Tax credits and the self-employed

When challenged about the cuts to tax credits, the Tories typically reply that most people will be compensated by a higher minimum wage. This is not entirely true (as far as I can tell, the minimum wage isn’t going up enough to fully compensate workers), but the biggest problem with it is that it assumes everybody is paid a salary.

However, there are a lot of self-employed people (either freelancers or owners of one-person companies) whose income depends on what they can sell (whether services or products) and who cannot simply increase their prices to compensate for falling tax credits.

Some politicians and economists have been wondering why productivity hasn’t been rising in the UK when employment has appeared to be doing rather well. I believe the answer can be found in a large rise in under-employed self-employment.

One shouldn’t forget that the job-seeker’s allowance (JSA) is in effect a working-class benefit, because recipients typically also get their rent paid; if a potential JSA claimant has a mortgage, on the other hand, there’s no help to get with that, and there’s therefore hardly any reason to apply for it. (It’s instructive to compare this with other countries like Denmark, where unemployment benefits are much higher but don’t include free rent, which means the system also works for people with mortgages.)

If you’re paying a mortgage, it makes much more sense to apply for Working Tax Credits (WTC) than JSA. You might only get £1,960 p.a. instead of £3,801, but you’re then free to do freelance work to top it up, and making at least two grand a year shouldn’t be too hard. (If you have kids, you’ll can also get Child Tax Credits, but let’s leave that aside for a moment.) Furthermore, you won’t be assigned silly jobs without pay by the Job Centres, and they won’t sanction you for missing a meeting, so you’ll have much more time to either make freelancing pay off or to apply for a real job elsewhere.

In other words, tax credits have to a large extent functioned as an unemployment safety net for people with mortgages, providing a certain amount of financial safety during the beginning of a freelance career or during bad years later on. (See also this article for some examples of the ways self-employment has simply become a way to hide unemployment.)

So what will happen now that the Tories cut the tax credits down to a very low level? The consequences won’t be felt by people in full-time minimum-wage jobs. Instead, it will be the large number of middle-class people who lost their jobs during the recession and who have been struggling to make ends meet by a combination of freelance work and tax credits that will potentially now have to throw in the towel, sell their house and go down to the Job Centre.

Another problem is that the way child tax credits will be limited to two children for new claimants. That will make it unattractive for people with more than two kids to accept temporary well-paid employment, because they can’t run the risk of not getting their tax credits back afterwards.

This will be a disaster for the Tories in many ways. Not only will many of the people affected be Conservative voters (at least in England), but it will also mean that the unemployment figures will start rising again (although it might be good for productivity).

Unfortunately, many of the people affected aren’t saying very much because it’s hard to come across as a successful professional or consultant or whatever if you’ve just told the world you didn’t manage to make more than three grand in the past year. It’s easier to keep shtum, grit your teeth and try even harder to find more work.

It’s interesting that whereas the problems with zero-hour contracts and salaries lower than the living wage are well-known, the hurdles facing the self-employed often get overlooked. Perhaps it’s because the issues are really hard to solve. You can’t simply legislate that freelancers and small businesses have to sell their products and services at specific prices — the consequence would often be a drop in earnings rather than a rise. In fact, tax credits are probably the single best way to help this group of people.

The Tories are going to regret this for a very long time. The SNP and the other pro-independence parties should already start to outline how they’ll solve it after independence.