WEDNESDAY 29 NOVEMBER 2000

MR L BEIGHTON and MR D DRAPER

  Chairman: Welcome to the Committee, gentlemen. Mr Leonard Beighton is a consultant on tax and benefits, as is Mr Don Draper, both of whom have helped the Committee substantially in the past. Thank you for the work you have submitted. We are particularly interested in the treatment of couples in this and we had the benefit of your advice on the Working Families' Tax Credit and some of the other inquiries we have been doing. We are particularly interested in that aspect of the work which you have done in the recent past.

  194. You have given us various graphs and arguments, perhaps you could just explain to the Committee in simple terms what it is about the Working Families' Tax Credit which makes a two-parent family worse off than a one-parent family. What disadvantages them?
  (Mr Beighton) There are several factors which come into this reckoning. The start point with the Working Families' Tax Credit, and after all we do not know much yet about Integrated Child Credit but on the assumption it is being built on the Working Families' Tax Credit and the other parts of the system and we assume it will look broadly like that—the start point is that you aggregate the income and the savings of the couple so that they are going to get a much higher starting point and therefore a lower amount of credit than you would if there were not aggregation. Then, having done that, you forget that in fact there are two adults in a couple family and you base the amount of the credit on the needs of one adult and the children. So in both ways the couple is disadvantaged. One or other would be consistent, fair and correct, but if you are going to do it in both ways, then you will find that they are disadvantaged. There are much more technical reasons than that which Mr Draper might like to give you.

  195. If it is technical, try to explain it in a way we can understand.
  (Mr Draper) What we have done is in essence quite simple. We have looked at the way the Government defines poverty and one accepts that poverty is multi-faceted. For simplicity the Government have pinned themselves on 50 per cent of average incomes, in fact they are now going for 60 per cent of median but the figures are almost identical. By income, they do not take what you and I understand as income, they adjust income upwards or downwards according to the number of people in the family. This process is called equivalisation. The term has cropped up once already this morning. May I just quote something which Baroness Hollis said in another place in answer to a question as to how the Government is defining poverty. She said, "The process of equivalisation involves the adjustment of household income to take into account variations in the size and composition . . . It reflects the common-sense notion that, in order to enjoy a comparable standard of living, a household of two adults with four children will need a higher income than a person living alone". That is Written Answer 134 of 6 November in the House of Lords. Very simply, what we have done is to look at a range of households who start off with the same pre-tax pre-benefit income, gross income. We have looked at incomes ranging from £100 per week to £500 or £600 per week. Then we have looked at their net incomes after deductions: income tax, national insurance contributions, Working Families' Tax Credit and looking ahead, the Children's Tax Credit to come in next April, Child Benefit. We have looked at what the household has to spend after all these amounts are added together or subtracted. We have adjusted net income in exactly the same way that the Government does when it works out the number of children in poverty and then looked to see how different families fare. One snapshot we have done—we have done other snapshots of course—is Chart 1 which shows a remarkable difference in standards of living enjoyed by nine different households who start off with £100 pre-tax employment income. This pattern goes right up the income scale.

  196. Just on that point, you were sitting in during the earlier evidence. You heard Sue Middleton criticise your analysis. Do you want to make any comment before we pass on?
  (Mr Draper) Just very quickly. I do not disagree with what she says about housing costs. The equivalent scales which Government use do, I think, take some housing costs into account to some extent. If other housing costs are super-imposed the differences between the families may be squeezed a bit. We have to do further work in this area but the early indications are that the general picture does not change radically.

