David Binder is Family Fiscal Policy Consultant at CARE.
The UK’s Tax Burden (expressed in our report as Income Paid and National Insurance paid and Child Benefit and Tax Credits received) can be imagined as a large pie over which there are many discussions about how to divide it up. Or in other words: who is it that should shoulder the heaviest burden? Those who earn the most, those who have fewer family responsibilities – or a combination of both? In the UK, Income Tax and National Insurance is assessed and paid on an entirely individual basis, whilst family responsibility is entirely recognised through the benefits system (for example Tax Credits and Child Benefit.)
This way of doing things has had particularly unfortunate consequences for one-earner couples with children. If you’re a family of this type, the non-earner is not recognised in the tax system and is not given any extra child benefit in light of their non-earning status.
Because of this and other factors, a one-earner couple family with children on the OECD average wage (which works out at £35,883 per year) has a tax burden that is 80.4 per cent of that of a single person without children. The OECD equivalent family (on average) faces a burden that is just 55 per cent. This figure has exceeded 80 per cent for the first time since CARE has been undertaking this research and is higher than it was all the way back in 2000 (79.8 per cent.)
Thus, in terms of tax burdens, things have become progressively worse under David Cameron’s watch.
In order to start addressing this and other disadvantages relating to the treatment of one-earner couple families in the tax and benefits system, we’ve been calling on the Government, since its inception in 2010, to enact what was enshrined in the Coalition Agreement and introduce a transferable allowance for married couples. As such, we were pleased to hear George Osborne finally announce in the last Autumn Statement that a transferable allowance policy will see the light of the day. As the Treasury’s proposals currently stand, basic rate taxpayers with only one spouse or partner in paid employment stand to benefit by up to £200 per year.
Thus, whilst this announcement is a welcome first step, it is nowhere near enough on its own to address the problems one-earner couples currently face. Indeed, our research reveals that, under these proposals, the tax burden of a one-earner couple with two children would only decrease from 20 per cent to 19.5 per cent. Thus, at 19.5 per cent, UK one-earner couple tax burdens would still be substantially higher than their international counterparts in the OECD or EU. Further, families receiving Universal Credit could potentially benefit by substantially less than the £200 figure noted above, and end up only seeing an income increase of £1.34 per week.
Based on these findings, we believe that only a fully transferable allowance, where (assuming a personal income tax allowance of £10,000) eligible families would be able to benefit by around £2,000 per year would make a significant difference in reducing the tax burdens faced by one-earner couples. Introducing a fully transferable allowance would also markedly reduce EMTR’s (Effective Marginal Tax Rate) faced by one-earner couple families, thus making any extra paid employment undertaken more rewarding. Indeed, if a fully transferable allowance had been in place in 2012/13 for one-earner couples with two children on the OECD average wage, tax burdens would have decreased to 16.5 per cent. This would still be higher than the equivalent OECD family average, but lower than both the EU(15) and EU(21) average.
What is more, whilst some might argue that implementing a fully transferable allowance would be expensive, other measures such as increasing the personal income tax threshold beyond £10,000 would be as, if not more, costly. More to the point, a transferable allowance would, according to the IFS be progressive, benefitting those in the lower half of the income distribution more than those in the upper. Increasing the personal income tax threshold would do the opposite
Overall, whilst it would be wrong to say that a fully transferable allowance would comprehensively deal with all the problems raised in our report, it would make a significant tangible difference to one-earner couple families with children. We therefore call on the Government to consider increasing the generosity of this policy at the earliest opportunity.
 Browne, IFS, Autumn Statement policy measures 2013, slide 4, accessible at: www.ifs.org.uk/budgets/as2013/as2013_james.pdf #page=4