How best do we support families?

I took part in a recent CIOT/IFS debate in London titled Taxing Families: 30 years after the introduction of independent taxation, have we got it right? The debate raised important questions. Who benefited from its introduction and who lost? How best do we support families?

We were told from someone who was around at the time of the introduction of independent taxation that the wives of cabinet ministers were pressing hard for it. Perhaps not surprising, as independent taxation was supposed to be about giving married women control of their tax affairs. But would it be over cynical to remind ourselves that couples with high incomes were the main beneficiaries? They had every incentive to shout loudest.  People who lost out were ordinary families with only one income; they did not attend smart garden parties with the powerful, I suppose. In 1990, nobody, it seems, spoke up for them. We were told that all this happened with cross party support.

A lot has changed since 1990, tax rates have come down and the tax threshold is much higher in 2018 - it is 80 per cent higher in real terms. For some families however it is only 13 per cent higher. How come?  The answer is that families had a higher threshold in 1990. Allowances put in place to stop families from losing out from independent taxation were withdrawn.

Does anyone care that as a result of independent taxation families in poverty may be paying thousands of pounds in income tax? Does anyone care that if Nigel Lawson’s original proposals for independent taxation had gone ahead some of these families would not be paying any income tax in 2018? This may be very academic if you are not a family struggling to make ends meet.  It is not at all academic if you are.

Did anyone really care in 1990 about the distributional effects of independent taxation? More importantly does anyone care now? Income tax bears all too little relationship to how well off the taxpayer is. How well off we are depends not just on our personal income but also on the income, size and composition of our household. It seems to me that the poor are taxed as if they are rich and rich as if they are poor. Surely this was not what Front Benches had in mind 30 years ago. It is not what happens in other counties. In Germany, France and the US income tax takes account not only of income but also to the size of the family. In Germany, for example, spouses can choose between joint assessment or individual assessment. There is no compulsion. Most opt for joint assessment as this minimises the tax burden on the household. Incomes of spouses are added together and then divided by two. Tax is levied on this figure. There are also, allowances for children. As a result, income tax liabilities are linked to how well off people are.

It was said that if we want to support families the best way of doing this is through the benefit system. Perhaps it is, but if you want to support someone you do not start by first knocking them down. You do not start by having an unfair tax system – a tax system which requires the bread winner for a family to pay the same income tax as someone without family responsibilities or for whom their income is second family income. Taking account of the family unit for income tax is not about supporting families but about sharing the cost of the State fairly between us all. Income tax needs to take account of ability to pay. This may well mean that some of us who now have no family responsibilities and have done well out of independent taxation do have to pay more.

 

Guest blog by Donald Draper, co-founder of Tax and the Family

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