Debate on Taxing Families, 30 years after the introduction of independent taxation - review (with audio)
It is 30 years since legislation was introduced to move from a system of taxation where husbands and wives were taxed jointly to one where they are taxed independently. With this in mind, the latest CIOT and IFS Debate was titled Taxing Families: 30 years after the introduction of independent taxation, have we got it right? It was held before an audience of civil servants, tax professionals, economists and journalists, in the RSA’s Great Room on 26 June 2018.
CIOT President Ray McCann was chair of the panel and suggested this was one of the best panels of speakers there has been at these popular RSA debates. McCann joked about going to parties in his youth in Glasgow, when working at the Inland Revenue. Instead of people getting angry when learning of his profession, instead they would ask for advice on when they should get married and have children.
The first speaker was Stuart Adam, Senior Research Economist at the IFS, who looked at the history of the decision to move to independent taxation. In the 1990s we saw the married couples allowance gradually phased out and tax credits introduced. But the family has been brought back into the tax system with the 2013 introduction of the High Income Child Benefit Charge and the 2015 Marriage Allowance. On the child benefit charge, he said that the IFS has found there are 300,000 households who should be paying it, unaccounted for, which suggests non-compliance might be high.
The issues involved in comparing treatment of couples under joint taxation and independent taxation are complex. Independent taxation and assessment means that marriage does not affect payments. However, only joint assessment means that arrangements within marriage do not affect payments. Adam said a progressive tax system and benefit system cannot achieve both of these. One reason the government provides family support through means-tested benefits and tax credits is because it is cheaper and better targeted on poorer families than doing so through the tax system or universal benefits - though means-testing has serious downsides.
We have ended up with individual taxation of earnings but effectively joint taxation of capital, Adam observed. This different treatment of capital and labour is something which has not been studied much yet.
When it comes to work incentives, independent assessment gives weaker incentives for first earners but a stronger incentive for the second earner, Adam explained. Second earners are generally more responsive to incentives, he added. Do we care more about someone in the family working or every individual working?
In the UK, it is almost true to say we nearly have an independent tax system and joint benefit system, but not quite. For example, we have the marriage allowance, High Income Child Benefit Charge and (residual) Married Couple's Allowance. It is accurate to consider the UK to have a hybrid system, Adam said.
Interestingly, he said income tax has started to depend on family circumstances, again. The Marriage Allowance disproportionately benefits those without children, and those in lower middle of the income distribution.
Adam closed his speech by saying financial incentives do affect marriage rates and fertility rates, but the effect is very small. There is no real evidence tax induced marriage benefits children, he added. Better outcomes for children of married parents is largely explained by the characteristics of people who marry, not the effects of marriage, research has found.
The second speaker was Don Draper, co-founder of the campaign group Tax and the Family. Draper worked on tax policy at the Inland Revenue for 23 years. He said nobody would want to go back to the 1980s system but that independent taxation was designed to meet the needs of the 1980s not today’s families as it has evolved in ways we never anticipated. Draper said he spoke to former Chancellor Nigel Lawson who said of all the tax changes for which he was responsible, the least likely to be reversed was independent taxation. However when Lawson introduced it he had intended it to be accompanied by a fully transferable personal allowance. This had not happened, and the ‘watered down’ measures which replaced it - the married couples allowance and retention of the additional personal allowance – were subsequently both phased out and finally abolished in 2000. As a consequence while independent taxation was not designed to increase tax on families in poverty, this had nevertheless been the result for many.
Draper set out a case study to reinforce his concerns about the marginal rate of tax - the percentage of tax paid on earnings for the next pound earned – that face people on a low income or living in poverty when you take into account tax bands and reductions in allowances. In his example of a real – but anonymised – West Country family surviving on low income, who get tax credits and help with their rent, he discovered their effective tax rate was 96 per cent, and they are left with a disposable income of about £400 a week. This means they cannot pay back the £1,000 they owe for being overpaid tax credits. Families like this would not be paying tax in Germany or France, Draper said.
