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First, what caused the Government to choose 55p in the pound withdrawal rates as opposed to 70p under family credit? Secondly, what would be the effect of going up the income scale, if they had chosen a percentage of 62.5p or 60p? Obviously, the noble Baroness cannot answer that off the top of her head but it may be helpful to have a note on that before the next stage of the Bill.
Baroness Carnegy of Lour: Will the Minister say something about my remarks? She may not have anticipated them in the light of the amendment. However, I wonder why the Government believe it to be necessary to apply this system to people who in no way will need persuading that work pays better than unemployment.
Lord Higgins: I am trying to understand the points the noble Baroness made about the taper. These are never simple matters and I often wonder whether we should have a blackboard. Having failed to get one in the Commons for many years, I doubt whether I shall succeed in the Lords.
First, how many more people does the Minister expect to come within the welfare net as a result of the changes being made both in relation to WFTC and child benefit? Secondly, does the Minister expect that carrying benefits that far up the scale will encourage anyone to work who was not previously working? It seems unlikely that someone will suddenly enter the workforce earning £38,000 per year. Perhaps that is a false point.
Thirdly, I should like to be better informed about the taper for subsequent stages of the Bill. Will more people be paying marginal tax rates of 60 per cent than are doing so at present? Fourthly, is it the case, as Professor Minford suggests, that this worsens overall, rather than improves, the poverty trap? Therefore, there are a number of issues on which we should seek clarification at this stage so that we can review the position on Report and Third Reading.
Also, will some people see their marginal tax rates increase from the position at which they are at present? Finally--again, this anticipates a matter which may arise later--is the fact that we go this far up the scale one of the main reasons that we have a passport problem? I still find it rather surprising that the Government did
Baroness Hollis of Heigham: I shall do my best to answer those questions. The noble Lord, Lord Skelmersdale, asked why we had opted for MDR rates of 55p. That relates to one of the questions raised by the noble Lord, Lord Higgins. There is a balance of judgment. We are trying to make a decision on how we want the taper to be. We are trying to work out how far up the income scale one should properly go, with the implications for public expenditure, set against the problem of withdrawal rates.
We face two problems which were mentioned on Second Reading. The first is the unemployment trap which relates to getting people off benefit and into work. The second is that once they are in work we need to make it worth them working longer hours for higher pay so that they may seek to climb up the ladder.
I can say from my experience that we know that couples on family credit dip down because they are already in work but may come up again quite quickly. Because of pay rates for men, they quickly climb out of family credit. But lone parents stay on family credit and at the same levels of family credit for long periods of their working life. In part, because they are relatively unskilled and because of childcare problems, women cannot work the extra hours and even if they worked to earn extra money, they would not keep very much of it. Therefore, they make a judgment that it is better to work for less, and family credit takes the strain. Therefore, they stay as they are.
In other words, they face the second trap which is the poverty trap. Having found work, it is not worth them coming off those benefits because the taper rate is so high that they have to work a lot more and earn a lot more before they have sprung free altogether of the poverty trap. That is a basic dilemma which is common to all governments in relation to DSS. It is not at all a partisan point.
One then must ask how one can reduce the combined effect of the tapers so that people's tax rates remain sufficiently appropriate to retain the incentive to go off benefit into work and once in work to climb out of dependency on longer-term benefits such as family credit. We went for the figure of 55p because, frankly, we thought that the balance was about right. Had it been 62.5p or 70p, as the noble Lord suggested, yes, we would have had people coming off benefit much sooner and there probably would have been reductions in public expenditure. However, for people climbing up, there would have been very high MDRs (marginal deduction rates). That would have meant that instead of being able to say to most people, "You will have a deduction rate of no higher than 60 to 70 per cent", very many more people would have had deduction rates of 80 to 90 per cent or 90 per cent plus. So, it is a question of balance. There is not a right answer but in the absence, at present,
If noble Lords agree, perhaps I may add to that point or even cite the figures I gave earlier. The implication is that, whereas in the past some 750,000 people were having marginal deduction rates of over 70 per cent., that has now been reduced to under 250,000 people. The noble Lord, Lord Higgins, is quite right that the consequence is that the number below the 70 per cent. rate is increased; that is, between 60 and 70 per cent. or between 50 and 60 per cent. Statistically, that is an inevitable consequence of what we are doing. If I have further information about the implications of a different taper, I shall write to the noble Lord. There may be research on this point with which I am unfamiliar. However, that is our basic thinking.
The noble Baroness, Lady Carnegy, asked why we need to do it for people on higher earnings knowing that they do not need the incentive to go into work; they are already well paid. Perhaps I may ask Members of the Committee to step back. What sort of family will receive tax credit at £30,000 plus? We are not talking of the man in work and the woman at home, a single high earner. By definition, they would not then be receiving the childcare tax credit, which is what takes people up the income scale. Who, therefore, will receive that? It will relate to a combined family income of over £30,000. That is the only way they will receive the child credit which, of course, therefore means that the woman is in work and has children at home being cared for by other people. That is why somebody with a family income of over £30,000 may be eligible for the working families' tax credit. In that case it is her income contributing towards his to take them to an income level of over £30,000.
That means, in practice, that apart from the 5,000 people I talked of who receive over £500 a week, that is over £25,000 a year, he is more likely to be in the £20,000 to £25,000 band. She is likely to be in a band somewhere over £5,000 to come within the 16-hour rule and therefore to count for childcare purposes.
I believe that the question raised by the noble Baroness assumes a single earner and, therefore, effectively somebody coming up to higher rate bands. If we did not have a generous childcare credit, the childcare costs of a couple both in work, and at that top point having possibly four or five children, would be so high that it would not be worth the woman working. We would then be in a situation where he might be on an income of £20,000 to £25,000 and receiving WFTC and she would be at home and not receiving childcare credit. Therefore, that would not take them into the higher earning levels we have been discussing. I see the noble Baroness would like to intervene.
Baroness Carnegy of Lour: I understand that point and am grateful to the Minister. However, I still wonder whether this is the right way to do it for that sort of family. Why not do it through the tax system because that sort of family does not require to be persuaded of the matters about which the Government are trying to
Baroness Hollis of Heigham: That is a deeper point about what the tax system should be carrying in terms of whether children are built into the tax allowance. Given that they are not--the noble Baroness will forgive me if she does not tempt me at this hour into a wider debate about the role of the tax system on this aspect--what we are doing is a perfectly decent and fair way of ensuring that, where a couple have a considerable number of children, three plus, and she wishes to work, she can afford to do so. That is the effect of how the system works, otherwise her childcare costs would outweigh any benefit.
One other point worth remembering is that even with childcare tax credit, at least 30 per cent of the costs will continue to be borne by the families. It is not 100 per cent reimbursement; the reimbursement arises because of the large number of children, the cost of childcare and the fact that the figure of £30,000 is based on two earners. So, in practice, we shall not be talking about very many higher rate taxpayers, which, of course, would be an individual. One can see how the model would not work.
The noble Lord, Lord Higgins, asked me how many extra people would come in. We expect WFTC to aid a further 400,000 families. He asked whether this was the reason, because of the taper, for the passport problem. Yes, I believe it is perfectly fair to say that that indeed is the issue. The Government will be coming back with their position. Again, it is an honourable problem to have, but that is one of the consequences. I hope that I have answered the queries raised by Members of the Committee.
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