Debate on independent Taxation - have we got it right?
In the summer of 1988 Parliament passed legislation bringing in independent taxation of husbands and wives. 30 years on, the Chartered Institute for Taxation and the Institute for Fiscal Studies are combining for a timely debate on independent taxation. The debate considered how the system is faring, considering questions such as:
- Should the transferable Marriage Allowance be extended – or scrapped?
- Has the High Income Child Benefit Charge undermined the principle of independent taxation?
- Is there a contradiction between individual assessment for tax and joint assessment for tax credits and benefits?
- Does it matter that government uses different definitions of a couple across the tax and benefit system?
Click here for audio of the debate which is now available on the CIOT website, alongside a short report and a set of the slides used by Stuart Adam.
A number of publications were mentioned during the discussion. The research paper, Independent Taxation – 25 years on, co-authored by Tax & The Family's founders Don Draper and Leonard Beighton five years ago, can be read here.
The Low Incomes Tax Reform Group report on Couples in the tax and related welfare systems can be read here.
Don Draper's speech is below.
"Nigel Lawson says that, of all the tax changes for which he was responsible, the reform which is least likely to be reversed is the independent taxation of married women.
Independent taxation was designed to meet the needs of families in the 1980s. My argument is that does not meet the needs of today’s families. It has evolved in a way none of us could have foreseen in the 1980s.
Families are bearing a bigger share of the income tax burden than they were both before, and immediately after, independent taxation was introduced.
Families in poverty may be paying thousands of pounds in income tax
I am defining families as households with children.
Perhaps, the best way to explain why some of us believe we need to revisit independent taxation is with a real example.
Mark and Philippa - their names have been changed to protect their privacy and that of their three children - live in the West Country. Mark is a bus driver. Working on average 39 hours a week. Mark earns around £21,000 a year on which the income tax would be £1,584. His actual earnings vary from week to week depending on his hours. In the week we met the family, his take home pay was £310.08. They get tax credits and help with their rent. They are living on about £396 per week which has to cover everything – food, clothing, car repairs and occasional ice creams for the children. They have no savings. Tax credits were overpaid when Mark did overtime and they now have a debt of over £1,000. Their effective “tax” rate when tax credit and housing benefit withdrawals are taken into account is 96%. With a tax rate of 96% there is no way in which they can repay a debt of £1000 by Mark working overtime. Philippa looked at getting a full time minimum wage job, but found that the wages would not cover even the childcare cost for three children. With disposable income of £396 per week they are probably in relative poverty . BUT Mark pays virtually the same income tax as someone in the top decile of the income distribution for whom £21,000 is a second household income.
The 1988 reforms were intended to make the taxation of families better - not worse. They were certainly not designed to increase the tax on families in poverty. Nigel Lawson’s original plan was that the independent taxation of married women should be linked with a fully transferable personal allowance.
These proposals were watered down. Nigel Lawson says this was because of Margaret Thatcher’s opposition. The transferable personal allowance proposal was dropped, and in its place a new allowance – the married couples allowance – was introduced and the additional personal allowance, which single parents and unmarried couples with children could claim, was retained. Subsequently both were phased out and finally abolished in 2000. It was said that they were “something of an anomaly”. With hindsight it is now clear that, in the absence of a fully transferable personal allowance or something comparable, they were an essential part of the structure of independent taxation if people like Mark and Philippa were not to lose out. They, and many like them, havelost out. If Nigel Lawson’s original proposals for independent taxation had been accepted, Mark and Philippa would not be paying any income tax today. If MCA and APA had been retained Mark’s income tax would be about £500 a year not £1500. £1000 is a lot to a family struggling to make ends meet.
In both Germany and France, both of whom are high tax countries, families like theirs do not pay income tax. In the US they would not pay any Federal income tax.
The way independent taxation has evolved has resulted in resulted in:
· Families bearing an increasing share of the income tax burden.
· For most of us the income tax threshold is 83% higher in real terms than it was in 1990. For a single income family it is only 19 % higher.
· Moreover. income tax liabilities being poorly related to how well off people are.
· Families in relative poverty are paying large amounts of income tax.
· More inequality.
It is difficult to reduce income inequality when income for this purpose is measured on a household basis but income tax is based on individual income .
As many of you will know the Department of Work and Pensions (DWP) produces annually an analysis of incomes, which do take account of household size and composition. The figures for the tax year 2016/17 were released in March. To have an average standard of living after housing costs, a couple with two children might have needed to earn twice as much as a single person without children and, as a result, pay three, four or even five times as much tax.
For example in 2016/17 a family of four with housing costs of £600 and an average income would have needed to earn over £50.000 and pay three times as much tax as a single person with the same living standard.
To be out of poverty they would have needed to earn over £30,000 and as a result pay two and a half times as much income tax as a single person on the poverty line -1.7 times the tax of a couple without children. A single parent on £30,000 pays the same income tax as a single without children who is not in poverty.
It was the failure of the income tax system to take account of family responsibilities that led Gordon Brown to introduce tax credits. Without tax credits and housing benefit the position of families like our bus driver family would be dire. No one is saying we can do without them.
Benefits are however are a mixed blessing.[ The complications in claiming them can be very considerable and the resulting effective marginal rates are far higher than those faced by any almost any other group of taxpayers} ].For families claiming tax credits, the effective marginal rate has been 73%, but for the increasing number of families who have no alternative but to rent, like the bus driver’s family, it has been 96%. Even under Universal Credit it will still be 80%.
What if anything can be done particularly at a time when there is so much pressure on the public finances? The situation cannot be left as it is.
This is modern day serfdom! Our bus driver’s family have effectively no control over their finances. They have what the State allows them to have – no more and no less - even if that amount leaves them in poverty!
Policy makers need have a greater awareness as to how the income tax impacts on families . They need to know which families have above average incomes and which have below average incomes. Which are in poverty and which are not. Taxable income can be misleading. There is little evidence that the Treasury looks at how well off people are when tax changes are being considered.
We need to look at the way in which countries like Germany and France tax families and ask whether there are ways of taking account of the family without going back to the 1980s. There surely are.
The large increase in the personal allowance since has been costly. The Treasury have sent me data which suggests that the cumulative cost has been close on £19 billion. Not much of this money has ended up with families. Most of the benefit has ended up with people who are in the better off half of the population. Transferable allowances would have been a more cost effective way of raising the tax threshold .
One option would be to freeze the existing allowance and to use the freed up resources to redress the balance between families with children and the rest of us..
Perhaps, however, we are no longer talking about income tax cuts but income tax increases. If that is the case, a way needs to be found to protect families who are already bearing an unfair share of the tax burden from increases.
Changing the tax system will not solve all the financial problems, which people like Mark and Philippa face. But it does not make sense to start with an income tax system that takes 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. "