EffectiveTax rate of 70%
Discussion
There has to be a better way of operating the tax credit system than this. If we ahve to have tax credits (and I am no fan ) than the maximum rate of claw back should be allot lower than 37p in the pound.
Telegraph Article below.
Some of the lowest-paid people in the country now suffer 70 per cent tax as an unintended consequence of increasingly complex rules, accountants said yesterday.
Means-tested benefits called tax credits have proliferated under Gordon Brown as he attempts to alleviate poverty. But there is growing evidence that the public does not understand them and that HM Revenue & Customs cannot administer them.
The Commons public accounts committee reported this week that the Revenue makes nearly two million tax credit mistakes each year. Edward Leigh, its Tory chairman, described the system as being "fatally undermined by complexity".
Even when the forms are filled in and processed properly, they produce outcomes which accountants say are "crazy and obviously unfair to the most vulnerable members of society".
That was how Mike Warburton, senior tax partner at Grant Thornton, described the impact of means tests. "Someone earning the minimum wage of £4.85 per hour, who works for 30 hours per week will have their tax credits clawed back at the rate of 37p in the pound, because of the means test. On top of that, these people earning about £7,000 a year will also have to pay National Insurance at 11 per cent and basic rate tax at 22 per cent. So the effective marginal rate of tax is 70 per cent," he explained.
George Bull, of the accountants Baker Tilly, said: "Tax and credits do not fit together very well. People whose earnings put them on the boundaries between the two regimes can get caught in the grinding cogs of these complicated systems."
Since 1997, Mr Brown has increased taxes and the scope of tax credits so that, for example, half of all pensioners can claim means-tested benefits. According to Tim Keogh, of the actuaries Mercer, a single man now needs to save £95,000 before retirement just to match his entitlement to state benefits. Because women tend to live longer, a single woman would need to save £107,000 to buy the same income from an annuity that the state will provide. Couples need to save £144,000. Anyone saving less has wasted their time and could have spent the lot and received the same income in benefits.
Telegraph Article below.
Some of the lowest-paid people in the country now suffer 70 per cent tax as an unintended consequence of increasingly complex rules, accountants said yesterday.
Means-tested benefits called tax credits have proliferated under Gordon Brown as he attempts to alleviate poverty. But there is growing evidence that the public does not understand them and that HM Revenue & Customs cannot administer them.
The Commons public accounts committee reported this week that the Revenue makes nearly two million tax credit mistakes each year. Edward Leigh, its Tory chairman, described the system as being "fatally undermined by complexity".
Even when the forms are filled in and processed properly, they produce outcomes which accountants say are "crazy and obviously unfair to the most vulnerable members of society".
That was how Mike Warburton, senior tax partner at Grant Thornton, described the impact of means tests. "Someone earning the minimum wage of £4.85 per hour, who works for 30 hours per week will have their tax credits clawed back at the rate of 37p in the pound, because of the means test. On top of that, these people earning about £7,000 a year will also have to pay National Insurance at 11 per cent and basic rate tax at 22 per cent. So the effective marginal rate of tax is 70 per cent," he explained.
George Bull, of the accountants Baker Tilly, said: "Tax and credits do not fit together very well. People whose earnings put them on the boundaries between the two regimes can get caught in the grinding cogs of these complicated systems."
Since 1997, Mr Brown has increased taxes and the scope of tax credits so that, for example, half of all pensioners can claim means-tested benefits. According to Tim Keogh, of the actuaries Mercer, a single man now needs to save £95,000 before retirement just to match his entitlement to state benefits. Because women tend to live longer, a single woman would need to save £107,000 to buy the same income from an annuity that the state will provide. Couples need to save £144,000. Anyone saving less has wasted their time and could have spent the lot and received the same income in benefits.
A child and his Mum were in a shop queuing up to pay for sweets. The child was nonchelently flicking a ten pence piece in the air and catching it. All of a sudden, he gets it wrong and the coin lands in his mouth and lodges in his throat. He starts to choke. His mother bangs his back, and others try different methods - all to no avail.
A grey-suited man slowly walks up to the choking child, puts his right hand on his groin and squeezes violently. The boy screems forcing the coin to pop out of his mouth and is caught by the left hand of the man. The relieved mother says "thankyou so much, are you a doctor?" No, he replies, "I work for the Inland Revenue".
A grey-suited man slowly walks up to the choking child, puts his right hand on his groin and squeezes violently. The boy screems forcing the coin to pop out of his mouth and is caught by the left hand of the man. The relieved mother says "thankyou so much, are you a doctor?" No, he replies, "I work for the Inland Revenue".
