Low-earner tax scheme under attack

Diane Coyle, Economics Editor,

The Chancellor's plan toreplace Family Credit, thetop-up benefit for low earners, with a special tax allowance for the low paid, has run into fierce opposition within the Treasury. reveals that officials are only too aware of the difficulties of the scheme Gordon Brown and his adviser, Ed Balls, want tointroduce.Martin Taylor, the Barclays Bank chief executive, who heads the Government's tax and benefits task force, is said by experts who have discussed it with him to believe that there is not much to be gained from abolishing Family Credit in favour of a tax relief.

The row within the Treasury has been rumbling for some weeks, as officials draw up the consultative papers which will be published with Mr Brown's "Green Budget" later this month. Reform of the tax and benefit system will be a major focus of the statement.

In his July Budget, the Chancellor sent a clear signal that he favoured replacing the existing in-work benefit with a tax allowance that tapers off as income rises. It would draw upon the successful experience of the American Earned Income Tax Credit which helps 19 million lower-paid workers.

But many experts believe the disadvantages would outweigh the benefits. Pamela Meadows, director of the Policy Studies Institute, said: "The consensus is that there would be great difficulties in switching. The case for a tax credit instead of a benefit like Family Credit has not been made."

Her view is in line with a majority of the evidence given to the Social Security Select Committee in its recent hearings.

The proposed tax allowance would have a key benefit. It would reduce the tax paid on every extra pound earned by people on low incomes by withdrawing the allowance gradually. This would contrast with the poverty trap that exists for those whose income rises just enough to disqualify them entirely for Family Credit.

However, it has a number of disadvantages. The main one, over which the Conservative scheme was blocked in the House of Lords, was the administrative burden it would place on employers. In addition, employers would gain a lot of additional information about the financial and family circumstances of their employees.

Furthermore, Family Credit is mainly paid to women, whereas men would be the main recipient of a tax allowance. A tax credit scheme would also require joint taxation of couples, rather than independent taxation, because it would be calculated on a household rather than an individual basis. Many people in the Labour Party campaigned against the scheme in 1985 on precisely these gender grounds.

Research carried out for the Joseph Rowntree Foundation has also indicated that the American Earned Income Tax Credit has drawbacks in practice. Not the least of these is that it is thought to be very prone to fraudulent claims.

However, officials say the Chancellor and Mr Balls are absolutely determined to press ahead. One said: "They want a big idea on tax and benefits, and this is the one they want."