SUMMARY

  1.  The Working Families Tax Credit (WFTC) has failed to treat couples and their children in a way comparable with lone parents and their children. Figures given below show the extent to which children in families headed by couples in work remain in poverty. By contrast, the WFTC lifts well clear of poverty children in families headed by a lone parent with the same gross income. We believe that, because couples and their children have health and educational advantages, and because of the economic and social cost of the breakdown of marriage, it would be sensible if the Integrated Child Credit (ICC) provided couples with a fiscal advantage. But, even if this view is not accepted, it cannot make sense to discriminate against them.

  2.  This discrimination against couples arises because the WFTC confuses aggregation and independent taxation. It aggregates the incomes and savings of a couple, but then ignores the second adult when looking at their needs.

  3.  It might be possible to remove this discrimination against couples by adjusting the Employment Tax Credit (ETC), but as the ETC is due to be phased out as incomes rise before the ICC is tapered, that could not be a comprehensive solution. Instead, our answer is to introduce an Integrated Family Credit (IFC) which would look at the family as a whole consistently throughout the tax credit system in the same way as is done with the income related benefits. Unlike the present proposals, this approach would provide the seamless system of support for children for which the Government is looking. It would also remove the anomaly within the Children's Tax Credit (CTC) under which the taper discriminates against single earner couples.

  4.  As it stands, the ICC will do little to provide employment opportunities for all. This is because it has been devised without regard to Housing Benefit (HB) or Council Tax Benefit (CTB). The recommendation for a housing credit made by the Social Security Committee in its recent Report on HB now needs to be pursued; and its recommendations on the length of time an award should last and on the savings disregard should apply to the ICC also. Progress towards making work pay and providing employment opportunities for all will be made only if the income related benefits and tax credits are looked at in the round.

INTRODUCTION: THE WORKING FAMILIES TAX CREDIT (WFTC)

  5.  The aim of the Government in introducing the Integrated Child Credit (ICC) is to provide a seamless web for supporting families with children whether or not they are in work, so as to move further towards the elimination of child poverty. It is to be introduced in conjunction with the Employment Tax Credit (ETC), which is to take further the policy of making work pay and of providing employment opportunities for all. As such these tax credits build on the WFTC, so that a good starting point in considering the prospects for the ICC is to examine how effective the WFTC has been in achieving these aims.

  6.  As we showed in our earlier written and oral evidence to the Committee [eg First Report, Session 1997-98, pp267-276 and 318-24], one feature of the WFTC has been its failure to treat couples, and children in families headed by couples, in a manner comparable with the treatment of lone parents and their children. Couples with the same gross income as lone parents, and in otherwise similar circumstances, will end up in the distribution of incomes one, two or even possibly three deciles lower than lone parents. As a result children in families headed by couples are more likely to end up in poverty.

  7.  This is illustrated by the following table which shows in which decile in the distribution of incomes particular families would fall if the tax and benefit system planned for April 2001 were in force now:

  8.  The present position can also be illustrated by the following chart which shows the position of these families when their gross income is £100 a week. The chart shows that the children of all three lone parent families have been pulled out of poverty—in the two families where the children are young markedly so—while the children in families headed by couples remain in poverty.

Key

  1 is a single person with no dependants.
  2 is a lone parent with one child aged two.
  3 is a lone parent with two children aged two and four.
  4 is a lone parent with two children aged 14 and 16.
  5 is a single earner married couple with one child aged two.
  6 is a single earner married couple with two children aged two and four.
  7 is a single earner married couple with three children aged two, four and six.
  8 is a single earner married couple with two children aged 14 and 16.
  9 is a two earner married couple, income split 80:20, with two children aged four and six.

  The poverty line is estimated to be at an equivalised income of £166 per week, ie the April 1999 figures published in Households below Average Income 1994-95 to 1998-99 increased by 2.5 per cent. For technical reasons this is likely to be an underestimate.

  Comparable charts illustrating the position at other income levels can be provided if requested.

  9.  Moreover these figures understate the difference in treatment. They assume that none of the lone parents is in receipt of the lone parent premium. In addition, any maintenance payments which a lone parent receives is ignored in calculating WFTC.

  10.  We would argue that the tax-benefit system should favour families headed by couples and their children. All the evidence shows that on average adults are healthier and happier, and their children are healthier, do better at school, and have fewer behavioural and criminal problems if they are married, or at least cohabiting, than if they are lone parents. To provide a fiscal advantage for people to come together and to be committed to each other in marriage would therefore make considerable economic and social sense.

