Conservative MPs call for lower marginal rates of tax on low income people

Conservative MP Jeremy Lefroy secured a debate in Westminster Hall on the taxation of low-income families, held on Wednesday. 

The debate coincided with the publication of a report titled Making Work Pay for Low-Income Families by the Strengthening Families Manifesto, a set of policies backed by 51 Conservative MPs and peers. The report itself follows an inquiry where a panel of MPs took evidence from a number of groups, including Tax and the Family, the Resolution Foundation and the Child Poverty Action Group. Among the Manifesto’s policies is a call on the Government to target an increase in the value of the Marriage Allowance for low income married couples or civil partners with children. They should enable those on universal credit and entitled to Marriage Allowance to receive the tax break automatically as part of their claim, and ensure it is not tapered away. Over successive budgets the Government should work towards reducing remaining couple penalties on Universal Credit, the report argues.

Conservative MP Jeremy Lefroy spoke first to say if we look at a one-earner, two-parent family with two children, paying income tax and national insurance and in receipt of tax credits, they face an effective marginal tax rate of 73 per cent. And that one in three in-work families with dependants are likely to be facing high effective marginal rates. Instead of encouraging aspiration, the combined impact of our tax and benefits system ‘suffocates aspiration, trapping families in poverty’. Since the introduction of independent taxation in 1990, there has been little or no recognition of family responsibility in the tax system, he said. He backs the findings of the Strengthening Families report, especially its call for the Chancellor to review the effective marginal tax rate for families, assessing the reasons why work does not pay for so many families and evaluating the possible solutions, with a particular focus on the tax system and the recognition of family responsibility. It is very telling that in 1990, just as independent taxation was introduced, far from 73 per cent, the effective marginal tax on a one-earner family with two children on 75 per cent of the average wage was just 34 per cent, close to the average 33 per cent effective marginal tax rate on such families today across the OECD as a whole, he said. Later in the debate, he lent his support to Centre for Policy Studies’ (CPS) call to look at the higher-rate tax relief on pension, something which comes at an enormous cost to the Exchequer, to the benefit of people earning double or triple the national average wage.

Fiona Bruce (Con) said the Government has failed to address the issue of high marginal rates and that universal credit has not solved the problem of people entering work and losing an average of 73 per cent of their earnings, or even more. The Chancellor promising in his recent Budget to increase the work allowance by £1,000 a year will not help much; it will just mean that they keep a little bit more of their money before they reach that point.​ She said the best systems of independent taxation give couples the choice as to whether the two people are taxed independently or jointly. She added that if the taper rate is altered to 50p, when universal credit recipients start to pay national insurance or income tax, they will still face a 66 per cent effective marginal tax rate.

Steve Double (Con) claimed the introduction of universal credit was a huge step in the right direction. However, under the current arrangements, there are those who are paying marginal tax rates of 75% if they are homeowners, and 80% if they are renting, and on universal credit. We cannot expect people to be incentivised to take extra work if they will get to keep only 20p or 25p in the pound for the extra work that they take on. He supported Lefroy’s call for the UK to set as a target bringing the UK in line with the OECD average marginal tax rate. He would support any move to treat families as families in the tax system by allowing some measure of transferrable tax allowance. He said it seems crazy that in the child benefit system taxpayers are treated as individuals rather than as families.

Andrew Selous (Con) said the UK’s youth unemployment rate is a fantastic achievement, and universal credit has also been good at getting rid of the pernicious effect of the old 16-hour rule. The problem of high effective marginal tax rates does not just affect single earners, he said. It affects a million of them, but there are also 600,000 dual earners who are similarly affected and 900,000 single parents as well. This is a problem for all types of family structure. He is not calling for the abolition of independent taxation but some element of choice. He is warm to the CPS’ proposal to look at the transfer of unused personal allowance.

Chris Green (Con) said the current tax system ‘crushes aspiration’ by disincentivising people from taking on additional hours of work due to the marginal tax rates involved.

Sir John Hayes (Con) said family, and particularly marriage, need to be supported in the tax system.

For Labour, Shadow Chief Secretary to the Treasury Peter Dowd spoke only briefly on tax, concentrating on other aspects of the Strengthening Families report. He said if services for early intervention are cut and there is a lack of funding, the impact is £48 billion from family dislocation. On tax he said that although he recognised many of the worthy points made by hon. Members, “that worthiness has got to be put in place, not by mechanisms, but by everybody playing their part in society and paying their taxes, and by corporations not getting tax breaks or being able to ​avoid this, that and the other. The point that the hon. Member for Stafford makes about tax reliefs is fair; I will potentially look at them.”

SNP Treasury Spokesperson Alison Thewliss said lots of the stresses and strains on our society are caused by austerity, not by whether people are married or not. The UK Government’s tax system remains quite a blunt tool with which to tackle income inequality and is riddled with loopholes that benefit the wealthy, she said. Thewliss talked about the impact of the immigration system on families. She gets many people coming to her surgeries who, because of the minimum income threshold in the immigration system, cannot bring a spouse to live here. Treating families as a unit within the tax system, as often happens with universal credit, has been widely criticised by women’s organisations because it removes women’s agency. She is against the abolition of independent taxation because ‘incentivising marriage is disincentivising separation’. Indirect taxation is a huge issue, with VAT disproportionately affects low-income families.

DUP’s Gregory Campbell suggested if we gradually moved toward a position where the first £15,000 per annum was tax-free and there was no requirement to pay national insurance contributions on it, that would be a huge incentive against the black economy, as well as promoting people’s getting out of the working tax credits system and into employment to try to work their way up through the salary chain. DUP MP Gavin Robinson said: “The disincentive that we have heard about... is an intentional outcome of the over-simplification of our tax system, but if it is not intentional, we should resolve to solve it.”

Speaking for the Government, Tax Minister Mel Stride praised the ‘thoughtful and detailed report’. He accepted that high marginal rates are ‘deeply undesirable’ but the entire system is not broken. Stride said the OECD has indicated that across the universe of low-income families in this country, we are above average when it comes to making sure that net income is received by those families. We have a very progressive tax system. Some 28 per cent of all income tax is paid by the top one per cent of earners.

We also have “A necessarily complicated tax system, because it tries to do many things at the same time, throws up all sorts of deeply unsatisfactory anomalies. The complexities of the tax system and the interaction with the benefits system means a complicated challenge ahead… [But] the Government remain committed to lower taxes and to simplifying them to the extent possible and to making sure that the anomalies raised today are addressed.” He promised to go back to the Treasury with the report and the comments made in this debate and “look genuinely and deeply at the issues raised.”

The full debate can be read here

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