Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 400 - 419)



  400. But a million people have now been dragged into the higher tax rate band by your Government.
  (Mr Brown) I think you could look at it another way: that there are a million people earning far higher wages and salaries as a result of the success of themselves and the success of the economy.

  401. But three million people are now going to be clobbered by your National Insurance increase?
  (Mr Brown) I would not put it that way at all. A one per cent rise in National Insurance across the board seems to me the fairest way of dealing with the provision of the public services for future years, and it is well understood by people that the Health Service is available to all. A one per cent additional contribution to the public services of this country is something that I think people will understand, and in time I think people will support.

Mr Cousins

  402. I am a sort of sorbet between the courses, Chancellor! I wonder if you could just tell me what percentage of the working population potentially will be covered by the tax credits as they will be in April 2003?
  (Mr Brown) April 2003 is the introduction of the working tax credit and the introduction of the child tax credit. What we are doing is splitting the working families tax credit into two, one for the work tax credit and one for the children's tax credit. As far as the work tax credit is concerned, we are including single persons and couples without children, and I will give you the exact figures as I find my notes for that. As far as the children's tax credit is concerned, as I said in the Budget it goes right up the income scale to £58,000. In fact, in the case of a family where the first child is under one it could go up to £66,000, so it covers most of the families of this country—and rightly so.

  403. I would be happy to accept more detail in another form later but, even on the basis of what you have said just there, it is clear, is it not, that by April 2003 most of the working population covering up to the very highest levels of income in some cases will potentially be able to receive income related tax credits.
  (Mr Brown) It is probably 86 per cent of households with children who will benefit from the child tax credit but you have to have children in your household to benefit from the children tax credit; it is not available to everybody. I think people understand that the tax credit is essentially the Inland Revenue paying money rather than receiving money in these cases. The amount of money that the typical family will receive for the first child is £27.50 including child benefit, and that will be paid directly to the mother.

  404. Now, there are two points, are there not, that need to be made about this considerable extension of income related tax credits right through the income ranges: the first is that the take-up of, for example, the working families tax credit is, in fact, rather poor. It is poorer even than the minimum income guarantee for pensioners?
  (Mr Brown) I do not accept that the take-up is poor. What has happened is there are probably about 450,000 more families receiving in work support through the working families tax credit than under family credit so, as far as a successful make-work-pay measure that has made it rewarding for people to be in work, 1.3 million families are now benefiting from the working families tax credit. I think it has served its purpose to send a signal to people that work pays more than benefits; that it is worth your while going into work; that there is a minimum family income, in this case about £240 a week and nearly £11,000 available to you if you take up work, and therefore I think it has been well targeted and has served its purpose, and I think the new measure will be even better.

  405. How many people do you think there are who could claim the working families tax credit but do not?
  (Mr Brown) I think you will find that at the lower end of incomes, the vast majority of people are claiming. Where you have the tapering off and there is less gain to people from claiming it is obviously less but, as far as the lower income group of people whom we had to attract back into work and show that work paid, the vast majority of people are receiving what they are due and claiming it.

  406. Does not the success of the tax credit package as a whole really depend upon the substantial take-up of the tax credits, and if they are to cover way more than the working half of the population and be carried right up the income scale potentially, is not there a grave danger that they will be substantially underclaimed?
  (Mr Brown) 85 per cent of those eligible to receive children's tax credit through PAYE have had their codes adjusted already, and then the self-employed and those who are on self-assessment will apply in the normal way when they send in their 2001-02 tax return, so there is a very big coverage of the children's tax credit; people do know about it and, of course, as we move to the new child tax credit there will be more information available to people because the benefits are considerably more for many families and they will want to take it up. Obviously you want to have one hundred per cent take-up if that is possible but equally over a year, and it has only been in for a year, the 85 per cent we have already achieved and the self-assessment and the self-employed forms will come in, where people will get their children's tax credit forms paid to them.

  407. Do you not think these schemes are becoming a little over complex?
  (Mr Brown) I think if you were to look at the tax code irrespective of what has happened to the integration of tax and benefits, you would say it was incredibly complicated and it is so in every country around the world. I do not think there is any great difference between ourselves and America or other countries in relation to that. Then if you look at the benefit system it is also because it has to target benefits properly. The integration of tax and benefits means that we end the situation where many people were, on the one hand, paying tax and, on the other hand, claiming benefit at the same time. Not only have we made the poverty and unemployment traps less; we have also avoided this duplication of claiming from the benefit system on the one hand while paying tax on the other, and I believe that we are getting to a better system, so it is actually in the end less complex.

  408. What percentage of the pensioner population do you think will either be entitled to the guarantee element of pension credit or the savings element of pension credit?
  (Mr Brown) We reckon more than five million pensioners will be entitled to pension credit; roughly a half. If you are a pensioner couple with income of less than £200 a week you will get something from the pension credit, and if you are a single pensioner with income of less than £135 a week you will get something, so for those people with modest occupational pensions and for those with limited savings but some savings, who in every other system that has been devised would be penalised because they could not get any of the benefits that were available, we are making their savings go further and we are rewarding them for having saved through occupational pensions. The average gain is something between £6 and £8 a week so from next year many pensioners who feel, rightly, that the system penalised them when they did save and they did have occupational pensions will be properly rewarded, but we have avoided the two difficulties of having a means-tested benefit for the very poor; we have a benefit that goes up the income scale now; and equally we have avoided what I think would have been a huge additional expense of simply, on a flat rate basis, raising everybody's pensions by more than what we are doing where you would not be targeting the resources to those groups of pensioners who are very much in need of a boost to their savings and a boost to their occupational pensions.

