APPENDIX 5
Memorandum submitted by Christian Action,
Research and Education (CARE) (TAB 68)
EVIDENCE SUBMITTED BY LEONARD BEIGHTON AND
DON DRAPER ON BEHALF OF CARE
INTRODUCTION
1. The Select Committee is seeking evidence
on issues arising out of the implementation of the Working Families
Tax Credit, the Childcare Tax Credit and the changes to National
Insurance Contributions announced in the Budget on 17 March 1998.
SUMMARY
2. Effects on Families. In many respects
the Budget is very welcome. But it fails adequately to meet the
challenge made by the Select Committee of providing equitable
treatment for different kinds of families. One way of achieving
this would be, as we suggested in our earlier evidence, to give
married couples the option of joint assessment. An alternative
might be to give a family headed by a married couple a further
credit reflecting their additional needs. The cost might be met
by not indexing, or if need be by cutting, the income tax personal
allowance (paragraphs 7 to 12).
3. Incentives. The Working Families Tax
Credit (WFTC) will affect the work incentives of different types
of family in different ways. Lone parents may find their incentive
to take paid work increased. For those without young children
this may well be helpful, but we should be concerned if it induced
those with young children to take paid work unless they wanted
to for non-financial reasons. By contrast, for many single earner
married couples the incentive for the caring parent to take paid
work will be reduced. This adds to the case for our recommendation
in paragraph 1 above (paragraphs 13 to 16).
4. The childcare tax credit (CTC) will
encourage parents to take paid work. In line with the spirit of
the proposals in the green paper on childcare, Meeting the
Childcare Challenge, there should be a corresponding incentive
for them to do the unpaid work of looking after children or dependent
relatives. Raising child benefit is the best means of recognising
the extra costs which children bring. But if the Chancellor carries
out his suggestion that it might be taxed in the hands of higher
rate taxpayers, it must be done in such a way as not to place
married couples at a disadvantage (paragraphs 17 to 21).
5. Employers. Whatever system is devised
for paying the WFTC through pay packets, it must get the credit
into the hands of claimants as quickly and as easily as direct
payments. How the WFTC will apply to the self employed must be
addressed (paragraphs 22 to 23).
6. Claimants. Very close working between
all departments and agencies concerned with benefits and the WFTC
will be essential if a good service is to be provided for claimants.
The scheme appears complex and may be capable of simplification.
There should be consultation with organisations representing claimants
(paragraphs 24 to 26).
EFFECTS ON
FAMILIES
7. In many respects the Budget is very welcome,
especially in so far as it seeks to tackle child poverty and begins
to reverse the policy of shifting the tax burden onto families
and away from single people without dependents. However in other
respects there is cause for considerable concern. The Select Committee
said in paragraph 19 of its Third Report,
One of the challenges of bringing tax and benefits
together is equitable treatment of different kinds of families.
The WFTC (coupled with the reduction in the
rate at which the Married Couples Allowance (MCA) and the linked
allowances are given) does little to tackle this challenge.
8. At present, after allowing for tax and benefits
and adjusting for family ages and size,[8]
a lone parent with one young child has a net income of around
85 per cent of that of a single person without children on the
same gross income.[9]
This figure drops to around 70 per cent if there are two young
children. The comparable figures for a single earner married couple
are around 65 per cent and 50 per cent respectively. When the
WFTC comes in the second half of 1999/2000 these broad relationships
will be maintained at the middle and upper end of the income scale,
but narrow a little at the lower end. However the net income of
a family headed by a single earner married couple will still be
significantly less than that of other comparable families.
9. We argued in our earlier evidence for optional
joint assessment.[10]
Although technically the WFTC may not involve a breach of the
principle of independent taxation, it does not seem right, given
the figures in the previous paragraph, to take account of a couple's
joint income in order to restrict their credit whilst at the same
time denying them the right to pool their other tax allowances
and reliefs. The cost of giving this option to married couples
where the youngest child is under five would be £0.8 billion,
ie. it would be comparable with the full year cost of indexing
the basic personal allowance for the under 65's.[11]
10. An alternative means of putting right the
unfairness at the lower end and in the middle of the income range,
and of meeting the challenge of fairness set by the Select Committee,
would be to adjust the WFTC. A family headed by a married couple
could be given a further credit which reflected their additional
needs. The WFTC should be fixed at such a level that, so far as
reasonably possible, each family on any given gross income would
have the same equivalised net income after tax and benefits.
