Saturday 26 March 2011

Revealed: how families 'lifted out of tax' will now contribute more to the Exchequer

George Osborne's budget again made much of the Coalition government's ambition to lift the poorest out of tax.

How well does this stand up? New post-budget research by the Fabian Society and Landman Economics offers the most detailed post-budget assessment of the impact on families of all of the tax and benefit changes undertaken by the Coalition government.

In order to test Osborne's claim, the research models the gains for families with children of George Osborne's cuts in income tax and national insurance, alongside the impact of increasing VAT, cutting tax credits and freezing child benefit.

You can read the report from Tim Horton and Howard Read on the Fabian website.

The research findings are also reported in the Guardian front-page report previewing today's anti-cuts march.

The demonstration is timed to mark the new financial year next week, when many of the cuts kick in. Research by the Fabian Society suggests that taken with the wider tax and benefit reforms announced since the election, this week's budget would in fact force large number of working families into tax, instead of lifting them out as the coalition has claimed.

Tens of thousands of the lowest-income families will lose around 6% of their net income in the next year because of the government's tax and benefit changes with the bulk of the cuts kicking in next week, the analysis by the Fabian Society shows. From next week the childcare element of the tax credit system will be reduced from 80% to 70% of qualifying families' nursery bills. A family with one child and one earner earning up to £23,000 will lose between 5.7% and 6.4% of their net income, compared with last year. This would cost such a family with an income of £6,000 £1,362 a year and a family on £23,000 £1,710 a year.

Taking the government's tax and benefit changes together, the detailed distributional tables show that many low income families are net losers, now contributing more to the Exchequer. Some of those who the government claims to have "lifted out of taxation" used to be net recipients from the tax and benefits system but are now net contributors to it following Osborne's changes.

Single-parent families are often hit particularly hard; nearly all such families where the parent works are net losers from Osborne's changes. A single parent of one child working full-time on the minimum wage and earning £12,000 a year will now be £79 a year worse off, while a single parent on £23,000 lose £411 a year from Osborne's tax and benefit reforms.

The losses will be greater for those families claiming help with childcare costs from tax credits. The research shows how a a single parent of one child working full-time on the minimum wage and earning £12,000 a year will now lose £1378 a year, or 6% of their annual income, while a one-child family with a single part-time earner on £7000 will lose £1339 overall (though they will have been taken out of income tax by the new threshold). A similar single-earner family with two children will lose over £2000 a year.

Given how the Chancellor's changes have reduced their household income, these families are less likely to experience themselves as having been lifted out of tax, and may rather feel they have been pushed further into taxation.

By contrast, double-income households with no children will often tend to gain most from Osborne's tax and benefit reforms. Overall, his changes to income tax and tax credits tend to have the net effect of redistributing away from families with children while benefitting households in work (especially with two-earners) who do not have children.


The March for the Alternative website has details of today's protests. Follow #26March on twitter to follow the build-up, and to share your experiences of and views on today's march.

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