Examination of witness (Questions 20 -
39)
WEDNESDAY 17 JUNE 1998
MR MARTIN
TAYLOR
20. What would you estimate to be the impact
of the administrative burden on the employer, especially the smaller
employer who does not have a big personnel department, of all
your changes? I should think it is still up in terms of volume
and workload?
(Mr Taylor) Not necessarily. It really would depend.
Certainly if you get down to a four or five employee business,
it would depend what they were. If they were all paid at a high
enough level so that the national insurance changes were not particularly
helpful, yet they were all in receipt of WFTC, no doubt there
would be some more work for the employer, but not a great deal.
I would imagine that that would be a pretty unusual case.
21. Would that not act as a depressant on
their wages?
(Mr Taylor) This is something that was discussed
quite a lot: the concern that the employer, knowing somebody was
on WFTC, could use that to push wages down. I would say two things
about that. First of all, although they do not know in the same
way today that someone is on Family Credit, I think an employer
who is unscrupulous enough to behave in that way could jolly well
find out, or will have a pretty good chance of modelling it. The
second thing to say is that I think that that is one of the reasons
why you need a minimum wage if you are going to bring in WFTC—I
mean to prevent that being pushed too far. There is some competition
in the labour market and people can move. I would be surprised
if that was very widespread.
22. What about the cash flow implications
for small businesses of what is being proposed?
(Mr Taylor) I believe the Revenue is at the moment
doing some consultation on this matter. We have had the full implications
pointed out to us that are both favourable and unfavourable to
businesses. You can argue that, under some scenarios, employers
in certain places would be lending money cheaply to the Crown.
There are also a number of potential cases where a very small
employer would have to be put in funds by the Crown effectively
because they would be paying no tax and national insurance at
all. One of the problems in the States has been that some unscrupulous
small employers have taken money from the government and run off
with it. I think that cuts both ways. What can be said with some
certainty is that some of the timing rules and some of the payment
rules need looking at in the light of the new circumstances. We
have the payment rules we have at the moment because we have the
system we have. As the system changes, the payment rules will
change. The Revenue are well into this and on top of it.
23. It seems to me a system that could end
up with quite a lot of money just being stolen and then for other
employers who are more scrupulous, some of the smallest employers,
they are very valuable because they do soak up the bulk of employment
in the country. Is this entirely satisfactory?
(Mr Taylor) People do have a genius for looking
on the dark side of these things.
24. We have to defend it. That is why.
(Mr Taylor) If you describe a world in which a
third of employers are lending money to the government for nothing,
a third of them are stealing money from the government and a third
of them are depressing wages because they can now see through
their employees' circumstances, I think you paint an exceptionally
black picture. Even given the US experience with a much more rough
and ready system than we shall have, that has not been the case.
If I may, I would like to draw attention to something which I
think I said last time I was here about the desirability of the
Working Families Tax Credit in general. We were very moved by,
as anyone who looks at it cannot help be, the potential problems
thrown up by the change. The question which was much discussed
around this table when I was last here was why bother. I said
then—and I would just like to put on record again now—that
I do not think it would be worth changing if all you were doing
was changing the delivery mechanism of family credit in a stable
universe. It is not worth going through this change for
a £2 billion-odd benefit. It is worth going through
the change because in the first stage you see the welfare to work
programme creating more jobs at the level that will attract this.
Eventually, this could be used as a delivery mechanism for other
benefits too. You can imagine it going further. I think if you
did not see it going further—this was certainly my advice
to the Chancellor—over time eventually it probably was not
worth it, not just for this but to go very much further.
25. Based on the psychological and behavioural
considerations, what about the incentives to employers to give
people part time jobs?
(Mr Taylor) I think the national insurance changes
will be a major incentive for people to give part time jobs that
are a little less part time than they are at the moment. One of
the things we do know for certain—this is not anecdotal—just
because of the huge bunching of work below the LEL, is that there
are an awful lot of people working more part time than they would
like to and probably more part time than their employers would
prefer. I say with the greatest confidence that there will be
more work done in the country and more national output created
as a result of that change. I am not concerned about that.
26. You are not concerned that it might
create more part time jobs rather than full time jobs and therefore
they become a burden to the state when they could have been paid
by the employer?
(Mr Taylor) You mean people deliberately restricting
their working hours in order to pick up benefit? Is that different
from the situation that there would be under Family Credit? I
do not think there is any difference.
Mr Pond: There is
an incentive to create part time rather than full time jobs.
Miss Kirkbride: The
IoD are perhaps more competent to express these things and part
time staff will be likely to become more attractive, they say.
Mrs Hewitt
27. There is an incentive in the present
situation which I think your changes do not completely remove.
If an employer employs somebody for 40 hours a week, they will
pay more employers' contributions on those wages than if they
employ two people for 20 hours a week each, because two people
at 20 hours a week each are getting the benefit of the lower rate
on part of the earnings, as it were. Your situation will, if anything,
slightly sharpen that incentive. You can take the view that this
is a very bad thing and it is cheating the Revenue of income;
you can take the view that two people employed, albeit for 20
hours each, is better than one person employed for 40 hours a
week.