11. We are seeking to establish the cost of
this proposal, but it might be met by not indexing, or if need
be by cutting the real value of, the income tax personal allowance
which every taxpayer gets. In this way, unlike the increase in
Child Benefit for the eldest child which is being paid for by
the cut in the value of the MCA and hence only by families, the
cost would be met by all taxpayers, including single people without
dependents.
12. Another advantage of recognising in the
WFTC the needs of a second adult is that it would reduce the financial
incentive which the current system provides—and which as
it stands the WFTC will widen—for couples to live apart.
or to fail to disclose their true situation: it can also discourage
reconciliation. This incentive arises because the credit available
to two individuals living separately may be greater than the credit
available to them if they are recognised as living together.
INCENTIVES
13. The committee will have noted that the welcome
reduction in the very high marginal deduction rates has been bought
at the expense of a very substantial increase, from 760,000 to
1,010,000, in the number of families facing rates of 60 per cent
or more.[12]
Moreover the figures which the Government has given are incomplete,
and misleading, without taking account of housing and council
tax benefit and the passported benefits. The actual numbers of
families with very high marginal deduction rates will be well
above those shown. The Government's decisions on these benefits
presumably await the completion of the comprehensive spending
reviews in the summer, and in the meantime any comments can be
only provisional.
14. The Select Committee said in paragraph 20
of its Third Report:
We appreciate that improving work incentives
can play an important role in helping families who might be able
to improve their position through the labour market, For those
with more difficulties entering the labour market, for example
those with young children or other family responsibilities, improving
work incentives will make little contribution to improving family
life.
15. In taking this view forward, the Select
Committee will note the different impact the WFTC will have on
families of different types. In so far as, in addition to the
other measures which the Government is taking through the New
Deal, lone parents will face lower marginal deduction rates following
the Budget, then their incentive to take paid work will increase.
For those without young children or other family responsibilities
this may be helpful in reducing welfare dependency and in providing
a role model for their children. We should be concerned however
if it were to lead to more lone parents with young children, to
whom the New Deal will not apply directly, seeking paid work where,
financial inducements apart, they would choose to look after their
own children at home.
16. By contrast, for many single earner married
couples who will be entitled to the WFTC, the incentive for the
caring partner to seek paid work will be reduced significantly.
His or her marginal deduction rate, which is currently nil, will
go up to 55 per cent or even more. This disincentive is present
within Family Credit, but that Credit applies to many fewer couples
than will WFTC. For this reason our recommendations in paragraphs
9 and 10 above is all the more important. And here again, the
choice of work, paid or unpaid, should not turn on the tax/benefit
position.
CHILDCARE TAX
CREDIT
17. In the green paper on childcare, Meeting
the Childcare Challenge, the Government say:
Parents will always have the primary responsibility
for the care and well-being of their children. It is up to parents
to decide what sort of childcare they want for their children.
This is not a matter for the Government. But it is the
Government's responsibility to ensure that parents have access
to services to enable them to make genuine choices. This means
good quality, affordable childcare for parents who wish to work
outside the home, and support for parents, relatives and other
informal carers who look after children.
[13]
18. However, while the green paper is full of
proposals and ideas for childcare for the children of parents
at work, there is far less about the provision, in particular
the financial provision, for those parents who want to look after
their own children in their own homes. Yet as the previous sections
of this paper have shown, it is precisely those married couples
where one spouse stays at home to care for the children who are
least well treated by the present tax/benefit system and who,
at least for the most part, will be least well treated under the
WFTC. All this despite the evidence that children, especially
very young children, do best if they are looked after by their
own parents in the security of their own homes.
19. We fully accept that one proper aim of social
policy should be to wean people off welfare dependency, and we
welcome those aspects of the New Deal which ensure that all lone
parents whose youngest child is of school age are fully informed
about the opportunities open to them and the financial implications
thereof. But parents should have a choice, which is not influenced
by a tax/benefit incentive to use paid childcare, to do what they
believe in their own circumstances would be in the best interests
of their families.
20. The best way of providing this choice would
be to concentrate resources on improving child benefit especially
for very young children, rather than on an instrument such as
the CTC which relates specifically to expenditure on paid childcare.
