The scholarship on policy feedback effects suggests that institutions of the welfare state influence the nature of social solidarity in a society. Importantly, the degree of support for social spending and willingness to pay taxes might be affected by social policy institutions. Changes in social policies could either preserve the existing social contract, or contribute to its alteration in the long-run.
Since the mid-1990s, reductions in individuals’ tax bills, instead of benefits, have been used to benefit low-income groups in many advanced political economies. Little is known of the feedback effects of this change. Yet, using a tax cut instead of a benefit might modify existing structures of interests. Tax credit beneficiaries might come to favour tax cuts over increases in social spending. Net contributors’ willingness to pay taxes might be affected as a result of the shrinking tax base. The turn to tax credit also entails a different framing: this might affect beneficiaries and net contributors support for that policy in particular, and for social spending more generally. The legitimacy of tax arrangements could be affected.
This paper examines the change in social policy preferences induced by the introduction of the Working Tax Credit in the UK in 1998. Four types of potential feedback effects are explored. First, do beneficiaries of tax credits support these tax credits? Second, do beneficiaries of tax credits support social spending in general? Third, does the transition to tax credits affects the willingness of beneficiaries and net contributors to pay taxes? Finally, does it affect the legitimacy of the institution of taxation itself? Using British survey data, I use both regression analysis and a difference-in-difference design to compare evolution in beneficiaries and net contributors’ attitudes to social spending and taxation.
Preliminary results suggest that tax credits do not generate the positive feedback effects associated with traditional benefits, neither on support for the instrument itself nor on support for social spending in general. This tends to show that such a change of instrument is indeed likely to be transformative in the long term, as it might reduce the overall support for social spending.