Tax/Benefit Integration: implementation issues

  51. In her study the integration of taxes and benefits for working families with children, Ms Pamela Meadows of the Policy Studies Institute outlined four broad options for integration:

-  The Inland Revenue could assess entitlement based both on taxable income and on family circumstances. It would devise a new set of codes that produced negative tax outcome for people in particular situations. Employers would deduct the credits paid out from the total PAYE due.

-  A major amendment could be made to the PAYE system so that household and family information has to be collected form all employees by their employers. Those whose taxable income fell below particular levels would, depending on their family circumstances, have a credit added according to an additional set of calculation tables.

-  The PAYE/National Insurance contribution system could be amended so that employers are asked to collect additional information about household and family circumstances only from people whose earnings apparently place them in the qualifying zone. A manual or simple computer programme would then calculate the benefit entitlement which would be paid with wages.

-  The DSS could assess entitlement based on individual circumstances set out in claims, and instruct the employer what should be paid. The employer would then deduct payments from National Insurance contributions, as with the refundable elements of sick pay and maternity pay.[83]

  52. The Institute for Public Policy Research assessed five approaches to tax/benefit reform and welfare to work. These are:

•   simplification and integration of in-work means-tested benefits including a low income mortgage benefit

•   a non-means-tested approach which reduces social rents, increases Child Benefit for the under 5s, raises the tax threshold and introduces a minimum wage

•   a participation income alongside the existing National Insurance scheme

•   Earned Income Tax Credit

•   merging Income Support and Family Credit.[84]

The Centre for Research in Social Policy at Loughborough University considered four possible alternative models.

•   Employment Credit

•   New Family Credit

•   Career Start Benefit

•   Credits, Parental Responsibilities and Out-of-work Benefits.[85]

We intend to look further at these models and others in our future Reports on this subject.

  53. Whatever the model chosen, careful planning and perhaps piloting will be needed. Andersen Consulting proposed a form of piloting which we will wish to examine in more detail: the creation of a tax/benefit integration `laboratory' established through public-private partnership. The laboratory would have a remit to help the Government explore how integration could be advanced taking individual's real experience into account.

    "The laboratory would be an office, appropriately equipped and staffed, in which the actual tax and benefit processing for its customers (both citizens and employers) could be performed. It would have three goals to fulfil its aim:

    -  to produce hard evidence as to which form(s) to tax-benefit integration will deliver the economic, financial and social outcomes that are sought by Government;

    -  to find ways to exploit the legacies (legislation, processes, skills, culture, IT systems, etc.) and to deal with the other obstacles, that may otherwise appear to make integration impossible;

    -  to have begun to address the root causes of any institutional or citizen resistance to integration and to secure public support."[86]

Andersen Consulting described the laboratory's workings:

    "A small, clearly defined population of citizens and employers is appropriate to these goals. This could be achieved by focusing the office on a particular geographic catchment or `zone'-perhaps a single travel-to-work area within one local authority-and selecting further from the population with that...citizens' participation could be left voluntary but formal, or be made compulsory."[87]

  54. Electronic Data Systems (EDS) provided valuable evidence on orienting projects to services and process, rather than legislation and product.[88] EDS uses a nine-tier framework to differentiate the levels at which enterprises can be integrated. Their memorandum detailed these nine levels with examples drawn from the UK tax and benefit systems (shown at Appendix 5). EDS also identified six major initiatives at the process level which they believe would be essential to effective integration but even without any form of integration would contribute significantly to overall accuracy, speed and cost effectiveness:

-	Citizen's Index	A single point for registration, tracing and authentication
-	Information Broker	Gathering, storing and making available information, including relationships across government
-	Citizen's Account	Posting all government related entitlements and liabilities to the accounts of each citizen; payment and collection
-	Data Matching	Scanning data to find cases needing further work
-	Statistics	Scanning and analysing data to produce information to support planning and tracking, especially for policy, expenditure and operations management.
-	Government.direct	Making it easier for the public to contact and work with government.[89]

Tax, benefits and family life

  55. A considerable part of the discussion of taxation and benefits revolves around work incentives and rewards for work and initiative. Another primary aim of any well-functioning system should be to promote stable family life and support child rearing. The terms of reference of the Taylor Task Force, set out in the Labour manifesto, refer specifically to strengthening family and community life. The background to these concerns are the changes to family structures that have occurred within the past 30 years and the impact that they have had on child-rearing and family formation:

-  The number of first marriages has decreased substantially since the late 1960s; in 1994 there were 338,000 first marriages, 40 per cent fewer than in 1971.[90]

-  Over the same period, the number of divorces has more than doubled so that the UK had the highest divorce rate in the European Union.[91]

-  There are high numbers of re-marriages; in 1991 37 per cent of all marriages involved at least one divorced partner.[92] This high number of re-marriages brings with it more step-families and shared custody.