This would also be less likely to give rise to the demand for
childcare of sufficient quality exceeding demand and pushing up
the price, with the implications that would have for the cost
of CTC. As the Chancellor said in his Budget Speech,
Child Benefit remains the fairest, the most efficient
and the most cost effective way of recognising the extra costs
and responsibilities borne by all parents.
[14]
The Select Committee will of course be coming
back to these issues relating to Child Benefit when it conducts
its inquiry into it in the autumn.
21. In his Speech the Chancellor also suggested
that an increase in child benefit raised the question whether
higher rate taxpayers should pay tax on it, which must, he said,
be right in principle.[15]
The question arises how this can be done in such a way as to raise
significant sums of Exchequer revenue if, as the Chancellor has
said, it is not to breach the principle of independent taxation.
There is a number of ways, he said, in which this could be done:
it is most important that the way chosen does not in practice
place married couples at disadvantage. The treatment of benefit
for children of remarried couples will also merit close examination.
If however, as we propose, joint assessment were introduced generally,
the taxation of child benefit on a joint basis could follow quite
naturally.
EMPLOYERS
22. Claimants will have a choice of payment
through the pay packet or direct by giro. In some cases it will
important that the payment goes direct to the caring parent so
as to ensure, so far as possible, that the benefit is passed through
to the family. More generally, however, if the link between what
the supporting parent gets in and out of work is to be maintained—and
this is a key Government aim[16]—it
will be desirable for payment to be made through the pay packet.
It is important therefore that, whatever system is devised for
this purpose, it gets the credit into the hands of the claimant
as quickly and easily as direct payment.
23. A significant proportion of people who are
eligible for the WFTC are likely to be self employed: equally
a substantial proportion of the self employed are likely to be
within its scope. The Government has so far said nothing about
how the arrangements for the credit will apply to them; and in
his evidence to the Committee, Mr Martin Taylor said that he had
not focused on the self employed but would do so.[17]
The Committee may wish to pursue this matter with him.
CLAIMANTS
24. Operational and practical issues also arise
from the viewpoint of claimants. The interfaces between the Benefits
Agency, the Employment Services Agency and local authorities are
vital today to the efficient and effective payment of benefit.
When the Revenue becomes responsible for WFTC there will be another
interface when a claimant moves in or out of work or falls ill.
The various computer systems will need to be compatible so that
information can be freely exchanged—legislation may be needed
to ensure that this can be done—and individuals must be
able to deal with all their affairs without hassle. This would
seem to require the development of one-stop enquiry centres where
information about all aspects of tax and benefits can be obtained,
and where details of any change in an individual's circumstances
can be fed straight into the data bank of each department and
agency.
25. If individuals are to be encouraged to claim
the proper amount of WFTC due to them, it is essential that its
rules should be as simple as reasonably possible. In particular,
the need to calculate a claimant's liability to income tax and
national contributions before calculating his or her eligibility
for credit seems likely to add to the possibility of confusion
and error, particularly for example where an individual is on
an emergency or Week 1 PAYE code so that an adjustment to his
or her tax liability may subsequently fail to be made. With the
bringing together of the systems it ought to be possible to use
the same figure of income for all purposes.
26. We welcome the consultation which the Inland
Revenue will be having on the operational and practical issues
with employers. This consultation should be widened to include
organisations representing claimants.
CARE
June 1998
8 This adjustment has been done by the use of the tool
known as the McClements scale, which is generally used by the
Department of Social Security. See para 4 of Don Draper's paper
for the Committee's First Report HC 283 Appendix 27. Back
9
These figures exclude the impact of Housing Benefit and Council
Tax Benefit. Back
10
CARE's evidence for the Committee's First Report, HC 283 Appendix
22. Back
11
Hansard, 22 April, 1998, col. 260w. Back
12
Table 3.3, Financial Statement and Budget Report, March
1998. Back
13
Paragraph ES7. See also para 1.26. Back
14
Hansard, 17 March 1998, col. 1107. Back
15
Hansard, 17 March 1998, col. 1108. Back
16
The Modernisation of Britain's Tax and Benefit System, Number
Three, para 2.15. Back
17
Third Report, Q 314 3, 327-9. Back
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