Matthew Sinclair is Director of The TaxPayers' Alliance. This is the second in a series of articles based on the TPA's 2020 Tax Commission proposals. Matthew Elliott contributed the first part eartlier today. Follow Matt Sinclair on Twitter.
There are currently two quite thorny policy challenges facing the Government. First, they have means tested Child Benefit in a way that is quite hard to enforce and creates very high marginal deduction rates for many middle class families. The reform is still a mess even after a second try at getting it right at Budget 2012. Second, many conservatives want to do something about the couple penalty but are struggling to convince Liberal Democrats and some within the Conservative Party. I think that a single measure – proposed in the final report of the 2020 Tax Commission – might be able to satisfy both of those needs: a Family Transferable Allowance.
At the moment, a single earner family loses out in three ways: one earner tends to earn less than two in the market; for a given level of household income they are more likely to fall into a higher tax bracket; and they only get one Personal Allowance.
Lower market incomes if you stay at home are only fair. People should be making a simple trade-off between the amount they can earn, and the value they put on that money, and the value they put on being at home. That means there is an appropriate incentive to work.
The problem is that the tax system exacerbates that and unfairly penalises those families that rely on a single earner. The charity CARE has estimated that the difference is enough that a one-earner married couple on the average wage are in the sixth decile while a single person on the same income is in the ninth decile. Correcting the inequity is partly a matter of changing the marginal tax rate schedule. With a proportionate income tax like the Single Income Tax recommended by the 2020 Tax Commission, if you earn twice as much, you pay twice as much, so single earners won’t be pushed into higher tax brackets. That still leaves the Personal Allowance though.
At the same time, there is a clear sense that we should be providing support for families with children, and not just the poorer families who get targeted benefits. You could do that just by retaining the old Child Benefit, but there is something deeply unpleasant about taking people’s money in taxes and then giving it back in benefits, making them dependent. It would be better to leave that money in their pockets in the first place, to replace Child Benefit with a Family Transferable Allowance.
The idea with the Family Transferable Allowance is that anyone, of any age, would have a personal allowance that they could set against Income Tax. They would be able to transfer a share of that allowance to another member of the family if they didn’t need it.
The share they can transfer would be determined by the OECD equivalence scale used to adjust household incomes for the differing needs of households of different sizes. Two people living together don’t have double the costs of someone living alone, after all. And while children are expensive, they again they don’t have the same costs as an extra adult or an adult living alone.
Under the current OECD equivalence scale (1 for the first adult; 0.5 for each additional adult; and 0.3 for each child) that would mean adults could transfer up to half of their personal allowance. With a personal allowance of £10,000 that would be worth £1,500 at the 30 per cent Single Income Tax rate. Children would be able to transfer up to 30 per cent of their personal allowance. Under the same assumptions that would be worth £900.
If further support was felt to be necessary for low earning families with the abolition of Child Benefit – particularly those earning too little to benefit from any change in Income Tax rates and allowances – that could be provided by increasing the Child Element of the Child Tax Credit. If further support was felt to be necessary for single-earner families, or families with children, then the equivalence scale could also be changed, an earlier OECD scale assigned values of 1 for the first adult; 0.7 for each additional adult and 0.5 for each child. And everyone will benefit if the main Personal Allowance is increased.
That would mean supporting families by letting them keep their own money. It would substantially cut the couples penalty. And it is a fair way of ensuring that different families get appropriate personal allowances that reflect their situation. It all fits with the point of the Personal Allowance, which is supposed to provide an allowance so people can earn the money to pay for their basic needs tax free. But there is still an incentive for both partners to work (which can be expensive, after all) as they then both get a full personal allowance, instead of half of one, for their pay.
If the Government want to make a success of their relaunch, they need to come back from a torrid Budget and reassure families that they are out to give them a good deal. Introducing a Family Transferable Allowance could be a key part of doing that.
> Read the full 'Single Income Tax' report at The TaxPayers' Alliance (PDF).