David Burrowes is the former MP for Enfield Southgate and Executive Director of the Manifesto to Strengthen Families, which is supported by over 60 MPs.
Political attention is no doubt elsewhere this week, but sadly for eight years of a Conservative-led Government family life has been largely ignored in the tax system. So much so, in fact, that low income families are being trapped in poverty.
This may come as a surprise, given a core tenet of Conservative policy during these years has been to make work pay. Since we got back into power in 2010, there has been a jobs creation miracle: there are now more jobs than ever before, and unemployment is at record low levels. Of course that has benefited families and now record numbers of children live in households who work.
But this is only one side of the coin. It’s no good creating thousands of new jobs if people don’t then feel the benefit of more money at the end of the month.
This issue of making work pay for low-income families prompted me to chair a panel of MPs – Fiona Bruce, Heidi Allen, and Chris Green – who conducted an inquiry in November and led to our report being published this week.
We found that work simply does not pay for many families in the bottom half of the income distribution. The UK’s unusually high effective marginal tax rates (EMTR) have stripped families of the incentive to work more hours or get a better paid job. EMTR is the amount of money someone loses from every additional pound they would earn above their current salary in tax, national insurance and lost benefits.
The UK is an outlier – it treats low-income families in the tax system worse than any other country in the developed world. The EMTR rate for a one-earner married couple with two children on 75 per cent average wage is the highest of all OECD countries and more than twice as high as the EU (22) average. If all these other countries can avoid the same astonishingly high EMTRs we have here, then clearly the problem is avoidable.
Research by the Tax and the Family shows that the EMTR for a single-earner family on £21,000 with three children, paying income tax and national insurance and entitled to tax credits, housing, and council tax benefit, is an eye-watering 96 per cent. This means for every extra £1 they earn, they keep only 4p. Under Universal Credit, this figure will fall slightly, but it will still likely be an 80 per cent rate.
All family types suffer under this current situation. It doesn’t matter whether you are a single parent, single-earner couple, or a dual-earner couple. One in three of all in-work families are likely to be facing high EMTRs. But it’s not just the very low paid who are affected. For example, a single income family with three children paying rent of £157 a week has in 2018/19 an EMTR of 96 per cent. This does not drop to 32 per cent until your income reaches £40,776 and where housing costs are greater, the 96 per cent rate reaches even higher. This means it is almost impossible for some families to escape poverty.
It was striking that during the inquiry, both Tax and the Family and the Iain Duncan Smith made mention of the fact that Lord Lawson, the Conservative Chancellor of the Exchequer who introduced a system of independent taxation, has gone on record to state that the option of joint taxation was implicit in his original proposals for independent taxation and was his preferred choice.
The case for tax reform to give more support for families is being made from across our Conservative political family. Last November the Centre for Policy Studies, in its report ‘Make Work Pay’, acknowledged that “the British tax system is, by international standards, rather ungenerous towards families”. The CPS report concludes that transferable allowances “recognise the fact that what matters most to people is often the family finances – not just their personal situation. From a moral standpoint, it seems right that the tax system should acknowledge this in some way”.
Earlier this month 21 Conservative MPs, who straddle the economic and social left and right of the Party, united to support an amendment to the Finance Bill, calling on the Chancellor to conduct a review to consider how family responsibility can be better recognised in the tax system and the high EMTRs mitigated. The Speaker chose not to select this amendment so, undeterred, a debate on the issue has been secured in Parliament today.
So we find ourselves in a situation which, for Conservatives, is completely contradictory. First, our eye-wateringly high EMTRs are anti-aspirational. We don’t recognise family responsibilities, which means families in poverty pay thousands in income tax but then have to be supported by inflated benefits, with our cripplingly high EMTRs kicking in when these benefits are withdrawn. This completely suffocates aspiration.
Secondly, it is illogical and philosophically incoherent. We celebrate families and the fact that the family is the bedrock of society, but we almost entirely ignore families in the tax system (apart from a token married couples allowance). At the moment, we tax families as if they are individuals even while we sustain a benefits system which views members of the family as a family. We send out a curious message in the tax system that if you are dependent on the State we recognise family responsibility, but if you are in work we don’t.
Thirdly, it is anti-choice. The best systems of independent taxation allow couples the choice of whether they want to be taxed independently or jointly. In the UK, families simply do not have that choice. The state has in effect decided that independence is the ultimate priority and this has been decided to the detriment of family life.
Fourthly, this arrangement is judgemental. It means that any family where the second earner is either not in work or earning less than their personal allowance will end up financially penalised for this arrangement. As IDS said during the inquiry, we are judgemental about couples who choose for only one spouse to work. To some extent, we are telling stay-at-home parents not to bother and to make grandparents or other carers provide the childcare.
It is clear the current status quo is unsustainable. If the Government are serious about making work pay then it must get real about what is happening in low income families, which means engaging with the issue of our absurdly high EMTRs. Rather than making it easy for families to aspire to increase their incomes, UK fiscal arrangements are effectively suffocating social mobility and trapping families in poverty.
The Conservative Party is at it’s best when it is a party of social mobility, social justice and the family. Unless the Government allocates family responsibility more equally between the benefits system and tax system in order to bring our effective marginal rates down, it will have fallen short.