The large increase in the personal allowance since 2010 has been costly, Draper said. Transferable allowances would be more cost effective than further increases in the income tax threshold. It is hard to reduce inequality if you measure it on a household basis while you tax independently, he added.
We have modern day serfdom in the UK, Draper argued. Those who make tax policy and comment about tax policy need to be aware of how income tax impacts on families. Changing the tax system will not solve all the financial problems of people such as those in the case study, but it can stop the system taking tax from families in poverty who are then locked in by high marginal rates as a result of having to be bailed out by benefits – a system which takes the same tax from a family in poverty as it does from someone who is in the top decile of the income distribution. We should not abandon the independent taxation of married women but we do need to rethink the way independent taxation works, he concluded.
Family fortunes: (Left to right) Bennett, Adam, McCann, Draper and Wrigley
Fran Bennett, a Senior Researcher and Teaching Fellow at University of Oxford, and of Women’s Budget Group, spoke in a personal capacity at the debate. When we talk about ‘taxing families’, if you drill down people are usually referring to one earner couples with children or married or civil partners, she felt. But we have to look at the full range of financial pressures these households face. Bennett argued that the transferable tax allowance and High Income Child Benefit Charge complicate the tax system. The charge also creates a high marginal tax rate which rather illogically varies with the number of children you have and creates perverse incentives to convert income to pension contributions and charitable giving, she noted.
Bennett said there was a risk with the marriage allowance that we are simply giving the high earner in a couple more money, widening the income gap between members of a couple, while providing a disincentive to the other partner from earning their own income. 85 per cent of higher earners in households are men, she told the audience. She said the allowance undermines independent taxation and should be scrapped. It was not even a recognition of marriage because many married people do not get it, she added.
Bennett said that any joint tax system would create disincentives to the non-earning or lower earning partner earning their own income.
Contrary to belief, a lot of benefits are based on the individual, such as state pension, bereavement benefit and jobseekers’ allowance, Bennett explained. When it comes to realising the objectives of independent taxation, she suggested that tax and benefits should be looked at together and there should be a focus on children and the balance of resources in the home. Bennett said: “The Women’s Budget Group would argue that individual benefits are important and independent income for women may increase their voice within the household.”
Other suggestions made by Bennett were to unfreeze child benefit, increase childcare support, more parental leave and improve the level of carers’ allowance.
The final speaker was Gillian Wrigley, Technical Officer at the CIOT’s Low Incomes Tax Reform Group (LITRG). Wrigley began by reading out a typical query on the LITRG website from a low income worker to show how confused and concerned people can be as to whether they are in a couple or not for benefits purposes; often the guidance they need from government is poor, leaving people unclear if they are eligible. People do not know how to claim it even, she said. She gave another example to illustrate the complexity and uncertainty around benefit and tax credit claims as well as tax, when it comes to couples not living together. Do people looking at claims know enough to judge accurately such cases, she wondered. Most people want to make correct claims but without proper guidance it is very hard for couples to judge for themselves.
Wrigley closed her speech by saying for the low income taxpayer, there is no such thing as independent taxation because for them taxation actually means benefit and tax credit claims. They need substantial help and guidance – especially given the repercussions for getting it wrong.
During the question and answer session, Policy Exchange’s Warwick Lightfoot, a former SPAD to Chancellor Nigel Lawson, said that at the time independent taxation came into play there was a huge debate over the role of women in society. On the one hand there is the complexity of high income households, and then those of benefits claimants. The Chancellor’s views were coloured by influential high income women that he was lobbied by, he suggested.
Introduction by President Ray McCann and speech by Stuart Adam, of IFS
Don Draper, of Tax and the Family
Fran Bennett, of University of Oxford
Gillian Wrigley, of Low Incomes Tax Reform Group (LITRG)