax credit is concerned, as I said in the Budget it goes right
up the income scale to £58,000. In fact, in the case of a
family where the first child is under one it could go up to £66,000,
so it covers most of the families of this countryand rightly
403. I would be happy to accept more detail
in another form later but, even on the basis of what you have
said just there, it is clear, is it not, that by April 2003 most
of the working population covering up to the very highest levels
of income in some cases will potentially be able to receive income
related tax credits.
(Mr Brown) It is probably 86 per cent of households
with children who will benefit from the child tax credit but you
have to have children in your household to benefit from the children
tax credit; it is not available to everybody. I think people understand
that the tax credit is essentially the Inland Revenue paying money
rather than receiving money in these cases. The amount of money
that the typical family will receive for the first child is £27.50
including child benefit, and that will be paid directly to the
404. Now, there are two points, are there not,
that need to be made about this considerable extension of income
related tax credits right through the income ranges: the first
is that the take-up of, for example, the working families tax
credit is, in fact, rather poor. It is poorer even than the minimum
income guarantee for pensioners?
(Mr Brown) I do not accept that the take-up is poor.
What has happened is there are probably about 450,000 more families
receiving in work support through the working families tax credit
than under family credit so, as far as a successful make-work-pay
measure that has made it rewarding for people to be in work, 1.3
million families are now benefiting from the working families
tax credit. I think it has served its purpose to send a signal
to people that work pays more than benefits; that it is worth
your while going into work; that there is a minimum family income,
in this case about £240 a week and nearly £11,000 available
to you if you take up work, and therefore I think it has been
well targeted and has served its purpose, and I think the new
measure will be even better.
405. How many people do you think there are
who could claim the working families tax credit but do not?
(Mr Brown) I think you will find that at the lower
end of incomes, the vast majority of people are claiming. Where
you have the tapering off and there is less gain to people from
claiming it is obviously less but, as far as the lower income
group of people whom we had to attract back into work and show
that work paid, the vast majority of people are receiving what
they are due and claiming it.
406. Does not the success of the tax credit
package as a whole really depend upon the substantial take-up
of the tax credits, and if they are to cover way more than the
working half of the population and be carried right up the income
scale potentially, is not there a grave danger that they will
be substantially underclaimed?
(Mr Brown) 85 per cent of those eligible to receive
children's tax credit through PAYE have had their codes adjusted
already, and then the self-employed and those who are on self-assessment
will apply in the normal way when they send in their 2001-02 tax
return, so there is a very big coverage of the children's tax
credit; people do know about it and, of course, as we move to
the new child tax credit there will be more information available
to people because the benefits are considerably more for many
families and they will want to take it up. Obviously you want
to have one hundred per cent take-up if that is possible but equally
over a year, and it has only been in for a year, the 85 per cent
we have already achieved and the self-assessment and the self-employed
forms will come in, where people will get their children's tax
credit forms paid to them.
407. Do you not think these schemes are becoming
a little over complex?
(Mr Brown) I think if you were to look at the tax
code irrespective of what has happened to the integration of tax
and benefits, you would say it was incredibly complicated and
it is so in every country around the world. I do not think there
is any great difference between ourselves and America or other
countries in relation to that. Then if you look at the benefit
system it is also because it has to target benefits properly.
The integration of tax and benefits means that we end the situation
where many people were, on the one hand, paying tax and, on the
other hand, claiming benefit at the same time. Not only have we
made the poverty and unemployment traps less; we have also avoided
this duplication of claiming from the benefit system on the one
hand while paying tax on the other, and I believe that we are
getting to a better system, so it is actually in the end less
408. What percentage of the pensioner population
do you think will either be entitled to the guarantee element
of pension credit or the savings element of pension credit?
(Mr Brown) We reckon more than five million pensioners
will be entitled to pension credit; roughly a half. If you are
a pensioner couple with income of less than £200 a week you
will get something from the pension credit, and if you are a single
pensioner with income of less than £135 a week you will get
something, so for those people with modest occupational pensions
and for those with limited savings but some savings, who in every
other system that has been devised would be penalised because
they could not get any of the benefits that were available, we
are making their savings go further and we are rewarding them
for having saved through occupational pensions. The average gain
is something between £6 and £8 a week so from next year
many pensioners who feel, rightly, that the system penalised them
when they did save and they did have occupational pensions will
be properly rewarded, but we have avoided the two difficulties
of having a means-tested benefit for the very poor; we have a
benefit that goes up the income scale now; and equally we have
avoided what I think would have been a huge additional expense
of simply, on a flat rate basis, raising everybody's pensions
by more than what we are doing where you would not be targeting
the resources to those groups of pensioners who are very much
in need of a boost to their savings and a boost to their occupational
409. So on day 1 of pension credit more than
half of the pension population is covered. If pension credit increases
in line with earnings, which is the undertaking that the Government
has given, pension credit will rapidly become the first universal
(Mr Brown) It depends what you mean by "universal".