  197. Let us assume for the moment, for the sake of argument, that your analysis is correct, in your memorandum you want couples with children to be given fiscal advantage. Could you explain to us what benefits you think will accrue to society from so doing? I must put to you the alternative point of view that if you give these sorts of families, married couples, a financial advantage that might well lead to more poverty and social exclusion amongst the others. The first question is what advantages do you think will accrue to society if we follow the route you are suggesting?
  (Mr Beighton) We start where the Government started in its Green Paper on supporting families, where it said that marriage was the most secure basis for bringing up children. Going back to what Sue Middleton said earlier this morning, when she was saying that perhaps it is not marriage, perhaps it is the extent to which the parental support varies, but of course that does not necessarily conflict because the stable families tend to be the married ones. Only last week there was some evidence which showed the extent to which cohabiting families with children broke up to a very much greater extent than married families with children divorce.[17] Although the work we have been doing is based on earlier academic research done, for example in the Exeter family study, nevertheless I do not think that what Sue Middleton said earlier conflicted with that. It was probably consistent. If what we are wanting to see is a society in which our children have the best education, best health, least likely to have emotional and criminal problems and such like, then surely we want to encourage a society in which that form of bringing up the family is itself encouraged. Then the question comes up: what role has the tax benefit system got in this. I would go back again to what the Government itself has said. Were you to ask the Treasury today what their absolutely fundamental approach to the tax system is, they would refer you to a short section, three paragraphs, in the Red Book which accompanied Gordon Brown's first budget in July 1997. Under a small section called Fair Taxes it started by saying of course the primary aim of tax policy is to raise revenue, etcetera. Then it went on to say that "taxation is not wholly neutral in the way it raises revenue . . . how and what is taxed sends clear signals about the economic activities which governments believe should be encouraged and discouraged and the values they wish to entrench in society." If that were the Government's view as to the role of what the tax system can do, then you would expect to find that it was using the tax system to encourage stable, married families. That is why we are claiming, although it is not relevant in this context, that the withdrawal of the married couple's allowance sent a fairly clear signal that the Government was not perhaps so interested in marriage despite what it said in the Green Paper on supporting families. To leave that to one side as it is not relevant in this context, in this context we are looking at a tax credit system which disadvantages couples. We are certainly not suggesting for one moment that lone parents should not be properly treated with the care and compassion which they are. However, if through the New Deal for lone parents and through other mechanisms you are focusing a great deal of your support and attention on lone parents, then you have to ask yourself the question: what are you actually saying about couples?

  198. We have had a look at your analysis and the effects on society of the present system and of your suggested alternatives. In paragraph 2 of your memorandum, you say that it is wrong to take account of a couple's joint income and savings when calculating their entitlement but then to ignore their joint needs and expenditures. What methods do you have to suggest for calculating joint needs to rectify this?
  (Mr Draper) What we are saying is that there is a fundamental design fault in the Working Families' Tax Credit which seems to us to be likely to be carried over. That is that because it does not take account of two adults in a family where there is a couple, whether they are cohabiting or married, it inevitably is not going to achieve the Government's objectives. We notice that some of the evidence you have received has suggested that the ICC should be fixed at a level, (or that Child Benefit should be fixed at this level), which will lift all children of working parents out of poverty. Our work suggests that is almost statistically impossible, if you build on the structure we are inheriting. Some way has to be found of structuring the credits so that they take account of two parents in the household, if there are two parents. The way that is done for the out of work benefits is that two parent families set a higher basic credit and that would be one technical solution. What we are suggesting in our paper is that rather than thinking in terms of an Integrated Child Credit we should be thinking about an Integrated Family Credit. The intellectual foundations for this are to be found in the out of work benefits and in the Housing and Council Tax Benefits. It was a mistake to build on the foundations of Family Credit and its predecessor.

  199. May I refer you next to paragraph 6? You say that children in families headed by couples are more likely to end up in poverty. That is quite an important statement. Can you justify that and explain it to us?
  (Mr Draper) Yes. Chart 1 shows that. That is not the same thing as saying that they are more at risk of being in poverty. What we are saying is that if you start off with identical pre-tax income, you are much more likely to find that a working family headed by a couple is in poverty—there is a distinction between out of work families here. You just cannot get away from the figures; it is the couple who will be left below the poverty line. In fact our figures are not as generous to lone parents as they could be because we have not assumed any maintenance payments. If we had assumed any maintenance payments, their entitlement to Working Families' Tax Credit would be higher and therefore their bars in Chart 1 would be further up the chart.

