Nola Leach is Chief Executive of CARE.
Margaret Thatcher famously said: ‘There is no such thing as society.’ While this statement was, of course, taken out of context and misconstrued, it is unfortunately nonetheless true that a culture of individualism impacted her approach to fiscal policy in the latter part of her premiership.
At the time she spoke these words, her Government was planning to reform income tax and in 1990 a new system called “independent taxation” was introduced. This was intended to benefit families.
The then Chancellor, Nigel Lawson, had wanted a fully transferable personal allowance so that families would not be worse off as a result of the change. His plan was that everyone – man or woman, married or single – would have a tax allowance in their own right, regardless of whether or not they were in paid employment. To recognise the shared responsibilities of a married couple, a spouse who did not have enough income to use up their own allowance would be able, if they wished, to transfer the balance to their husband or wife. The aim was that no couple would suffer a reduction in cash terms to their total allowances. Instead, the two new-style allowances would amount to the same as the total allowances made available to a two-earner couple under the old system.
This enlightened, pro-family approach meant that the tax system would not discriminate against families where one spouse wished to remain at home to care for young children. Transferable allowances would provide recognition through the tax system that, at different times and for different reasons, one partner in a marriage may be financially dependent on the other.
This was not what happened. Thatcher wanted the transferable allowance proposal dropped. In its place, we saw the introduction of independent taxation, under which there is no looking across from one spouse to the other. Two new allowances were introduced, however, to try to prevent families (both couples and single parents) losing out which they would have done if they only got the basic personal allowance.
In his Budget speech of 1993, however, the Chancellor at the time, Kenneth Clarke, inferred that one of the new allowances, the married couples allowance, predated independent taxation, and was now unnecessary. Despite the fact that the allowance had only just been introduced as part of the new independent taxation system, he stated: ‘Now that husbands and wives are taxed independently …the married couple’s allowance is a bit of an anomaly.’ Clarke went on to announce that he was going to reduce its value, and also that of the linked Additional Personal Allowance which single parents could claim. Both were finally abolished by Gordon Brown. With hindsight it is now clear that they were an essential part of the new structure of taxpayers with children – one earners, two earners, single parents and married couples – if they were not to bear an increasing share of the income tax burden.
In this context, the current Government’s decision to prioritise helping people through raising the personal allowance, which has absolutely no cognisance of family responsibility, has greatly compounded the individualism of our fiscal arrangements. It is, therefore, no great surprise that the IFS has demonstrated that this policy, which has costed billions, has disproportionately benefited those in the top half of the income distribution.
The consequences of the lack of recognition of family responsibility in our tax system are all too clearly seen in new figures published recently by CARE, comparing the tax burden in 2016 on families in the UK with that in other developed countries. These show that the tax burden on people without children is nearly always lower than that in other counties – typically 15 or 16 per cent below the international average. In contrast, the income tax burden on a family with two children is now 25 per cent greater. Even two earner couples appear to pay more income tax than they would in countries like France, Germany or the USA.
Most other countries have not gone down the same road as we have. They still recognise that people live in families and that one income may have to feed more than one mouth. Their income tax systems take account of this, ours does not. The new CARE figures show that a UK family with an income of £36,000 could be paying 70 per cent more income tax than a French family, more than twice as much as an American family and an unbelievable 15 times as much as a Germany family. By contrast, a single person on £36,000 in the UK pays less income tax than they would in France, Germany and the USA. It was not meant to be like this. If the reliefs that had been introduced in 1990 to protect families had been kept and uprated, the tax threshold for families would be around £18,000.
France, Germany and America all have systems of joint taxation. However, for tax purposes in the UK we ignore the family unit, creating huge pressures on our benefits system which must compensate, and in so-doing burdens families on half to three quarters of the average wage with the highest effective marginal tax rate in the developed world – 73 per cent – when these benefits are withdrawn.
Of course, from 2015 recognition of family responsibility was reinserted into the tax system through the marriage allowance. After 15 years of no recognition of marriage in the income tax system this was very welcome.
The problem is, however, that it only allows the non-earning spouse to transfer ten per cent of their allowance to their working spouse to boost their household income. It means that 90 per cent of the allowance – often of a full-time parent (usually the mother) – is not deemed worthy of recognition. In the upcoming budget we would like to see the introduction of a truly meaningful fully transferable allowance, even if only for a smaller pool of married couples – perhaps those with young children. This, however, must be set out in the context of the longer-term aspiration to move towards a fully transferable allowance for all married couples.
In addition, and mindful that: 1) we already have incredibly generous personal allowances, and 2) increasing the personal allowance from £11.5K to £12.5K by 2020 will cost £4 billion and disproportionately benefit those in the top half of the income distribution, there is a strong case for limiting future rises to tax-payers with children.
Based as it is on the individual, the income tax system may work well for those without family responsibilities. It does not work well for families. It should work well for everyone. Many people thought this is what the Prime Minister had promised on the steps of Downing Street on the day she assumed office.