Supporting Family Life: The Taxation and Tax Credit Policy Challenge

By Don Draper and Leonard Beighton, Fiscal Policy Consultants, CARE

Family issues are back on the political agenda and not before time. For twenty years tax policy makers have largely ignored the family. Tax systems in most other countries recognise marriage and take into account family responsibilities. The UK system is now unusual in that for most taxpayers it doesn’t. Tax credits do take account of the financial needs of children and one parent, but they ignore the needs of a second parent.

In the UK the tax burden on single taxpayers and indeed on many families is, in general, not out of line with that in other countries – in the case of single people it is often lower. The exception is single earner married couples with children earning modest/average incomes (as little as £26,000). Viewed from the perspective of the last 40 years, the proportion of income paid in tax by one earner couples on modest incomes in the UK has actually more than doubled, while the proportion of income paid in tax by single people with no family responsibilities has remained almost unchanged. Today the tax burden is heavier for one earner married couples with children on average incomes than in other countries both as proportion of income – almost a third higher than the OECD average – and as a percentage of the tax paid by single people without dependents and the same income. In other OECD countries the tax paid by these families is typically just over 50% of that paid by a single taxpayer with the same income. In the UK the figure is 75% even after tax credits and child benefit are taken into account.

The picture is different for those on below average incomes. With tax credits taken into account the tax burden falls rapidly as income reduces. In the current tax year the tax burden is negative (i.e. tax credits and child benefit exceed income tax and national insurance contributions) for a couple with two children (and a lone parent with two children) on incomes up to £431 per week (£22,412 pa). However, we think that 25% of all families may have a marginal deduction rate of 70% or more (IT 20%, NIC 11%, tax credit withdrawal 39%). And for many couples it is financially advantageous to live-apart rather than to live together. For some lone parents marriage or even cohabitation is not an option. Moreover, the way tax credits are structured a couple with two children may have to earn three times as much as a comparable lone parent to get out of poverty.

The tax burden on low income families appears to be low both by historical and by international standards. This is good, but the system is trapping many children in poverty who would be taken out of poverty by a more logical tax credit system – the failure of tax credits to take children of in-work couple families out of poverty is one of the main reasons why child poverty has not come down more rapidly. A system which makes living together very challenging undermines family life and increases child poverty.

There is a need for a fundamental rethink - tinkering is not enough. If fairness is the primary concern, there is a need to look the balance between singles and families –especially one–earner couples. If family stability is the concern, the couple penalty needs to be reduced. If child poverty is the concern, tax credits must be redesigned to tackle in-work couple family poverty. If we want a more aspirational society, the next Government must tackle the high marginal tax rates which many families face. If we want to support marriage you don’t start with a system where it is disadvantageous for some couples to live together or where other families bear a disproportionate share of the tax burden. These are daunting tasks but a start must be made. Christians of all political persuasions need to take the lead in finding solutions. When times are tough it is all the more important that taxation should be fair, sensible and support all families. Dealing with these issues need not involve stigmatising anyone and should not involve taking money away from lone parents.

For the background research see
The Couple Penalty 2008/09, Draper (CARE 2009) http://www.care.org.uk/Groups/71198/CARE/Campaigns/Family_and_Marriage/Family_Fiscal_Policy/Couple_Penalty/Couple_Penalty.aspx
Tax Burden on Families 2008/09, Draper and Beighton (CARE 2010) http://www.care.org.uk/Groups/102622/CARE/Campaigns/Family_and_Marriage/Family_Fiscal_Policy/International_Tax_Comparison/International_Tax_Comparison.aspx

Don Draper and Leonard Beighton, 29/03/2010