  409. So on day 1 of pension credit more than half of the pension population is covered. If pension credit increases in line with earnings, which is the undertaking that the Government has given, pension credit will rapidly become the first universal income-tested benefit?
  (Mr Brown) It depends what you mean by "universal". It is certainly not means-tested in the old sense because capital is not being tested—

  410. Income-tested.
  (Mr Brown) It is income that matters. Someone becoming a pensioner will be able to phone up, give the details of their retirement pension and their occupational pension and their savings, and get assessed immediately from the time they retire for a period of years, and only have to report the serious income change that is taking place.

Mr Tyrie

  411. A couple of points on tax credits. Clearly, Chancellor, you are extremely well informed about it and you have taken a great personal interest in tax credits. I would like to ask you about the classification of these tax credits in the accounts. If you could take a look at box C2 on page 216, which I am sure you know well and which has been an issue of great contention, this is the issue of whether tax credit should be scored as public expenditure, as the ONS favour, or, as you have done up to now, as negative taxation thereby reducing the tax burden. I note that you have made a change to move the treatment of these into line with the OECD whereby you will treat tax credits as negative taxation "to the extent that credits are less than or equal to the tax liability of the household". Could you give me a rough estimate of the proportion of total tax credits which is attributable to that category, and the proportion which will, therefore, be treated as public spending?
  (Mr Brown) I may have to send you a detailed note on some of these points[3]. The OECD new classification is the one we have accepted. I think it is a victory for us that we did say this should happen internationally and we have had repeated exchanges in this Committee on this, and now the OECD has agreed to this change which will apply to all countries. In fact, as a result of that, it adds around 0.5 percentage points to the tax GDP ratio largely because around only 12 per cent of WFTC actually scores as negative tax under the new system. So we have accepted this new definition.

  412. Sorry, was the answer you are giving me there 12 per cent? You began the answer by saying you did not know the answer.
  (Mr Brown) Well, I will send you a note but these are the details I have here with me. Around 0.5 percentage points is added to the tax GDP ratio as a result of that, largely because only around 12 per cent of WFTC actually scores as negative tax under the new system. We have accepted the OECD view of this and will publish our figures according to that in future, and that means that of course only income that is received by people who are tax payers is accounted for on this.

  413. You must have worked these figures out, Chancellor, because otherwise would it not be impossible to draw up the chart on the following table on page 219, where chart C3 gives the tax to GDP ratio and, although it is extremely difficult to work it out, if you read the footnotes carefully it says in that chart that the net taxes and contributions are defined in table C10, and if you go to C10 it says "Footnote 3" and refers you back to box C2, so we arrive back at the reclassification which we were talking about a moment ago. So you do already have these numbers available in the Treasury?
  (Mr Brown) I have just given you the numbers that I have.

  414. You have given me a percentage for the current year but this is a historical series—
  (Mr Brown) I do not think there is any secret about this.

  415. Would you give us the figures?
  (Mr Brown) We are following the OECD classifications and you can see what is included. I will send you a note on what we have.[4]

  416. I wonder whether you might have considered publishing the ONS figures alongside these to give more solidity to your tax burden ratio?
  (Mr Brown) We are following the OECD classification—surely that is the best way of moving forward—and now that there is an internationally agreed definition and we have accepted that part of the working families tax credit cannot be included as a tax credit—

  417. Chancellor, is that not repetition of the same point?
  (Mr Brown)—Surely that is the best way forward?

  418. I put it to you that if you had published the ONS figures you would have found that the tax burden has risen from 35.2 per cent of GDP to 38 per cent of GDP, and that that 38 per cent of GDP would be the highest level of the tax burden since 1984-5 over about 17 years. I put it to you that this fact might have something to do with the reason why you decided you did not want to publish ONS figures?
  (Mr Brown) I do not accept that. We have, as I said, adopted classification changes from the OECD that add around 0.5 percentage points to the tax GDP ratio. I did not need to do that—we could have held to the old definition that we had been using—but I thought it right to move towards the internationally agreed practice that we had played a part in creating. I have given you the figures which show that 12 per cent of WFTC only scores as negative tax under the new system, and I do remember these debates have gone on between governments on quite a regular basis because the last Government included, for example, mortgage tax relief as a tax cut and there was a debate about that when, of course, some people were getting the benefit of it and were not taxpayers.

Mr Cousins

  419. Chancellor, I am forming a new organisation, Socialists for International Bankers—and you cannot get much more new Labour than that! What is the present tax take from the taxation of foreign company UK branches?
  (Mr Brown) I do not have a figure for that. What we are adopting is a rule that is adopted in most of the other major economies where there is the proper allocation of capital when calculating the tax liability. It is true that a number of overseas institutions operating in Britain, because of the way capital is attributed, were not paying a tax at all and, therefore, it was right to take action to follow what is essentially international practice by America, Germany, France and other countries.

3   See Appendix 8. Back

4   See Appendix 8. Back

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