this year’s budget there was a bit of a backlash from stay at home mums (and dads) because of the lack of support afforded one-earner families. The proposal
for child care tax breaks for all families apart from one-earners did not go
down so well with stay at home parents. However, George Osborne has since
promised that an announcement on the long-awaited transferable allowance policy
will be forthcoming in this year’s Autumn Statement, ahead of the 2014 Finance
Bill. This policy will directly benefit one-earner married families and cannot come too soon. Here are just
some of the reasons why:
it right that two, two-parent families, each with two children and on identical
household incomes should be taxed radically differently because of the choices
the parents make about how that income is raised?
CARE’s research shows that a
one-earner family on mean average wage (as defined by the OECD, 2011), £34,286,
will pay £8,159 in tax. A comparable two-earner couple, by contrast, will not pay
nearly as much. For example, if one member of the couple is on £20,572 (£395 per
week) and the other is on £13,714 (£263 per week), then together they will pay
£5,544.87 in tax. The simple truth is that one household with the same number
of adults and children as the other will pay £2,1614.13 more in tax just
because one parent stays at home to look after the children! Is that right?
Moving to one-earner families on £60k,
the income level where child benefit is lost, the difficulties become even starker.
A one-earner couple with two children on an income of £60,000 will pay £13,950
in tax. A comparable two child, two-earner couple family, each earning £30,000,
meanwhile, will pay £8,768. After the Higher Income Child Benefit Charge is
added, the one-earner couple's tax bill rises to £15,667. This is £6,899 more
than that of the two-earner couple. Put another way, a one-earner family with
two children and on an income of £60,000 already pays 59% more tax than a
comparable two-earner couple, each earning £30,000. With the introduction of
the HICBC, the one-earner couple will pay 79 per cent more tax.
That this is not great is underlined
by the fact that other countries do things rather differently. Our analysis demonstrates that in 2011 a UK one-earner
married couple with two children on average wage bore a tax burden (that is tax
and national insurance net of benefit) that was 42 per cent greater than the OECD
average. This basic insensitivity to one-earner families was underlined by the
fact that the tax burden on one-earner married couples with two children on an
average wage was 73 per cent of that paid by a single person on the same wage with no
dependents, whilst the OECD comparable figure was just 52 per cent. This is hardly
surprising when one realises that the UK is almost alone amongst large OECD
economies in not recognising marriage in its tax system.
Now, one-earner couples have not found
themselves saddled with a raw deal overnight. Things have deteriorated
particularly over the last twenty years, something that the Conservative Party
rightly recognised some time ago. In February 2009 Philip Hammond, then Shadow
Chief Secretary to the Treasury, spoke to the Daily Express about, ‘the
continuing bias in the tax system against two parent families where only one
adult works'. No other European country penalises families in this way. If we
want to end child poverty we must end this discrimination. That is why
Conservatives have pledged to reintroduce a recognition of marriage into the
Mindful of the above difficulties,
which have been made rather more stark as a consequence of the proposed child
care tax breaks for two-earner and single parent but not one-earner families,
the Chancellor’s commitment to make an announcement about transferable
allowances in his autumn statement this year is particularly welcome.
In considering the case for this
change, however, it is important to recognise the potential for this policy to
bear much wider dividends than those considered above and the wider marriage arguments that have
been rehearsed elsewhere.
At the moment we are very unusual internationally in having a tax system that
makes no provision for family responsibility. Instead our tax system rests
entirely on the individual and there are no compensating provisions that allow
for family commitments – be they spousal or parental. The complete
insensitivity of our tax system to the family (which has only been in place
since 2000) has meant that as a progressive country we have been compelled to
compensate by inflating benefits. The boost that our benefits system has
required, however, which has been met principally through tax credits, is such
that it has created a new problem that did not exist in our benefits system
Specifically, the withdrawal of these
inflated benefits has significantly increased our Marginal Effective Tax Rate
(METR). The METR is the effective rate of tax that you would pay on each
additional pound earned over and above your existing income, whatever that may
be. It is here that the international comparisons are again really interesting.
The METR on a one-earner married couple family with two children on 75 per cent average
wage in the UK is a massive 73 per cent, the highest in the entire OECD. That
is to say that for every additional pound earned, you only take home 27 pence!
The average OECD METR, however, is just 34 per cent and very interestingly this was the
UK figure in 1990 before family recognition was completely removed from our tax
system and there was the compensating increase in benefits. At this rate you
take home a much more substantial 64 pence of every additional pound earned.
It is because of this that redesigning
the benefits system alone cannot solve the basic ‘making work pay’ challenge. While
the Universal Credit is, for example, very helpfully removing some of the very
highest Marginal Effective Tax Rates in the 90 per cents, other lower METRs have
necessarily increased and indeed the average METR under the Universal Credit
will be 76 per cent, slightly more than the current average. The only way to
achieve a net reduction in the METR – absolutely key if we are to create an
‘aspiration nation’ – is by reforming both the tax and the benefits system
together, which would require a joint Treasury-DWP initiative.
In restoring some recognition of
family responsibility to our tax system, transferable allowances will ease
pressure on the benefits system and this in turn will ease pressure on the
Marginal Effective Tax Rate. It will be a very important first step to bring us
back into line internationally both in terms of the tax burden on one-earner
families and the Marginal Effective Tax Rates on some aspirational one-earner
might respond to the above by saying but isn’t the Government only offering a
limited transferable allowance? Is this really likely to have much impact? It
is true that the allowance offered in April 2010 was limited but we must not
lose sight of two points. First, when introducing the policy in April 2010
David Cameron was very clear that he was disappointed that it could not be more
generous at that time (referencing fiscal constraints) but that it was a ‘start’ and something that he intended to
build on across the Parliament.
Even if it is implemented on the basis
suggested in 2010 this will be hugely significant and very welcome. It will be
a start. Second, while the Prime Minister has committed to recognising
marriage, he is not stuck with the exact terms of his April 2010 commitment. We
would hope that in 2014 he would be more generous with his transferable
allowance, especially given that there may not be another occasion to build on
them during this Parliament.
In order for transferable allowances
to be operational by the next election, provision must be made for them in the
2014 Finance Bill for the year 2014-15. This would enable people to claim
against them from the beginning of the 2015-16 tax year, meaning that they
would be up and running from April 2015, a good month before polling day.
piece is based on a presentation given by Dr Dan Boucher, Director of Parliamentary
Affairs for the charity CARE to the Centre for Policy Studies on 16 July. A more
comprehensive overview of the arguments for transferable allowances can be
found here and here.