-  The number of births outside marriage rose from 8 per cent in 1971 to more than one-third in 1994.[93]

-  Whereas fewer than one in ten children was brought up by a lone parent in 1972, the proportion is now one in five.[94]

-  The proportion of families with dependent children headed by a lone parent increased from 8 per cent in 1971 to 23 per cent in 1993.[95]

  56. The statistics involving marriage and family formation provide only part of the picture. In the last thirty years there have been enormous changes in the social and economic roles of men and women. Perhaps most relevant to this inquiry is the change in the position of women. The welfare state was established when society was almost exclusively based around the married couple and their children, in which the father was usually the main financial breadwinner and the mother the main care-giver (regardless of whether or not she worked in the labour market). The major changes to the family have opened up important and controversial issues on the most suitable family formation to raise children, the rights of cohabitees in relation to married couples and how child care and care for elderly or sick relatives can be best catered for now that fewer people can expect such support without charge from their families. Any effective integration of tax and benefits needs to have clear objectives about how families with children are to be supported and whether it is desirable or possible to achieve neutrality between one and two-parent families and married and co-habiting couples.

  57. At present, large numbers of children are being raised in families on low income. According to the Child Poverty Action Group, in 1994/95, 2.4 million children (18 per cent of all children) lived in non-working lone parent families and 1.7 million children (13 per cent of all children) lived in two parent households where neither parent was working.[96] Added to this are those families on low wages receiving Family Credit; 747,000 households, containing 1,510,000 children, (12 per cent of all children).[97]

  58. Ms Patricia Morgan in Are Families Affordable? maintained that society as a whole had retreated from supporting families with children. Instead, it had concentrated on alleviating poverty in lone parent families. Ms Patricia Morgan believed that two parent families tended in fact to be the most disadvantaged: she cited figures that of all those in the bottom 10 per cent of the population (by income), 46 per cent are couples with families while only 12 per cent are lone parents.[98] According to Ms Patricia Morgan the relative financial decline of the family has been encouraged by the changes in the structure of taxation and argued that a significant change in the structure of taxation had been the abolition of tax allowances for children and their replacement by Child Benefit. She believed that the mechanics of the benefit system discouraged parents living together with their children.[99]

  59. The memorandum from CARE (Christian Action Research and Education)[100] argued that families with children as a whole, whether two parent or one parent, have been losing out in terms of the tax burden compared to other taxpayers and added that married couples where one spouse stays at home to care for a dependent child or elderly relative have been in the main losers.[101] The Children's Society believed that there remain significant disadvantages in tax and benefit terms for families with children and that children of lone parent families in particular are likely to find themselves in poverty.[102]

  60. In his memorandum to the Committee, Mr David Webster, University of Glasgow, regarded changes to the labour market as determining the growth of lone parenthood rather than the effects of the tax and benefits system. He argued that it was the rise of male joblessness which is by far the most important cause of the rise in lone parenthood and that, contrary to the claims made by Charles Murray[103] and those influenced by him, tax and social security arrangements were not an important influence on family structure. He also contended that the main influence on female lone parents' propensity to work was the availability of work in their locality.[104] The section on Child Benefit below further discusses adequate support for children.

Wallet -v- purse

  61. At present, Child Benefit and Family Credit are almost always paid to the female partner of a couple. Some commentators have pointed out the importance of independent income going to women. For example, Professor Ruth Lister cited preliminary findings from research currently being undertaken which indicated that Family Credit is valued because it is paid directly to women.[105] According to Ms Pamela Meadows:

    "There is consistent evidence that payments directly to the mother are more likely to be spent on the children or on household essentials than payments via wages to the father. One issue that must be confronted is whether the objective is to reward the worker (in which case the pay packet may be the appropriate vehicle) or to improve the well-being of the family (in which case payment directly to the mother is the answer)."[106]

  62. Ms Patricia Morgan did not believe that fear of income disadvantage within marriage should be the determining factor in deciding policy and argued that there was only a very small minority of families, usually where there was a lot of conflict or violence, where the man did not take the bulk or all of his income for general domestic expenditure.[107] She was in favour of encouraging male responsibilities:

    "The rise of disadvantage in families is very much connected with the demise of the male breadwinner. Because of employment changes, and tax changes, men cannot support families as they could in the past. I do not think we should be discouraging them. We need to encourage them."[108]

Ms Sally Witcher of the Child Poverty Action Group believed inequitable distribution of income within marriage was not necessarily a small scale problem and that even if it was only in a small minority of cases, there would still be very strong arguments indeed for ensuring a more equitable distribution of income within households where it was possible.[109]