  11.  Even if this argument is not accepted however, what cannot make sense is to provide a fiscal advantage for those families who on average are less likely to be successful in bringing up their children—for that is what the evidence shows. Moreover, given the very significant cost to the Exchequer of marriage breakdown, it would seem only reasonable to ensure that couples who stay together do not face a tax-benefit system which is less favourable to them than if they split up.

  12.  The disadvantage which couples face has come about in part because of the Government's concern that lone parents should be helped back into work. But it does not follow from this laudable objective that this help should put the children of couple families at a comparative disadvantage, in particular within a mechanism like the ICC which is designed to give support for all children and to take all children out of poverty.

  13.  The other reason why couples and their children are disadvantaged is that the WFTC does not consistently follow the practice to be found with the income related benefits generally. This is to look at the family and its needs as a whole. In assessing how much WFTC is due the income of the spouses or partners is aggregated, as are their savings. However the needs of the second adult in a couple are then ignored and no tax credit is given in respect of him or her. In this way the principle of aggregation is followed when it may be to the disadvantage of the couple—and then at that point the principle of independent taxation is applied, also to the disadvantage of the couple. This is clearly inconsistent as well as unfair.

  14.  In our view this issue needs to be tackled now within the WFTC without awaiting its replacement by the ICC in 2003.

THE TREATMENT OF THE FAMILY WITHIN THE ICC AND THE ETC

  15.  At first sight the comparative treatment of couples and their children seems unlikely to be improved within the ICC: indeed it may well get worse. This is because, by focussing on the children alone without regard for their family circumstances, the credit will not easily be able to take account of the additional costs which a couple necessarily incur in the way that the benefits system does. Paradoxically, by focussing on children, the ICC may do them a disservice by favouring those environments in which, on average, they do less well.

  16.  It would of course be possible to provide for the second adult elsewhere in the tax-benefit system. There could be separate benefits and tax credits for adults which fully took account of the needs of couples whether they had children or not. Indeed within the tax credit system the ETC will do that to some extent. But even if, when the ETC applies, it takes full account of the needs of adults so that couples and their children were treated comparably with lone parents and their children, as things stand that would not fully meet the case.

  17.  This is because, under the Government's proposals, the ETC is to be tapered out before there is any tapering of the ICC [Tackling Poverty and Making Work Pay, paragraph 4.12]. In other words, there will be significant numbers of families who will be entitled to the ICC but not to the ETC in full, or even to the ETC at all. A tax credit system which takes account only of children cannot properly reflect the needs of their family as a whole.

  18.  One way of meeting this would be to taper out the ETC at the same time and over the same range of incomes as the ICC. In this way all families would be treated equally according to their family circumstances and the disadvantage suffered by couples and their children would be removed. However in practice this might be quite complex to arrange.

THE INTEGRATED FAMILY CREDIT (IFC)

  19.  The alternative—which we favour—would be to introduce an IFC in place of both the ICC and the ETC. This would mesh in well with the benefits system and take over smoothly from Income Support and Jobseeker's Allowance when the recipient found work. The income of spouses and partners would be aggregated, as would their savings, and the amount of tax credit would be calculated taking full account of the circumstances of all the family, as happens with the income related benefits. Childless people would qualify for the credit at a lower level.

  20.  Under the Government's proposals, in the case of couples the ICC will be paid to the carer of the children and the ETC to whoever is in work. It would be possible to divide the payment of the IFC in this way, but to do so would seem to be unnecessarily complicated. Payment of the WFTC through the employer has added very considerably to the compliance burden on businesses without really doing much to establish the credit as a reward for work. With its proposal to pay the ICC to the carer along with child benefit, the Government has largely abandoned this principle on which initially it put so much weight. There would seem little case for trying to resurrect it with the IFC, all of which should go to the carer (or possibly to either parent as with benefits generally).

  21.  While we have a system of income related benefits based on aggregation and a taxation system based on the individual, it is inevitable that there will be some discontinuity somewhere. At present, as explained in paragraph 13 above, that discontinuity arises in the middle of the WFTC. Under the system now proposed by the Government, the discontinuity would arise in the middle of both the ETC and the ICC. This runs counter to the aim of providing a seamless basis of support for children. By contrast, with the IFC aggregation would apply consistently to both income related benefits and tax credits, leaving the tax system on an individual basis. In this way the discontinuity would be least damaging.