There is another thread already running on the "flat rate" tax system proposed by the Tories (which will never happen by the way).
I would like to keep this thread focussed on the Tax Credit system which is rapidly becoming a national disgrace. I fully expect the system to be scrapped within two years and I expect that it will eventually cost the British tax payer about £4 billion in unrecovered overpaid amounts to Tax Credit recipients.
As mentioned in the Telegraph article, even when the system is working correctly, it ALWAYS initially pays out the wrong amount. When the payouts are adjusted, over or underpayments will then be recovered or paid out by the Inland Revenue. However, recipients are allowed to KEEP overpayments if they can successfully claim that they could resonably be expected to have THOUGHT that the amount they received originally was correct. As you can see, the onus is placed on the recipient to prove that they DIDN'T know they were getting the wrong amount. In other words, the administrators of the scheme - who you should expect to know their own rules and regulations - expect the ordinary recipient to know these rules and regulations better than the Inland Revenue do.
IF you can prove this position, you can keep the incorrect amounts. However, if the Inland Revenue are able to recover the overpayments by merely reducing your current payments, they will do so. In these circumstances they are currently clawing back the overpayments without notifying the recipient that they can make a claim to retain the overpaymnents on the grounds mentioned above. In other words, the Inland Revenue are breaking their own law and contravening the code of proactice of the system.
As we speak, an army of family solicitors and barristers are lining up to attack the Inland Revenue on their behaviour over Tax Credits. This could be Gordon Brown's nemesis and torpedo any chance of him becoming PM (we live in hope).
I would like to keep this thread focussed on the Tax Credit system which is rapidly becoming a national disgrace. I fully expect the system to be scrapped within two years and I expect that it will eventually cost the British tax payer about £4 billion in unrecovered overpaid amounts to Tax Credit recipients.
As mentioned in the Telegraph article, even when the system is working correctly, it ALWAYS initially pays out the wrong amount. When the payouts are adjusted, over or underpayments will then be recovered or paid out by the Inland Revenue. However, recipients are allowed to KEEP overpayments if they can successfully claim that they could resonably be expected to have THOUGHT that the amount they received originally was correct. As you can see, the onus is placed on the recipient to prove that they DIDN'T know they were getting the wrong amount. In other words, the administrators of the scheme - who you should expect to know their own rules and regulations - expect the ordinary recipient to know these rules and regulations better than the Inland Revenue do.
IF you can prove this position, you can keep the incorrect amounts. However, if the Inland Revenue are able to recover the overpayments by merely reducing your current payments, they will do so. In these circumstances they are currently clawing back the overpayments without notifying the recipient that they can make a claim to retain the overpaymnents on the grounds mentioned above. In other words, the Inland Revenue are breaking their own law and contravening the code of proactice of the system.
As we speak, an army of family solicitors and barristers are lining up to attack the Inland Revenue on their behaviour over Tax Credits. This could be Gordon Brown's nemesis and torpedo any chance of him becoming PM (we live in hope).
You have criticised the way the tax credit system is operated Eric, but I feel it is inevitable given the complexity of the system due to means testing, what is the solution though?
I can understand the point of tax credits, to make the poor better off by working than staying on benefit. The problem is that once someone has got a job, they have no incentive to improve themselves/work overtime becuase they are facing a marginal tax rate of 70%.
What is the solution though?, if we ignore the rest of the flat tax proposals and simply implement a greatly increased personal allowance, that would have a big benefit for the working poor, but would be very expensive.
If we were to make the benefits universal, ie allocate all the money to the basic tax credit that most people receive (£520 I believe) that would eliminate the disincentive affects, but may not be sufficient to tempt the poor off benefits.
It is a tricky situation and one that may have to be solved by looking at things from a different perspective, ie pushing people off benefits.
I can understand the point of tax credits, to make the poor better off by working than staying on benefit. The problem is that once someone has got a job, they have no incentive to improve themselves/work overtime becuase they are facing a marginal tax rate of 70%.
What is the solution though?, if we ignore the rest of the flat tax proposals and simply implement a greatly increased personal allowance, that would have a big benefit for the working poor, but would be very expensive.
If we were to make the benefits universal, ie allocate all the money to the basic tax credit that most people receive (£520 I believe) that would eliminate the disincentive affects, but may not be sufficient to tempt the poor off benefits.
It is a tricky situation and one that may have to be solved by looking at things from a different perspective, ie pushing people off benefits.
JagLover said:
but may not be sufficient to tempt the poor off benefits.
