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What’s wrong with tax credits? categorising the problems Donald Hirsch

What’s wrong with tax credits? categorising the problems Donald Hirsch Special Adviser, Joseph Rowntree Foundation Institute of Fiscal Studies tax credits conference 15 September 2005. What’s wrong with tax credits?. They do not produce the right income entitlements

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What’s wrong with tax credits? categorising the problems Donald Hirsch

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  1. What’s wrong with tax credits? • categorising the problems • Donald Hirsch • Special Adviser, Joseph Rowntree Foundation • Institute of Fiscal Studies tax credits conference • 15 September 2005

  2. What’s wrong with tax credits? • They do not produce the right income entitlements • The delivery of these entitlements is flawed

  3. What’s wrong with tax credits? • They do not produce the right income entitlements eg: • They are too favourable to some groups compared to others • They are not high enough to eliminate poverty • The uprating system is confusing • They are overemphasised compared to decent market wages, and encourage low pay

  4. What’s wrong with tax credits? • The delivery of entitlements is flawed eg: • Delays and errors in payments • Overpayments resulting in high repayments, penalties and hardship among people on very low incomes • Lack of comprehensibility of system • Poor communication between claimants and staff

  5. What’s wrong with tax credits? • The delivery of entitlements is flawed Evidence from, eg: • Parliamentary Ombudsman Tax credits – putting things right • Citizens Advice Money with your name on it • One Parent Families The new tax credits system • CPAG Tax credits one year on 2005 2004

  6. What’s wrong with tax credits? • The delivery of entitlements is flawed Possible explanations: • “Teething problems” - early, resolvable delivery difficulties • “Flawed administration” – features of delivery system seem to create processing error, and insensitivity + error in its follow-up • “Flawed rules” - procedures such as reporting rules and rules for adjusting tax credits arguably create unreasonable outcomes • “Flawed system” - Annual, retrospectively adjusted assessment is, arguably, not viable for this case

  7. Why do particular difficulties arise? • Wrong initial assessments • Two-year-old basis for assessmentin first year (teething) • Computer processing delays and technical glitches worst in first year (teething), but persist (admin). • Revenue’s early assurances “over-optimistic” – (ombudsman ) • System appears to rely excessively on computer assessment. Inadequate structure of human backup. (admin)

  8. Why do particular difficulties arise? • Overpayments and excess payments* • One-third of awards in first year overpaid; • 600,000 by £1k+ • 40,000 by £5k+ • Overpayments behind eg 67% of all tax credit complaints received by ombudsman. * “Excess payments” are those corrected in-year.

  9. Why do particular difficulties arise? • Overpayments – some possible causes • Initial inaccuracy of income estimates (teething) • Computer or clerical error (admin) • Delay in reporting change in circumstances (System/admin) • Everything administered properly, but in-year adjustment needed (System) • Everything administered properly, but end-of-year adjustment needed (System)

  10. Why do particular difficulties arise? • Inequitable follow-up of overpayments – • Computer system makes continuous in-year adjustments without looking at individual circumstances (rules) • Staff ineffective at responding to this (admin) • Rules do not waive erroneous overpayments where staff think client should not have considered them “reasonable” (rules) • Inevitability of substantial overpayments makes budgeting very difficult for low income families (system)

  11. Partner moves in/full-time job HOUSEHOLD INCOME Tax credit Part-time job Part-time job HOUSEHOLD EARNINGS • Why do particular difficulties arise? • A system-based question about overpayments - Is this acceptable? April May June July Aug Sep Oct Nov Dec Jan Feb Mar

  12. Millions are getting their tax credits without problem. But… • System continues to account for most ombudsman and citizens advice cases, 2 years in • Even where no problems, complexity is undesirable • Level of hardship for worst cases: below income support • Not just a small minority overpaid (1/3 in first year). Not “problem” cases, but is it desirable? Is it as bad as all that?

  13. Is it as bad as all that? • The Inland Revenue is working hard to improve. Welcome, but… • How far can administration be improved in computer-driven system? • How far will code of practice revisions go in changing rules for recovery of overpayment? • How far can any of these improvements resolve problems as long as system based on retrospective recovery?

  14. Is it as bad as all that? • We risk recreating a welfare system that feels wrong to the client… A view from the sharp end: “If you’re honest, you seem to lose out”

  15. Why do particular difficulties arise? - summary Teething Administration Rules System Wrong initial assessments Overpayments arise Problems with follow-up of overpayments üüü üüüü ü üüü üü

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