  200. A last question relates to paragraph 10. You say, "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". Can you point us to any of the evidence for this statement?
  (Mr Beighton) The particular study to which we are referring there is the Exeter family study and I should be happy to give the Committee the precise details of that.[18]

  201. You can send that. I am not sure whether the Committee Office have it but you can send it to us anyway.
  (Mr Beighton) The suggestion being made earlier today was that is perhaps no longer relevant and is being overtaken by further evidence, I do not think from what we were told this morning however, that the two bits of evidence are inconsistent at all.

  202. Where you quote evidence like that you are suggesting that families are healthier and happier and economically better off and so on compared with those who are not married or cohabiting. Is it not possible that you could argue the other way round, that unstable elements in the community tend not to get married and not to form stable partnerships and they tend to be ones who report unhappiness and poor health as you are suggesting?
  (Mr Beighton) That rather goes back to the discussion we were just having.

  203. It takes us back to Sir Keith Joseph and all sorts of things.
  (Mr Beighton) There is surely a place for saying that the tax benefit system should not discriminate against the type of family unit which is most likely—obviously there are individual examples to the contrary—to bring up children in a secure basis. If in fact you are providing fiscal incentives for other types of lifestyle, then if that has an impact, it has an impact through children.

  204. What is the evidence that does in fact occur? The clear evidence that being in the married or the stable cohabiting state does have this effect? You quoted the Exeter study.
  (Mr Beighton) The evidence will be objective, will it not, because you will be looking at children in different family households, different situations and following that through? It is not just children, there is also evidence to show for example that the adults themselves are happier and healthier but that is not a question which is perhaps germane to the present issue.

  205. There may be a chicken and egg argument there. May I put the point the other way round to you? If, for example, we are showing that people are in greater problems and social difficulties in lone parent families, is it not a question of not discriminating against the married family you are talking about but discriminating in favour of those in greatest need?
  (Mr Beighton) If I may say so, I think that is playing with words. Whether you are discriminating in favour of X or against Y does not seem to me to be a very relevant consideration.

  206. It depends where you come from, does it not?
  (Mr Beighton) What we are saying is that in so far as the tax benefit system sends messages about the sort of system you want, the sort of society you want, you are sending the signal in favour of the less stable, if I may put it like that, and is that what you want to do?

  207. Maybe they are the ones who need the most help.
  (Mr Beighton) That is the dilemma, is it not? Not necessarily need most help: what we are actually saying in this paper is that they should be treated equally.

  208. Could you explain exactly why you feel that children of couples are more expensive? Is that a relative or an absolute situation?
  (Mr Draper) It is not that we have a view on this. We have just done our figures on the basis of the standard Government equivalent scales which make this assumption. Every statement which is made about distribution of income or number of children in poverty that I have seen has rested on the DSS statistics for the analysis of households below average income. Their assumptions are built into our work. They are not our assumptions. We have simply said that there is an interesting issue here which we do not think other people have picked up and that is that if you want a seamless transfer from non-work to work, if you want to focus on relief of poverty, you have to take account of all members of the family. There is something very odd about building a system which does not deliver an equal amount of assistance to families which are equally poor. It seems to have been almost an accident of policy that the Government chose to build the Working Families' Tax Credit, which I personally very much approve of in principle, on the foundations of Family Credit. Had they built it on the foundations of Income Support or Housing Benefit. We should have a more coherent structure, we should actually be relieving more families in poverty, have better distributional effect and we should be supporting more stable families.

  209. Why has it been done that way? This is going to sound terribly party political but nobody could disagree with trying to relieve child poverty, but that is not actually, given the evidence we heard earlier, what we are aiming at here, we are aiming at family poverty. It does not quite have the same ring to it, does it?
  (Mr Draper) I am not sure you can draw a distinction between child poverty and family poverty.

