Friday afternoon. It’s raining cats and dogs. You can’t go anywhere because the Christmas madness is in full swing. What can you do?
Knock up a computer program to understand the ‘what if’ scenarios in the Tax Credit system – obviously.
The results were fascinating – to me if nobody else.
What I wanted to understand was how the thing worked when you built scenarios that excluded the edge cases of single parents, disabled people and people over 50 called Fred but used to be called Jim that may have worked sometime in the past six months but then might not for which you might get an extra £50 per week if you manage to roll a six on a d20.
Let’s cut to the chase I thought. What’s the real deal for that ‘hard-working family’ you hear these policiticans trot out whenever somebody sticks a microphone near their nostrils.
So I ran through the calculations, rubbed my eyes and ran through the calculations again. But no the numbers weren’t lying – they were real.
The hard-working family earns 30p for every pound of income they generate. The government takes, or takes back 70p – 22p tax, 11p national insurance and 37p tax credit claw back.
Not quite 1 for you 19 for me, as The Beatles ‘Taxman’ puts it. Its actually 6 for you, 14 for me. So there’s a little bit of growth room if he should need it once he has the keys to Number 10 in his mitts.
Let’s consider a few examples of a hard-working family. Let’s start with the traditional one income family, stay at home mum and a couple of kids. Let’s say he works a full 37 hour week at minimum wage (£5.35 ph).
- Net family income including tax credits is £15,000
- The family is already suffering full income tax, full national insurance and £1,877 of the working tax credit has already been clawed back.
- This family has a marginal rate of tax of 70%.
Now let’s say mum gets the perfect part-time job – 2 x 8 hour shifts that perfectly coincide with childcare again at Minimum Wage (£5.35). Let’s assume that you can actually get childcare for 2 kids at £30 per session.
- Net family income including tax credits rises to £16556
- Child care for 4 sessions is paid for with Working Tax Credit (80% WTC – the rest covered by the Child Tax Credit individual element).
- The marginal rate is still 70%, and the clawback has risen to £3524.
- Essentially mum has worked the entire day for less than £15 in her hand (£1.87ph) – and that’s before the cost of travel, subsistence and clothing is taken into account.
Now, as anybody who has looked for a part-time job knows, there is no such thing as a job that gives 16 hours in two neat shifts, but which co-incides perfectly with childcare. The more typical case is 20 hours per week over five days and a commute just long enough so that you have to pay for the entire day’s childcare.
- Net family income rises to £15,275
- Clawback rises to £3935
- Mum works for 26p per hour, or £1.06 for the day’s toil.
And that’s why she doesn’t bother.
Perhaps you’re thinking that is to be expected at that level. But it’s not just at minimum wage that these disincentives arise.
Consider the same family, but this time with hubby earning £12.50ph (£24K per year). Again let’s start with stay at home mum and two kids.
- Net family income including tax credits is £19,127
- This family still has a marginal rate of tax of 70%.
- Tax credit clawback is running at £6,967
Now let’s give mum a part-time job – 20 hours as before, but this time at £8.00ph. full childcare at the prescribed rates (£30 per session).
- Net family income including tax credits rises to £20,423
- The marginal rate is still 70%
- Tax Credit clawback is now £10,045
- Mum is working for £1.25 per hour or £5 for each day in her hand. The rest goes on childcare costs, tax and clawback. And we haven’t even considered the bus fare, or the lunchtime butty.
Now let’s throw in childcare vouchers. Let’s say the marketing men have done their job thoroughly and childcare vouchers are on offer. The couple sacrifice £55 of their respective weekly salaries (permanently!) for £55 of childcare vouchers (remember they go to school at age 5). That’s £110 tax free to offset the cost of childcare. Got to be an improvement now surely.
- Net family income is now £19,644 (yes really!)
- The Clawback has dropped to £7929
- Marginal rate remains at 70%.
- Mum is now working for 50p per hour in her hand.
At this point she would be advised to give up and develop a taste for Trisha.
Perhaps I’m being stereotypical. Let’s try another example both partners earn the same income. Let’s be very generous and give them both a salary above that of the median male (£448 per week at last count). £12.50 per hour for a 37 hour week does that for us, and therefore we already have the figure if only one of the partners is working (£19,127 per annum).
What happens when the second partner goes back to work full-time. Let’s be exceedingly generous and assume that the necessary extended childcare for the two children is available for £300 per week.
- Net family income including tax credits rises to £25,142
- The Working Tax Credit clawback is up to £15,866
- The marginal rate remains at 70%
- The second partner is working for £3.13 per hour or £23.45 per day.
These families are very hard-working, and probably wonder why after all their hard work they don’t appear to be getting anywhere.
2nd person plural imperfect tense of the verb ‘to con’.