Child tax credits: Introduction to the legislation
The family tax credits upon which this chapter will focus are relatively recent initiatives: Child Tax Credit and Working Tax Credit have been payable from April 2003. Couples are required to apply for tax credits jointly, and members of couples are precluded from applying for tax credits separately. The Child Tax Credit, which is the primary focus of this chapter, is payable to people caring for at least one child, and is paid directly to the carer. According to Her Majesty’s Revenue & Customs, nine out of ten families with young children qualify for tax credits, so the reach is very wide. Families with income of up to the income threshold per year are able to claim, and the claim lasts until 1 September following the child’s 16th birthday.
Child Tax Credit came into effect with the Tax Credits Act, which abolished the Working Families’ Tax Credit and Disabled Person’s Tax Credit. The credits include a ‘child care element’, which ‘is an element in respect of a prescribed proportion of so much of any relevant child care charges as does not exceed a prescribed amount’. Child Tax Credit is, in design, an earned income tax credit, which may be defined as a benefit linked to paid employment. Confusion, which will be discussed below, exists as to whether the modern Child Tax Credit is a benefit, and thus a form of welfare payment; or a credit which may be deducted against ultimate tax owed. The fact of the matter is that the Child Tax Credit carries features of both. Its ultimate purpose is to guarantee families who work in the marketplace a minimum amount of income through the allocation of a benefit. As this payment is linked to money earned, it shares features, in spirit at least, with a tax credit, for the benefit increases and decreases proportionately (much like a tax credit).
Tax credits were particularly 1990s, New Labour – and in the US, Clintonian – initiatives. The development of the UK’s tax credits (earlier known as the Working Families’ Tax Credit, or WFTC) and the US’s earned income tax credits (or EITC) followed strikingly parallel lines, although, as Gerfin and Leu explain,
[t]he main difference between the Earned Income Tax Credits and the Working Families Tax Credit is that the Earned Income Tax Credit has a wage subsidy component at low incomes (in the so called phase-in region), whereas the Working Families Tax Credit replaces the phase-in region by a minimum working hours requirement of 16 hours per week.
The Working Families Tax Credit, now Child Tax Credit, chose to focus on working hours, as opposed to income, perhaps as part of an effort to render the initiative potentially relevant to the middle classes. This relevance is strikingly absent in the US, where Staudt has described the Earned Income Tax Credit as part of a ‘push’ to force ‘poor’ mothers into work.
In the UK, the tax credits were part of a package of initiatives targeted at families living in poverty. The Working Families Tax Credit and New Deal (the latter aimed at 18-24 year olds with a history of at least six months of unemployment) were directed specifically at families with low income and low levels of ‘skill’, and low-income workers more generally. The focus of the Working Families Tax Credit, however, was the provision of an encouragement to enter the marketplace, viewed in the context of what the government perceived as the very powerful deterrent of a generous benefits provision for families.
Studies conducted by Blundell et al have concluded that the effects of these initiatives have been ‘significant but relatively small’; that whilst some families have received ‘unambiguous’ enticement to enter the marketplace, the number of families who have received this is relatively small. Additionally, the Women’s Budget Group has warned that ‘the tax credit scheme is only reaching a minority of families who would like to make use of formal childcare to take employment’. Given such studies, it is likely that the tax credits will be extended to reach a wider range of families.