It is certainly not means-tested in the old sense because capital
is not being tested
(Mr Brown) It is income that matters. Someone becoming
a pensioner will be able to phone up, give the details of their
retirement pension and their occupational pension and their savings,
and get assessed immediately from the time they retire for a period
of years, and only have to report the serious income change that
is taking place.
411. A couple of points on tax credits. Clearly,
Chancellor, you are extremely well informed about it and you have
taken a great personal interest in tax credits. I would like to
ask you about the classification of these tax credits in the accounts.
If you could take a look at box C2 on page 216, which I am sure
you know well and which has been an issue of great contention,
this is the issue of whether tax credit should be scored as public
expenditure, as the ONS favour, or, as you have done up to now,
as negative taxation thereby reducing the tax burden. I note that
you have made a change to move the treatment of these into line
with the OECD whereby you will treat tax credits as negative taxation
"to the extent that credits are less than or equal to the
tax liability of the household". Could you give me a rough
estimate of the proportion of total tax credits which is attributable
to that category, and the proportion which will, therefore, be
treated as public spending?
(Mr Brown) I may have to send you a detailed note
on some of these points.
The OECD new classification is the one we have accepted. I think
it is a victory for us that we did say this should happen internationally
and we have had repeated exchanges in this Committee on this,
and now the OECD has agreed to this change which will apply to
all countries. In fact, as a result of that, it adds around 0.5
percentage points to the tax GDP ratio largely because around
only 12 per cent of WFTC actually scores as negative tax under
the new system. So we have accepted this new definition.
412. Sorry, was the answer you are giving me
there 12 per cent? You began the answer by saying you did not
know the answer.
(Mr Brown) Well, I will send you a note but these
are the details I have here with me. Around 0.5 percentage points
is added to the tax GDP ratio as a result of that, largely because
only around 12 per cent of WFTC actually scores as negative tax
under the new system. We have accepted the OECD view of this and
will publish our figures according to that in future, and that
means that of course only income that is received by people who
are tax payers is accounted for on this.
413. You must have worked these figures out,
Chancellor, because otherwise would it not be impossible to draw
up the chart on the following table on page 219, where chart C3
gives the tax to GDP ratio and, although it is extremely difficult
to work it out, if you read the footnotes carefully it says in
that chart that the net taxes and contributions are defined in
table C10, and if you go to C10 it says "Footnote 3"
and refers you back to box C2, so we arrive back at the reclassification
which we were talking about a moment ago. So you do already have
these numbers available in the Treasury?
(Mr Brown) I have just given you the numbers that
414. You have given me a percentage for the
current year but this is a historical series
(Mr Brown) I do not think there is any secret about
415. Would you give us the figures?
(Mr Brown) We are following the OECD classifications
and you can see what is included. I will send you a note on what
416. I wonder whether you might have considered
publishing the ONS figures alongside these to give more solidity
to your tax burden ratio?
(Mr Brown) We are following the OECD classificationsurely
that is the best way of moving forwardand now that there
is an internationally agreed definition and we have accepted that
part of the working families tax credit cannot be included as
a tax credit
417. Chancellor, is that not repetition of the
(Mr Brown)Surely that is the best way forward?
418. I put it to you that if you had published
the ONS figures you would have found that the tax burden has risen
from 35.2 per cent of GDP to 38 per cent of GDP, and that that
38 per cent of GDP would be the highest level of the tax burden
since 1984-5 over about 17 years. I put it to you that this fact
might have something to do with the reason why you decided you
did not want to publish ONS figures?
(Mr Brown) I do not accept that. We have, as I said,
adopted classification changes from the OECD that add around 0.5
percentage points to the tax GDP ratio. I did not need to do thatwe
could have held to the old definition that we had been usingbut
I thought it right to move towards the internationally agreed
practice that we had played a part in creating. I have given you
the figures which show that 12 per cent of WFTC only scores as
negative tax under the new system, and I do remember these debates
have gone on between governments on quite a regular basis because
the last Government included, for example, mortgage tax relief
as a tax cut and there was a debate about that when, of course,
some people were getting the benefit of it and were not taxpayers.
419. Chancellor, I am forming a new organisation,
Socialists for International Bankersand you cannot get
much more new Labour than that! What is the present tax take from
the taxation of foreign company UK branches?
(Mr Brown) I do not have a figure for that. What we
are adopting is a rule that is adopted in most of the other major
economies where there is the proper allocation of capital when
calculating the tax liability. It is true that a number of overseas
institutions operating in Britain, because of the way capital
is attributed, were not paying a tax at all and, therefore, it
was right to take action to follow what is essentially international
practice by America, Germany, France and other countries.
3 See Appendix 8. Back
See Appendix 8. Back