Better squeezed than baffled by tax breaks
WHEN my wife was pregnant last summer we received a £100 voucher from the government to ensure she was eating enough fruit and vegetables. She already was eating enough fruit and vegetables, but the money came in handy for other things.
This is just one small example of how a well-intentioned policy is a waste of public money. If such vouchers could be targeted at people who needed them, then perhaps they would do some good. But as a two-income household we are lucky to be able to afford all the apples and potatoes we could wish for.
Having said that, tax rises (including inflation) mean we have less disposable income than we had last year and like many families we are feeling the pinch. Which makes our relationship with the state all the more frustrating. Changes to various tax credits and benefits make it hard to know whether one is better or worse off.
For example, in April 2012 the threshold for child tax credit will fall from £41,300 to around £26,000 (for one-child families). And while people on under £42,475 per year are entitled to £2,915 of tax-free childcare vouchers per year, people earning more than this now get just £1,484.
These changes reveal two things about the tax system. The first is that it is too complex, because granting such allowances creates interest groups that are hostile to their removal. But these giveaways are small compared to the taxes that are paid. It’s like someone giving you a chocolate after kicking you in the crotch. And resources get wasted when they’re passed from families to government and then back again.
The second thing the changes reveal is that they favour well-educated, middle class people. After a lot of effort I was able to sign up the childcare voucher scheme before the end of the 2011/12 tax year and therefore remain eligible for the full allowance despite exceeding the income threshold. This also shows why the NHS is so popular with well-educated, middle class people – they are able to understand the system and use it to their advantage. It’s the people too busy to look into these things that deserve our sympathy.
Although I do claim child benefit of £20.30 a week, this is also a socially wasteful program. It does not make sense that people in full time employment should pay taxes only to receive some of that back as benefits. For this reason I would not complain if people like myself – full time employed on a decent salary – lost some of their entitlements. Indeed it is because of this principle that I don’t spend more time attempting to hire accountants and conduct the research that would almost certainly be to my financial benefit.
The reason is because my policy opinions derive from my principles, not my personal interests. It is a great myth that capitalists support capitalism because it makes them rich. Back in December the Washington Post reported that 30 billionaires had donated money to Barack Obama. Meanwhile the most free market presidential candidate – Ron Paul – had the support of zero.
Most free market economists tend to be like me – on modest incomes and promoting liberty at the expense of our bank balance. If that necessitates being squeezed a little more, so be it.
Anthony J. Evans is associate professor of economics at London’s ESCP Europe Business School.
www.anthonyjevans.com
Email him at [email protected]