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Tax credit reform should focus on one issue: the marginal rate

Widespread concern over the financial impact of the Government’s planned tax credit changes on Britain’s poorest workers is understandable. Although the intentions of the plans – to reduce the deficit and to move to a high wage, low welfare economy – are commendable, they fail to achieve a fundamental principle: to ensure work pays.

As originally set out, the Chancellor’s plans to lower the withdrawal threshold and increase the taper rate would have exacerbated the existing high marginal tax rate faced by the lowest paid. This high marginal tax rate has remained the fundamental flaw in the tax credits system since its introduction by Gordon Brown, as it undermines the incentives of recipients to increase their income.

The Government must now make sure that those workers whom tax credits are intended to help are not discouraged even further to aspire to earn more. As the Chancellor now returns to the drawing board he should use the opportunity to fix Britain’s broken tax credit system once and for all.

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James Pilditch, Rupert Darwall & Tim Knox - Thursday 29th October 2015

James joined the Centre for Policy Studies in April 2014 having previously worked at the Centre for Economics and Business Research.

Rupert Darwall is a corporate strategist, economist and author. He was special adviser to Chancellor of the Exchequer in 1993, and also worked at the Conservative Research Department. He has also advised a number of blue-chip companies on M&A, regulatory, licensing and competition issues.

Tim Knox was Director of the CPS from 2011-2017. Before he was Director, Tim was the Editor at the CPS - a position in which he was responsible for publishing papers by every Conservative leader since Mrs Thatcher as well as by hundreds of leading academics and opinion formers.