‘Taxing Families’ debate
Date Posted: Tuesday 14th August 2018
Fran Bennett on the case for independent taxation
The Chartered Institute of Taxation and the Institute for Fiscal Studies held a joint event on 26 June 2018 on ‘Taxing Families – 30 years after the introduction of independent taxation, have we got it right?’.
Fran Bennett, member of the Women’s Budget Group, was one of the panellists.* Here, she reflects on the issues involved.
The title of the debate organised jointly on 26 June 2018 by the Chartered Institute of Taxation and the Institute for Fiscal Studies – ‘Taxing Families: 30 years after the introduction of independent taxation, have we got it right?’ – said it all.
Not that it was 30 years since the introduction of independent taxation of women and men – proposed by Chancellor Nigel Lawson as Chancellor and introduced in April 1990. But that we were supposed to be debating ‘taxing families’.
As I said in my contribution as a panellist, this is an odd phrase to use. We tax income. We tax goods – though indirect taxation was not in fact discussed at this event (see http://oro.open.ac.uk/27577/ for a gender analysis of the UK tax system by WBG members Susan Himmelweit and Jerome de Henau with Cristina Santos that does include this). In practice, when people talk about ‘taxing families’, they are often concerned in particular about the tax position of one-earner families – usually couples with children, and sometimes only those who are married or in civil partnerships. This can be seen in, for example, the publications of CARE and ‘Tax and the Family’. Both these organisations feature as a key contributor Don Draper – who is not Jon Hamm of Mad Men, but one of the other speakers at the event on 26 June.
So we should call a spade a spade, in my view. And if we are concerned about the position of one-earner families, we should consider all the policies affecting them, not just taxation. We should consider the individuals affected, not just the couples. And we should not assume that changing their tax position is the best or only solution to any problems they may have.
The first question posed to panellists for the debate was: should the transferable marriage allowance be extended or scrapped? We should argue unambiguously that it should be scrapped. The transferable tax allowance for married couples and civil partners was introduced in 2015/16, after the coalition government had been pressed to ‘recognise marriage in the tax system’, by CARE and others such as the Centre for Social Justice. The transferable allowance gives additional resources to the higher earning partner in a couple if they have a partner with no or low taxable income, as long as they are not paying higher rate tax. At the time of its introduction, 85 per cent of these higher earning partners were men.
The allowance was introduced for the wrong political reasons, having apparently been a trade-off in return for the Liberal Democrats in the coalition government being able to propose free school meals for all 5-7 year olds. But in addition, as Susan Himmelweit and I wrote for the Women’s Budget Group, it has negative impacts on incentives for the non-earning or low-earning partner, at least in principle. (In practice, at £4 per week, it is currently likely to be less influential – and, perhaps in part because of this low level, has suffered from low take-up.)
The transferable tax allowance is not even a recognition of marriage, as many married couples don’t get it. We stopped shaping support around marriage, and one-earner families in particular, in 2000, with all-party agreement. We should not have started to do so again, when individuals have aspirations that are so much higher than wanting to be part of someone else’s taxable capacity. Giving the higher earner more resources does not just worsen the incentive for the other partner to enter the labour market and earn their own income, which any joint system of taxation is likely to; it also increases inequality within the household.
If we are concerned about one partner not having any taxable income of their own, we should be asking why that might be, and whether this is an issue of concern for public policy. If the answer is yes, the question arises as to whether giving their partner extra income is the best way to address this. In my view, and that of the Women’s Budget Group, the answer to this question must be no. Alternative ways to address this are discussed below.
The second question we were posed as panellists was: has the higher income child benefit charge undermined the principle of independent taxation? The answer to this must be yes, it has.
The charge (sometimes, more accurately, known as the higher income child benefit tax charge) kicks in when one partner in a household in which someone gets child benefit earns £50,000 or more of ‘adjusted net income’ per year. They then have to pay a ‘tax charge’, which results in the value of child benefit being withdrawn entirely by the time they are earning £60,000 per year – unless the person getting child benefit gives it up. The person paying the charge may be the child benefit claimant or their partner.
Stuart Adam, the speaker from the Institute for Fiscal Studies at the event, expressed concern about possible non-compliance with the charge. But concern has also been expressed by the Treasury Select Committee about the potential damage to state pension rights caused by giving up child benefit, because the claimant’s national insurance contributions record is not maintained unless they take deliberate action.