  22.  But it leaves open the question whether aggregation should apply throughout the tax-benefit system. To pursue this in full might go beyond the compass of the Committee's present inquiry. But one aspect of it is in point here. The Children's Tax Credit (CTC), which is due to be introduced in April 2001, is also based on a mixture of aggregation and individual taxation. In awarding the CTC a couple is looked at together, and there are provisions under which a cohabiting couple are treated as man and wife. However the rules of independent taxation are then applied, and the Credit is tapered where either one of them is a higher rate taxpayer. In the case of a single earner couple, the tapering will begin when their income is a little over £32,000, and by the time their income reaches £38,000 no CTC will be paid. By contrast, a couple where both partners earn will receive the CTC in full if their joint income is £64,000 earned by them equally. This is a good example of the sort of anomalies which arise when the principles of the tax system are applied to benefits without any adaptation for the circumstances.

MAKING WORK PAY

  23.  Given the complexity of the income related benefits and the interaction between them, any significant increase in the incentive to work will be difficult to achieve except at very considerable cost. Certainly the proposed ICC will have little impact on the will to work—nor, it is fair to say, would the IFC except in the case of childless people. But it would put all families on an equal footing in an area where any move towards clarity and simplicity must be welcome. It would also mean that parents would have a real choice whether or not to stay at home to look after their children.

  24.  However the Committee itself in its recent Report on Housing Benefit (HB) [Sixth Report, Session 1999-2000] referred to the need in reviewing the relationship between HB and the new tax credits to address the high marginal deduction rates [paragraph 79]. With respect, we wholly concur. We have long drawn attention to the fact that the consideration of the WFTC and of HB has gone on in separate compartments with little regard to their interaction.

  25.  Treasury Ministers have claimed significant reductions in the number of people suffering the very highest marginal deduction rates on a basis which takes no account whatsoever of HB or of Council Tax Benefit (CTB)—see for example the Budget 2000 Red Book, Prudent for a Purpose: Working for a Stronger and Fairer Britain, paragraphs 4.66 and 4.67. Likewise the only reference to HB or CTB in the Treasury publication Tackling Poverty and Making Work Pay outlining the tax credits is in a footnote to one figure. And even now, there is no mention at all of HB or CTB in the very recent publication, Opportunity for all. One year on: making a difference, or recognition of the impact of those benefits on the incentive to take paid work.

  26.  At the same time, although the Housing Green Paper, Quality and Choice: A decent home for all, made some reference to WFTC, it hardly explored the interactions. This failure to look across tax credits and the income related benefits as a whole has now to be corrected if work is to be made to pay. As the Committee recommended, the introduction into the new tax credits of a housing credit might well radically simplify the structure of these benefits and do more than anything else to strengthen the message that work pays [paragraph 94 of its Report].

  27.  Our own recommendation for taking this forward was to pass responsibility for oversight of HB to the Inland Revenue (which we believe would also be likely to lead to significant simplification and a reduction in fraud). We recognise however that this proposal runs counter to the Committee's own recommendation against administration by a central Government agency (although in terms it did not consider the Inland Revenue) [paragraph 145]. So we do not press the point. We suspect however that other means will have to be found for ensuring that these issues are considered in the round together, and that the present compartmentalisation is broken down.

  28.  The particular issue of the length of time for which an award should last, on which the Committee made recommendations in its report on HB [paragraph 29] and on which it is seeking evidence here, is a good example of the need for a consistent approach. There might be a case for having a different rule for HB than for the tax credits, but the need for simplification so far as possible suggests that it would probably be preferable to have the same period for all purposes. But on this issue the proposals on tax credits in Tackling Poverty and Making Work Pay point in a direction which was argued against in the Housing Green Paper. Until this sort of inconsistency is ironed out, the required overall consideration of the whole tax-benefit system is unlikely to be given effectively.

  29.  Similarly, in its report on HB the Committee recommended that the value of the savings disregard should be increased to its 1988 real value [paragraph 82]. However, while the disregard in the case of the Disabled Person's Tax Credit is the same as that for HB, WFTC is not paid once savings have reached £8,000, half the level for HB. We see no good case for the difference in treatment, and believe that the Committee's recommendations for HB should also apply to the new tax credits.

CONCLUSION

  30.  The aim of reducing child poverty will not be properly secured by the ICC as it stands. The family must be looked at as a whole, whether through the IFC as we suggest or by some other means. Similarly, the aim of making work pay, which is an important component of the drive to reduce child poverty, will be achieved only if the issue is looked at in the round and a common approach is taken across departments and across all the tax credits and income related benefits.

Leonard Beighton and Don Draper
Consultants on tax and benefits for Christian Action Research and Education (CARE)

September 2000