  210. Going back to the evidence Sue Middleton gave, she actually suggested that there is not actually much difference in terms of money spent on children from different families. What does happen is that in poorer families it is the parents who lose out. I think that was what she said. Has this been designed this way to be eyecatching? Removal of child poverty, when actually we are not looking at that, are we? We are looking at household poverty.
  (Mr Beighton) May we take that in two stages? We start with the change from Family Credit to Working Families' Tax Credit and that was done in the way that it was done, as I see it, to make quite a speedy change on a fairly minimal basis, and not much was actually done apart from renaming it. What was a benefit became a tax credit and this enabled it to be handed over to the Inland Revenue to administer and this enabled the payment to be made in some cases, only about 55 per cent of the cases, through the employer and through the pay system. That was the reason for the change from a benefit to a tax credit. What we are now told is that the Government has set out its twin goals: employment opportunity for all and tackling poverty, in particular the commitment to abolish child poverty within a generation. It seems to me that you cannot really look at the Integrated Child Credit in isolation because for any family you have a number of sources of income coming in. One of the great difficulties which has been pointed out is the interaction between all these different credits and benefits which people are getting or taxes they are paying, all with slightly different definitions. Some cumulate on others, some do not cumulate on others and the evidence so far is that the policymakers have not yet really got the measure of the interactions right. They may have done so but the evidence in the public from the work which has been published suggests they have not. As far as the individuals are concerned, they have to run round from authority to authority with different forms of so many pages in length and have real, complex issues, which I am sure you see in your constituency postbag every day. That is why it worries me a little just looking at the Integrated Child Credit on its own and not actually looking at the whole lot together. I do not think we are actually going to get an entirely satisfactory answer to all this until we do try to look more widely at where we are going with the whole tax benefit system.

  211. Given the nature of your proposals but the whole system of what we are trying to do here, is there any danger that the work ethic could be challenged here? Where do we draw the line? If we are saying that couples who live together, preferably married, if we accept your evidence their children are less likely to get into trouble and on and on it goes. How is it possible to target help not purely in a financial sense but in an overall sense? It seems that we are almost challenging the work ethic.
  (Mr Draper) Government have said that they are trying to enhance the work ethic. The difficulty is that, (this is a purely personal view), all reliefs for the family have been stripped out of the tax system and therefore it has had to start with a tax system which is unfriendly to families.

  212. I was getting at your particular proposal rather than what the Government is doing.
  (Mr Draper) I do not think it does attack the work ethic any more than the present arrangements do. What we try to do is suggest a way of delivering a more equitable amount of financial assistance, whether through lower tax or additional credit to those who are poorest.
  (Mr Beighton) The main thing which affects the work ethic is the marginal deduction rate. Here it is very important to look at the whole system and not just look at the taper of this credit or the taper of that credit. I must say I do find that some of the statistics the Government have given about marginal deduction rates are very suspect because they do not do that. They do not take account of Housing Benefit or Council Tax Benefit.

  213. It is on precisely that question but I suspect you will have to write to us with the answer. How should the Treasury and the Inland Revenue properly take account of the interaction with Housing and Council Tax Benefit?
  (Mr Beighton) The Treasury should do so, starting by reading the report of this Committee, the Sixth Report in the current session.[19]

  Chairman: Nine out of ten for that answer. Gentlemen, I am really grateful to you. This is an important inquiry and you are particularly interested in an important part of the argument. We are very grateful for your evidence and we are very grateful for your appearance this morning. Thank you very much. The public session is now adjourned.

18   Note by Witness: Exeter Family Study, Cockett and Tripp, Joseph Rowntree, 1994. See also "Marriage-lite", Mrs Patricia Morgan, Institute for the Study of Civil Society, 2000. Back

19   Housing Benefit (HC 385). Back