Child benefit is the way we recognise family responsibilities within our fiscal system today. It was introduced in the late 1970s because it achieves this better than the previous combination of child tax allowance and family allowances. The high income child benefit tax charge – like the transferable tax allowance – complicates the tax system. It also makes for a high marginal tax rate which, illogically, varies depending on the number of children child benefit is being paid for. In the context of the government’s ongoing tax cuts, which give more to those on higher incomes, it is also perverse to pick on only those who happen to have children at the moment to pay more in tax in this way.
The third question we were asked to respond to was: is there a contradiction between individual assessment for tax and joint assessment for tax credits and benefits? This question betrays the confusion that often abounds in this area. Many see means-tested benefits and tax credits the only benefits that exist. But other benefits exist, and many of these are based on the individual. Indeed, state pensions and bereavement benefits have become more individualised recently, with reductions in ‘derived benefits’ (based on someone else’s rights) and in the additions to benefit for dependants. Contributory jobseeker’s allowance and employment and support allowance, carer’s allowance and maternity allowance are all individual rights as well.
In its 2015 report, the Low Incomes Tax Reform Group recognises two important realities. The first is that an individual, not just a household, may be on a low income. The second is that income may not be shared equally within a household. These are some of the main reasons why the Women’s Budget Group argues that individually based benefits are important in their own right, and in addition that access to an independent income can increase the ‘voice’ someone has in relation to the use of the household’s joint resources as a whole. So examining whether people have their own source of income is key. Holly Sutherland, another WBG member, and I examined this – and also found that the abolition of such individual non-means-tested benefits would result in an increase in in-work poverty amongst couples.
The final question that panellists were posed was about whether it mattered that government uses different definitions of a couple across the tax and benefit systems; Gillian Wrigley of the CIOT tackled this in her contribution, so this is not discussed here.
But I argued that it is also important to debate the principles on which we should base policies on taxation. These should include looking at tax, benefits and services together, rather than in isolation, when considering the position of a couple or family. We should not necessarily think, either, that reforming the tax system is the place to start when examining solutions. (Neither should we take it for granted that the current order of priorities between tax cuts and benefit cuts is the right one.)
The case for independent taxation is if anything even stronger today than it was 30 years ago, because of the development of women’s aspirations, and the need to recognise the multiplicity and fluidity of family forms today. So if we think it is a real issue that one partner in a couple has no income of their own, we need to consider whether this is just a case of household production adding to the family’s living standard, or whether it is a position that public policy should recognise and respond to – and if this is the case, how best to do this?
It is hard to justify support for one earner couples without caring responsibilities today. If someone does have caring responsibilities, however, then if this involves looking after children, child benefit should clearly be a key element of the solution. It is neutral in terms of family status and employment; and it is paid to the mother or main carer, so it follows the child through any of these changes. It should be paid to all those with children, to recognise the additional costs they face (following the taxation principle of horizontal distribution). If we think better off people should pay more tax, this should not just be applied to those who are currently raising children. Child benefit should be unfrozen, paid to all those with children and increased in real terms. But this is not providing an income for the parent themselves.
Help with childcare costs should also be improved, if possible via the supply side, by support to childcare providers, rather than via the demand side by giving more to parents. For those who are doing the caring themselves, there should be more generous pay for parental leave – with the right to return to work, which is essential. Other incentives to share that leave should also be improved, in particular by introducing ‘use it or lose it’ periods of leave for fathers. The amount of carer’s allowance should be increased, as is being done in Scotland already, and paid care leave from work to look after disabled or elderly people should also be introduced at national level.
Most importantly, perhaps, we should avoid looking only at the distinction between one-earner and two-earner couples (whether married or not), or at household income at one point in time, when we are considering issues of redistribution via taxes or benefits, or both. Instead, children should be seen as the family responsibilities that matter, and that should be more fully recognised – alongside caring for disabled or elderly people. The balance of resources within (not just between) households should be seen as crucial. And our focus should be on the implications of any changes for roles and relationships, and opportunities and income trajectories, for individuals not just in the present but also over their life-course as a whole.
*The other panellists were: Stuart Adam, of the Institute for Fiscal Studies; Don Draper, of Tax and the Family; and Gillian Wrigley, of the Low Incomes Tax Reform Group (Chartered Institute of Taxation). The debate, at the RSA, was chaired by Ray McCann, president of the CIOT. A summary and audio recording of the proceedings can be found here.