(Mr Taylor) Or certainly no worse. I do not share
the view that part time work is in some way disreputable. It is
very difficult to design a tax system or indeed a benefit system
which does not have distortions built in around the edges. Wherever
you have a cut-off, you are encouraging some behaviour. I think
you should do your best to minimise that. That, by the way, was
why we suggested that they should increase national insurance
on the self-employed because there is a distortion. I work for
a large employer which spent, like a lot of others, a lot of the
1980s trying to get rid of part time work, regarding it as in
some way abhorrent. It is perfectly clear that a very large number
of our employees, particularly women and particularly women with
young families, actually prefer part time work and regard part
time work as an alternative to not being in the work place at
all, very often. I just think we should give them every opportunity
we can and let 100 flowers bloom.
Miss Kirkbride
28. We are very grateful for the Labour
Party finally recognising the value of part time work in a way
that they did not for many years during our administration. You
were very coy when you came last time on the minimum wage. We
now have the Low Paid Commission's recommendations and I would
be very interested in your views on the level that they have been
set at and how you think they will be competitive with your reform,
including those people who will be on the minimum wage.
(Mr Taylor) They look to me both unsurprising
and quite sensible. I am worried about the young. I am worried
about the effect on youth unemployment of banging the £3.20
in fully and quickly. That is not a considered view, I have to
say, because I have not studied the numbers properly, but one
of the things that is very clear in the application of the minimum
wage on the continent, admittedly at a higher level, is that the
effect on youth unemployment has been very severe. I would be
much more worried about that.
29. You hope the Chancellor will win this
battle in Cabinet?
(Mr Taylor) If there is a battle in Cabinet and
if what I read in the newspapers is true, yes.
Mrs Hewitt
30. Can I just pick up on this issue of
how the system might work in practice from the point of view of
both the employer and the employee, thinking of small companies?
Having at various stages been an employer of just one or two people
myself, I am very conscious that under the present system, as
an employer, you have something misnamed as a simplified deductions
table. You look at it and starting at one pound a week it says
to you if you are paying X pounds a week then you deduct Y pounds
national insurance, Z pounds income tax and then possibly you
add SMP or SSP etc. You work out the numbers and it is quite a
complicated and irritating system. That is what is happening now
for the employer. For the employee on Family Credit, there is
a separate calculation by the Benefits Agency based on several
weeks' evidence of employment and earning. They calculate Family
Credit. That is paid separately and it remains unchanged for six
months. Which would you recommend? Do you envisage the Working
Families Tax Credit being calculated once and then added to the
earnings by the employer, regardless of any variations through,
say, the subsequent six month period; or do you envisage in effect
a change to the tax code so that simplified tables in future would
say, "If X, add Y", so that you could cope, week by
week, with variations in earnings?
(Mr Taylor) I think it would be better from the
employers' point of view that the thing should run through the
tax code, which would also allow the present cumulative principle
to apply. It depends on what is practicable and possible for the
Inland Revenue. Something which I did not know when I went into
all this but I learned during it and I found it quite heartening
was that the Inland Revenue appears to be getting into the software
business and is developing software for small businesses to use.
Almost any business which employs any number of people nowadays
will have to concede and there is no reason why quite complex
tax changes in the future and quite complex benefit changes cannot
be handled quite simply because the software will do the job of
the tables. I would certainly see it going that way.
31. Can I pick up on your reference to "cumulative"?
At the moment, as I understand it, take somebody who works for
the first six months of the income tax year on wages that are
significantly above Family Credit eligibility. Then demand drops.
They lose their overtime. Maybe they even go from 40 hours to
30 hours a week or something of that kind. Earnings fall and they
get into Family Credit eligibility. We have a lot of empirical
evidence that for couples Family Credit is really important at
that point because, on the basis of the reduced earnings, the
earner claims Family Credit and effectively can then stay in that
job, even though the earnings have fallen.
(Mr Taylor) Based on the lower weekly earnings,
rather than on the fact that they got a higher total over the
year?
32. Precisely. When you talk about "cumulative",
does that suggest that the earnings you have had in the first
six months of the tax year might affect the eligibility and that
would then be calculated over a longer period than simply looking
at what is happening week by week?
(Mr Taylor) It should not necessarily. It was
more the other way round that I was concerned about. It depends
on how the rules have been drawn up. The rules seem to me at the
moment to be drawn up partly for administrative convenience and
what is practical. How frequently can you actually review these
things? You cannot do it weekly; it is three monthly or six monthly.
Also, partly for what most sensibly impacts the lives of those
affected. I certainly agree that the point about the welfare state
in general is that the help that is required by people should
come quickly and with the minimum of hassle. It would certainly
be offensive to that principle if the cumulative principle worked
in the way that you describe. That would not be my intention.
33. That is very helpful. If it works like
a PAYE code, the intention, assuming this is practical, would
be that just as tax deductions go up and down as earnings fluctuate
weekly or monthly, so the tax credit would go up or down as earnings
fluctuate weekly or monthly. Is that what you are suggesting ought
to happen, if it is practical?
(Mr Taylor) I do not see why that should not happen.
