Nola Leach is Chief Executive of CARE.
For nearly a decade, CARE has been producing annual tax reports examining the tax burden on families in the UK in comparison to the rest of the OECD. Our research has shown consistently that the UK is a cold place, especially for traditional one-earner families, because of our highly unusual, overly individualised tax system.
On the one hand, our latest report, published last week, demonstrates that we place a smaller proportion of the tax burden on people without family responsibility than across the OECD and EU on average. On the other, it demonstrates that we place a significantly higher tax burden on one-earner married couple families on average wage than is the case across the OECD developed countries of the world on average. When we look at the tax burden placed on a one-earner married family with two children (four mouths to feed) as a percentage of that placed on a single person (just one mouth to feed) on the same income, the resulting figures are quite disturbing.
While across the OECD as a whole the average tax burden placed on a one-earner married family with two children on average wage is just over half that placed on a single person on the same wage at 57 per cent, the burden placed by the UK on such a family is closer to the burden placed on a single person with no children at 79 per cent.
The report also highlights that one-earner married families with two children on 50 per cent and 75 per cent of the average wage (key income points at which we should be working hard to encourage families to aspire to better things) experience the highest average effective marginal tax rates in the world, 73 per cent under tax credits, rising to 76 per cent under Universal Credit. This means that as these families consider the possibility of working more hours they will know that they will only take home between 27 and 24 pence in the pound. Far from facilitating aspiration amongst those we should be encouraging, we are actually at risk of imprisoning them on low incomes.
In this context, rather than worrying about a top rate of tax of 45 per cent for the rich we should be worrying about the 76 per cent rate for the poor!
Furthermore, the report highlights something entirely new that did not impact the tax burden at the time of our last report, or indeed at any time previously.
A week after our last report was published, the Chancellor proposed sweeping tax credit cuts that would have dramatically increased the tax burden (defined as taxes net of benefits) that low to modest income families have to pay. Eventually, the Government was forced to drop these plans in the Lords. What they are now proposing, however, is that rather than introducing the cuts through tax credits in April 2016, these will simply be introduced – with some transitional arrangements – through the Universal Credit in 2017. And the same critique that applied to the tax credit cuts applies to the Universal Credit cuts.
Family responsibility can be recognised on two different fiscal bases: through the tax system and through the benefits system. Most countries recognise the family through a combination of both, as we did prior to 2000. Between 1990 and 2000, however, we took the very usual step of removing recognition of family responsibility from the tax system entirely, in the context of which it was recognised that there would have to be a compensatory boost to fiscal recognition of family responsibility in the benefits system. What is now proposed through the 2017 Universal Credit cuts is that fiscal recognition of family responsibility in the benefits system will also be subject to dramatic cuts.
The truth is that you cannot remove entirely one form of fiscal recognition of the family – in the tax system – and then slash the other form of fiscal recognition – in the benefits system – without leaving the family incredibly exposed on both sides. Such a policy would create an incredibly hostile environment for families. It is so very far removed from the Conservative aspiration in the party’s 2010 manifesto to make Britain the most family friendly country in Europe.
There is, however, a ray of hope, on the horizon. While it is true that recognition of family was completely removed from the tax system in 2000, it was re-introduced in a very small way in April 2015 with the transferable allowance for married couples. The problem, however, is that the provision prevents the stay at home spouse from transferring 90 per cent of their allowance to their working spouse.
During the 2015 election campaign, David Cameron said that he wanted to see the transferable allowance increased. Now the case for doing so is massively increased by the Government’s decision dramatically to reduce the recognition of family responsibility through Universal Credit from next April. To be sure, the Government should look at other family tax allowances to compensate for the significant cuts to benefits, but the transferable allowance is the most obvious place to start because it already exists, albeit on a very limited basis, and because the Prime Minister has already said that he wants it increased.