Workfare! People who are unemployed should be doing voluntary work in our communities and non-technical manual work like cleaning the streets.
If people are being forced to work for their benefit money, then I think they will pretty soon learn that if they got themselves a "proper" job they could have some of the finer things in life.
If they don't work, they don't get any benefit. Simple.
volvos70t5 said:
but may not be sufficient to tempt the poor off benefits.
Workfare! People who are unemployed should be doing voluntary work in our communities and non-technical manual work like cleaning the streets.
If people are being forced to work for their benefit money, then I think they will pretty soon learn that if they got themselves a "proper" job they could have some of the finer things in life.
If they don't work, they don't get any benefit. Simple.
Agreed - or benefits should be at a rate which acts as a safety net, rather than enabling a modest lifestyle, so any realistic paid job is prefereable to benefits - but the transition should be such that it is never preferable to be on benefits than working.
volvos70t5 said:
Workfare! People who are unemployed should be doing voluntary work in our communities and non-technical manual work like cleaning the streets.
If people are being forced to work for their benefit money, then I think they will pretty soon learn that if they got themselves a "proper" job they could have some of the finer things in life.
If they don't work, they don't get any benefit. Simple.
I agree
Even if it doesn't encourage people to get a proper job they will at least provide a service for the community.
I think that creative solutions such as this should be looked at to deal with the problem of the non-working classes.
Eric Mc said:
There is another thread already running on the "flat rate" tax system proposed by the Tories (which will never happen by the way).
Funny you should say that. I was talking to a senior manager from the IR only the other day and his prediction was that there will be one tax code for all and everyone will fill in a tax form at the end of the year. This will make thousands of tickers and stampers redundant cos the tax offices will no longer chase you round the country, they will simply take a bigger chunk at source.
volvos70t5 said:
If they don't work, they don't get any benefit. Simple.
I am sure it was like this 20 years ago, to a certain degree; when I left school, I had to go on what was then called a C.A.P. (Community Action Program), to get my £25 per week. This entailed menial jobs like painting and decorating schools, but it was OK, because 2 days a week we learnt new skills at a 'young skills centre', learning bricklaying/plastering etc. This, with hindsight was very good (I seen it at the time as nothing more than slave labour), as it gave me the skills for my first job. I don't see or hear about anything like that scheme anymore, kids seem to leave school and straight onto benefits, flat, and pumping out kids! (generalisation I know, but broadly true) Where's the incentive gone?
Don't assume that tax credits only goes to people who don't work. In fact, the tax credits mainly go to people who are already working.
The people who receive the largest amounts are single mothers who are working - that is because the single biggest tax credit hand-out is to mothers who place their children in day care nurseries whilst they are at work. Part of the ethos behind the tax credits was to make working a viable option, especially for women.
The system in principle is a good one. The problem lies in its reliance on income information which is predictive rather than historic. As you have to predict your income for the future year in advance of receiving youir credit, you have to guess what your income is going to be. If you underestimate, you MUST inform the Revenue who will then adjust the Tax Credit downwards AND claw back what they have overpaid you so far. If the clawback exceeds what they should rightfully pay you, they ask for a cheque. Single mums are finding that they are being asked to refund amounts anywhere bewteen £500 to £11,000.
If they have already spent the money, they are in big trouble. I foresee that some individuals might be forced into bankruptcy over tax credit failures.
This morning on Radio 4 the matter was being discussed and it seems many people have decided not to bother making claims this year as it has all got too much for them. However, simply not submitting the claim form which would have been sent to you automatically could land you in trouble. Once a form has been sent to you, it is an offence not to return it. Moreover, you will probably have been receiving 2005/06 tax credits since 5 April 2005 and the Inland Revenue will want all that mnoney back.
So, doing nothing is not an option.
The people who receive the largest amounts are single mothers who are working - that is because the single biggest tax credit hand-out is to mothers who place their children in day care nurseries whilst they are at work. Part of the ethos behind the tax credits was to make working a viable option, especially for women.
The system in principle is a good one. The problem lies in its reliance on income information which is predictive rather than historic. As you have to predict your income for the future year in advance of receiving youir credit, you have to guess what your income is going to be. If you underestimate, you MUST inform the Revenue who will then adjust the Tax Credit downwards AND claw back what they have overpaid you so far. If the clawback exceeds what they should rightfully pay you, they ask for a cheque. Single mums are finding that they are being asked to refund amounts anywhere bewteen £500 to £11,000.
If they have already spent the money, they are in big trouble. I foresee that some individuals might be forced into bankruptcy over tax credit failures.