At the moment, the setting of the credit is not done for any reason
apart from the fact that it is administratively inconvenient to
revisit it more frequently. We looked at the tax credit quite
carefully and we decided that the best thing to do at the beginning
was to model it on Family Credit as closely as possible because
Family Credit is there. It has the advantage of existing. I think
it is a good benefit, by the way. To take a design that we know
works and translate that seems to me a good place to start, but
I do not believe that you should be prevented by that principle
from adapting it as time goes on to the circumstances of payment
through the pay packet, which is different in all sorts of ways.
34. Do you envisage that, where somebody
is doing, say, two jobs that add up to more than 16 hours—somebody
is doing one job of ten hours a week and one job of 12 hours a
week—they are going to be eligible for Working Families
Tax Credit?
(Mr Taylor) I do not know what the result is at
the moment. I would have thought it would be a question of the
total hours they were working would have to be over 16 for Family
Credit to bite and that it would be a function of the total sum
they earned. I am afraid that most people who are in the position
you describe are declaring one lot and not declaring the other
lot.
Mr Gibb
35. The Working Families Tax Credit, when
combined with the Child Care Tax Credit, according to the project
book, will actually bring 400,000 more families into eligibility
for benefit. Did you envisage this huge expansion in the dependency
culture when you devised this programme? What is your view really
of the expansion of the credit?
(Mr Taylor) I cannot comment on the Child Care
Tax Credit at all. It is absolutely beyond my brief and beyond
my remit. We did not look at it and we were not involved in it.
I do not know is the answer.
36. The Working Families Tax Credit itself
is also an expansion and it was hoped that more people would claim
it as compared with the numbers claiming Family Credit. How do
you envisage the increase in the dependency culture as a way of
tackling all the problems you set out to tackle? Do you think
it is worth dealing with or do you think this is a retrograde
step and that it has been set at the wrong levels?
(Mr Taylor) I do not see people claiming credit
which Parliament has decided they ought to have as being an increase
in the dependency culture. We did try to look into the evidence
and we found it very sparse and very difficult to interpret, I
am afraid, as to why the Family Credit takeup was only around
70 per cent.
37. 85 per cent by expenditure, which seems
very high.
(Mr Taylor) There were those on the Task Force
who judged that that was a low level of takeup and there were
those who judged that it was a highly satisfactory level of takeup;
and that the only reason people were not taking up the rest was
that they thought that they would not be in that income band for
very long. They would be, in Patricia's words, "cumulated
out" and so there was no point going through all the hassle
of being on a benefit that would not be for them for very long.
Partly because the benefit has not been around for very long and
it has not been studied, we were dealing with supposition here.
Generally speaking, if a credit exists, one wants people to take
it up. What seems to me more desirable over time is that more
people should be taking up Working Families Tax Credit because
they should be working and they should be not be taking up the
out of work benefits that they are taking at the moment.
38. That is not what is happening. The reason
why these numbers are so large is they are moving up the income
scale. You can now claim this credit if you are earning 30,000
a year.
(Mr Taylor) I was not asked to structure the financial
side of the Working Families Tax Credit. The principle under which
we worked was that we would recommend Revenue neutral reforms
and there are no Revenue implications in what we put forward for
the Working Families Tax Credit. Nor are there indeed in what
we put forward for National Insurance, although the Chancellor
was good enough, I think wisely, to spend a bit of money at the
lower end and subsidise that because we actually put forward some
ways in which he could have got that money back if he wanted to.
The change in the numbers and the tapers and, therefore, the population
covered by the Credit at the moment was not part of the work of
that committee.
Mr Leigh
39. You are a very interesting creature
for a Select Committee, if I may put it that way, because you
have penetrated the inner recesses of Government and you have
now emerged blinking into the sunlight in the real world a free
man and you can therefore now be entirely open with us as you
now want nothing from the Government. You were a bit frustrated
when you last appeared before us because you had prepared a Report
for the Chancellor and quite rightly you had to give it to him
before you gave it to us. I know you have been asked a number
of questions already but can I sweep up so far and say is there
anything that you would have liked to have told us last time,
or amplify anything? I do not know if you have had a chance to
refresh your memory of the transcript of what you said to us last
time. Is there anything that you would like to tell us now that
perhaps you could not say then?
(Mr Taylor) I
do not think there is anything in particular. The difficulty last
time was that not only had I not given the Report to the Chancellor
but I felt that parts of it were likely to be covered by Budget
secrecy and in particular the National Insurance reforms, which
were to be the most important part of the work that we did. That
is not to minimise the Working Family Tax Credit but I think that
would have happened anyway if our committee had not sat. We were
simply asked to consider something that the Chancellor had already
decided that if it worked he would like to do, whereas the NI
reforms did not fall into that category. Since for me that was
the most important part of what we were doing, and since I could
not really discuss it with you, the meeting was rather frustrating.
The reforms are easy to understand and they are set out and there
they are. I remember being asked a lot of questions about what
we were really doing which I answered to the best of my ability
subject to the constraints I was under. No, I do not think I held
anything back that I was dying to say, apart from what was in
the Report. I do not recall anything being in these dark recesses
of Government that you do not know about.
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