Making a case for flat tax credits: income fluctuations among low-income families

Abstract

This article contends there is an increasingly clear need for a redesign of the UK tax credits system to make tax credit income more stable. Evidence from a recent longitudinal study shows that many tax credit recipient families experience substantial income instability, which is sometimes worsened by the pattern of tax credit receipts. Instability is also introduced by aspects of the system’s design, which lead to overpayments. The article highlights arguments for caring about income stability, including the growing literature on how income fluctuations affect child development, as well as evidence from behavioural economics suggesting that effective policy design should consider people’s preference for stability. It concludes that a strong contender for such a redesign should be a system of flat payments, reassessed every six months and made responsive to need by allowing families to seek earlier reassessment if required.