This morning on Radio 4 the matter was being discussed and it seems many people have decided not to bother making claims this year as it has all got too much for them. However, simply not submitting the claim form which would have been sent to you automatically could land you in trouble. Once a form has been sent to you, it is an offence not to return it. Moreover, you will probably have been receiving 2005/06 tax credits since 5 April 2005 and the Inland Revenue will want all that mnoney back.
So, doing nothing is not an option.
Eric Mc said:
Don't assume that tax credits only goes to people who don't work. In fact, the tax credits mainly go to people who are already working.
The people who receive the largest amounts are single mothers who are working - that is because the single biggest tax credit hand-out is to mothers who place their children in day care nurseries whilst they are at work. Part of the ethos behind the tax credits was to make working a viable option, especially for women.
I never made that assumption
I wasn't referring to you specifically but there were comments by others which inferred that those claiming were non-workers.
As it is, the benefit system (outside of tax credits) is also wrongly assumed to be aimed at "non-workers". In many cases, people claiming benefits are in situations not of their own making and would literally starve it is wasn't for the safety net of benefits and credits.
Don't get me wrong. The benefit system and (especially) the tax credit system is FAR from perfect and there are lots of people out there who perhaps don't "deserve" them. But, on the whole, most of the recipients have genuine reasons why they are entitled to them.
As it is, the benefit system (outside of tax credits) is also wrongly assumed to be aimed at "non-workers". In many cases, people claiming benefits are in situations not of their own making and would literally starve it is wasn't for the safety net of benefits and credits.
Don't get me wrong. The benefit system and (especially) the tax credit system is FAR from perfect and there are lots of people out there who perhaps don't "deserve" them. But, on the whole, most of the recipients have genuine reasons why they are entitled to them.
Eric Mc said:
I wasn't referring to you specifically but there were comments by others which inferred that those claiming were non-workers.
As it is, the benefit system (outside of tax credits) is also wrongly assumed to be aimed at "non-workers". In many cases, people claiming benefits are in situations not of their own making and would literally starve it is wasn't for the safety net of benefits and credits.
Don't get me wrong. The benefit system and (especially) the tax credit system is FAR from perfect and there are lots of people out there who perhaps don't "deserve" them. But, on the whole, most of the recipients have genuine reasons why they are entitled to them.
I am well aware that there are some on benefits who need the money temporarily, but it should be a safety net not a way of life. The new film out 'Cinderella Man' makes the point perfectly, check out the scene near the end.
Why should it HAVE to be temporary?
There are people out there with all sorts of problems with their lives which make them totally unemployable. Some of them have domestic issues that cannot be resolved any other way - such as caring for ill or elderly family members. Some have mental or physical illnesses of their own which makes it impossible to find work or keep a job for any length of time. Of course, by far biggest single section of society dependent on the state are the elderly.
As I said earlier, there are people out there "playing the system" and they should be rooted out and made contribute to society rather than be a drain on society. Howwever, the vaxt bulk of people claiming benefit are fully entitled to them and I do not for one moment begrudge my tax contributions funding their needs
The true mark of a civilised society is not how great its technical, economic or military achievements are, but how it treats the disadvantaged who live within it.
>> Edited by Eric Mc on Sunday 11th September 08:12
There are people out there with all sorts of problems with their lives which make them totally unemployable. Some of them have domestic issues that cannot be resolved any other way - such as caring for ill or elderly family members. Some have mental or physical illnesses of their own which makes it impossible to find work or keep a job for any length of time. Of course, by far biggest single section of society dependent on the state are the elderly.
As I said earlier, there are people out there "playing the system" and they should be rooted out and made contribute to society rather than be a drain on society. Howwever, the vaxt bulk of people claiming benefit are fully entitled to them and I do not for one moment begrudge my tax contributions funding their needs
The true mark of a civilised society is not how great its technical, economic or military achievements are, but how it treats the disadvantaged who live within it.
>> Edited by Eric Mc on Sunday 11th September 08:12
Eric Mc said:
The true mark of a civilised society is not how great its technical, economic or military achievements are, but how it treats the disadvantaged who live within it.
>> Edited by Eric Mc on Sunday 11th September 08:12
Up early too Eric
In the case of the truely disabled, and any family members caring for them, if need be, and also the elderly I agree with you, but not in ANY other circumstance.
The sooner we return to the way the Welfare state was intended to operate (when it was set up by a LABOUR government)and treat it as temporary help, for those, through no fault of their own, find themselves in financial difficulty, the better.
>> Edited by Jaglover on Sunday 11th September 08:21
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