 Introduction
The British welfare and tax system contains a mixture of social insurance, universal and means tested benefits. Unemployment insurance and pensions have traditionally been based on social insurance principles. They have been backed up with a means-tested minimum income scheme - at present called Income Support. Finally there are a few examples of universal benefits - in particular Child Benefit is paid to every household with a child. For our purposes it is worth noting that the income tax system( which is calculated on an individual not household basis) applies to the majority of the population - including many of the low paid - and that the majority of taxes are paid through the employer in a Pay As You Earn system (in general people do not fill out tax returns).
Working Families Tax Credit
In 1971, in response to concerns about work incentives Britain introduced the Family Income Supplement (later to be replaced by Family Credit) - a benefit paid through the welfare system to low paid working families.
In 1999 Family Credit was reformed and extended into the Working Families Tax Credit. Modelled on the US EITC it had as its main aims the improvement of work incentives and the targeting of in-work poverty.
Details
As a tax credit rather than a means tested benefit (like Family Credit) it was hoped that the WFTC would reduce the stigma associated with claiming benefits and raise take-up. The WFTC is usually paid via the employer - through the monthly pay packet. A decision was made to pay the WFTC to the main carer of the child - as evidence suggests that the mother is more likely to spend the money on the child.
The WFTC also carried an element of tax-benefit integration for it ended the system whereby around 500,000 families were simultaneously receiving Family Credit and paying income tax.
The diagram below shows how the level of the WFTC varies with gross earnings (and the interaction with Income Support, Child Benefit and small tax deduction called the Children's Tax Credit).
In 2002 details were released about the planned splitting of the WFTC into two new tax credits: the Child Tax Credit (CTC) and the Working Tax Credit (WTC).
Child Tax Credit
The CTC will amalgamate the child related component of the WFTC with the Children's Tax Credit and out of work benefits paid to families with children ? creating a seamless system of financial support which follows the child whether their parents are in or out of work: thus minimising unemployment and poverty traps.
The CTC will provide a basic income floor for families with children (in 2003 £54.25 per week for the first child) who earn under £13,000 per annum. The CTC will then be tapered away as income rises - at a rate of 37p in the £. Then the CTC will settle at £26.50 per week (for the first child) until income reaches £50,000 per annum.
It is worth noting that that the CTC will reach around 80% of families - though with the bulk of resources going to the poorest.
Working Tax Credit
The Working Tax Credit builds upon the in-work component of the WFTC and also UK experiments with Earnings Top Ups for the over 50s external link.
The WTC is extended to households without children - making it (together with the UK minimum wage) a floor on wages for all low paid households.
It will only be payable to people over the age of 25 who are working 30 hours or more each week.
The chart below sets out the interaction of the WTC and CTC together with Income Support and Child Benefit.
Further Reading
Mike Brewer and Paul Gregg, "Eradicating Child Poverty in Britain: Welfare Reform and Children Since 1997", Institute for Fiscal Studies WP01/08, 2001 UK
Mike Brewer, Tom Clark, and Michal Myck, "Credit Where It's Due? An Assessment of the New Tax Credits", Institute for Fiscal Studies Commentary 86, 2001 UK
Mike Brewer, Michal Myck, and Howard Reed, "Financial Support For Families With Children: Options for the New Integrated Child Credit", Institute for Fiscal Studies Commentary 82, 2001 UK
Mike Brewer, Tom Clark, and Alissa Goodman, "The Government's Child Poverty Target: How Much Progress Has Been Made?", Institute for Fiscal Studies Commentary 88, 2002 UK
Richard Blundell, Alan Duncan, Julian McCrae, and Costas Meghir, "Evaluating In-Work Benefit Reform: The Working Families Tax Credit in the U.K.", Joint Center for Poverty Research UK
Richard Blundell, "Work Incentives and 'In-Work Benefit Reforms: A Review", Oxford Review of Economic Policy, Vol 16 No 1, 2000 UK
HM Treasury, "Tackling Poverty and Making Work Pay - Tax Credits for the 21st Century", 2000 UK
HM Treasury and Inland Revenue, "The Child and Working Tax Credits", 2002 UK
Marilyn Howard, "Designing the Employment Tax Credit", Poverty 107, 2000 UK
Jeffrey Liebman, "Lessons About Tax-Benefit Integration from the US Earned Income Tax Credit Experience, Joseph Rowntree Foundation, 1997 UK and US
Pamela Meadows, "The Integration of Taxes and Benefits for Working Families With Children", Joseph Rowntree Foundation, 1997 UK
Jane Millar and David Hole, "Integrated Family Benefits in Australia and Options for the UK Tax Return System", Joseph Rowntree Foundation, 1998 UK and Australia
Robert Walker and Michael Wiseman, "The Possibility of a British Earned Income Tax Credit", Fiscal Studies, Vol 18, No 4, 1997 UK
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