Welfare to work: Integrating taxes and benefits would have mixed results says JRF analysis

This concludes that the options for achieving integration are feasible and employers could act as paying agents. But the new arrangements would involve:

• a return to the family as the unit of assessment rather than the individual, removing the privacy introduced with separate assessment;
• the completion of a tax return by all tax payers (only 25% currently do this);
• the passing on of labour costs from some employers to the tax payer, with increased scope for fraud;
• the creation of some 'losers' from a simplification in the current Family Credit and from loss of some benefits-in-kind which are currently available.

The study examines the case for integration: because the mechanism would be automatic, it is likely to improve the take up of the in-work benefits from the current level of around 70% of those eligible; it should enable people on low incomes to make the transition to work from unemployment knowing what their future incomes would be; low income families may prefer to be free of the benefit system; and, given the growth in tax payer resistance to financing the payment of benefits, there is likely to be stronger popular support for an integrated system than for the current benefits arrangements.

The advantages of integration are already seen in the United States and the JRF analysis draws on a report commissioned from Professor Jeffrey Liebman, Professor of Economics at Harvard University and adviser to President Clinton's Administration. In the US, minimum wage legislation limits the ability of employers to take advantage of in-work payments by reducing levels of pay.

"The automatic entitlement to support which would come from integration would help those who currently do not claim Family Credit," said Pam Meadows. "However, integration would make the tax system much more complex for the 99 per cent of taxpayers who would not benefit from the change, as well as for the 1 per cent who would. This complexity would include reverting to the family rather than the individual as the basis for taxation.

"Employers could cope with administering payments to employees if given instructions to do so by a government agency. However, it would cause problems if they were to have to consider entitlement and make enquiries about the personal lives of their employees.

"Overall, while integration would have undoubted presentational advantages, it is not the only way of helping lower paid people in work, and it would be important to take account of practical details. For example, one of the features of Family Credit is that it is generally paid to mothers, whereas a tax credit would be paid with the wages of whoever was the family earner, often the father. What would this shift mean for families?"