Select Committee on Social Security Report


Memorandum submitted by Leonard Beighton and Don Draper on behalf of CARE (Christian Action,

Research and Education) (CB 14)


  0.1 The Government's policy on taxation and benefits should be coordinated with family policy.

  0.2 There is a good case for increasing child tax credits rather than, or in addition to, increasing Child Benefit (CB). To do so would serve a similar purpose as increasing, and at the same time taxing, CB. By contrast, Childcare Tax Credits (CTC) should not be increased as they do not benefit all children.

  0.3 There would be significant difficulties in taxing CB, in particular in finding a way of treating single earner families and two earner families fairly whilst retaining the key elements of independent taxation. A threshold which was expressed in terms of gross incomes would be unfair as it takes no account of the size and composition of the family. This problem would be overcome if the threshold could be expressed in terms of a family's equivalised income which does take account of both. Many of the problems stem from the combination of a benefits system based on family income and a tax system based on individuals' income. Joint assessment or transferable allowances, for which we have argued previously before the Committee, would provide an answer.

  0.4 There is an insufficient case for varying the rate of CB with the age of the child. However there is a good case for increasing the benefit for one child under 5 in each family. This would assist towards the cost of professional childcare for mothers who go out to paid work and provide some compensation for women who are not earning because they are caring for a child at home.

  0.5 An increase in CB would not have much impact on incentives to work.


  1.1 The Select Committee is seeking evidence for its inquiry into Child Benefit (CB) under eight headings. CARE wishes to give evidence on six issues:

    (i)  policy coordination;

    (ii)  advantages and disadvantages of CB;

    (iii)  taxation;

    (iv)  rates of CB and the age of children;

    (v)  first children;

    (vi)  work incentives.


  2.1 Policy on tax and benefits should not be considered in isolation from other policies, in particular family policy. The policies need to be coordinated. As the Home Secretary said when talking about family policy:

  What has gone wrong in the past has not been the result of malign strategy or evil intent, but a failure to coordinate and predict the results of disparate policies".[45]

  2.2 However, there is little evidence to date that this lesson has been learned or that the Government's policies on tax and benefits have taken due account of the Government's family policy. This involves strengthening the support for marriage, and supporting parents who want to bring up their children full-time as well as those who go out to paid work. We hope the Committee will stress the need for coordination.


  3.1 In his Budget Speech in March the Chancellor of the Exchequer said:

  "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".[46]

  3.2 Channelling resources through CB strikes the right balance between those families where the children are cared for at home by their parents and those who use out of home child care facilities. It gives parents more freedom to make their own decisions as to what is best for their children and their family. However, as the Chancellor also recognised, it does have adverse distributional effects and some way may need to be found for clawing back some of the benefit paid to more affluent families. The problem is how this can be done in an efficient and acceptable way.

  3.3 If resources are limited there is, of course, a case for channelling resources to those families who are in greatest financial need. One way of doing this and reducing the net benefit paid to better off families would be to use the mechanism of the Working Family Tax Credit (WFTC). The WFTC contains two credits for children: the Child Tax Credit (CTC); and the Child Care Tax Credit (CCTC). The first goes to all families within the WFTC whereas the second goes only to those who use professional child care facilities.

  3.4 A distinction should not be made between families who use child care facilities and those who do not. Increasing CTC would avoid making this distinction and would focus help on less well off families without raising the problems of taxing CB whilst retaining independent taxation. Given the practical difficulty of taxing CB, to which we turn next, there may be a better case for increasing CTC despite the attractions of CB to which the Chancellor referred.

  3.5 Increasing the CTC would, of course, not help non-working families. But a comparable level of help could be delivered to these families by corresponding increases in the child component in the Income Support and Job Seekers Allowances.

  3.6 We recognise that any increase in the value of the WFTC will extend the disincentive effect of high marginal deduction rates up the income range, but this has to be balanced against the better distributional effect and in particular against the advantage of treating one earner and two earner families more equitably than we fear may be the case if CB is increased without changing the tax system.


  4.1 In his Budget Speech in March 1998 the Chancellor of the Exchequer said:

  "It must be right in principle that if child benefit is raised in future, then there is a case for higher rate taxpayers paying tax on it".[47]

  4.2 CARE has no difficulty with the principle that any increase in CB should be partially clawed back from the best off. But doing this through the tax system as it stands today is fraught with difficulties which will need the most careful handling even if liability is restricted to higher rate tax. Major unfairness could easily result.

  4.3 These difficulties arise from the interaction of a benefit system which is based on families and a taxation system which is based on individuals. In giving evidence to the Select Committee on the Treasury, the Chancellor of the Exchequer was asked by Mr Kidney:

  "If [taxing CB at higher rate] is to be worthwhile would you not have to assume that parents are together higher rate taxpayers and not treat them as individuals?"

  (Mr Brown): "There is a number of ways this could be done and this is being looked at, but it does not breach the principle of independent taxation."[48]

  The Chancellor was not asked to elaborate.

  4.4 The question is on whom the liability should fall. There are five possibilities:

    (i)  on the child;

    (ii)  on the caring parent;

    (iii)  on the supporting parent;

    (iv)  on the parents jointly;

    (v)  on the parents jointly if they have opted to be assessed jointly.

  We examine each of these possibilities in turn. We use the term "caring parent" as shorthand for the person who is entitled to CB, but we would emphasise that we would see both parents as equally responsible for the care of the child. This should be fully taken into account in the formation of both tax and benefit policies.

(i) The Child

  4.5 Since CB should enure to the benefit of the child,, it would be appropriate in principle to regard the caring parent as no more than a bare trustee and to tax CB in the hands of the child, in the same way as other income (apart from that derived from parents). This might be the logical method but the yield would be minimal.

(ii) The Caring Parent

  4.6 Since the caring parent is the recipient of the CB it might be thought appropriate to tax it in his or her—normally of course her—hands. She might then have higher rate tax to pay if her income from all sources, including CB, exceeded the higher rate threshold (or whatever figure was chosen). A woman whose total income from all sources exceeded that figure would be liable to higher rate tax whether or not she had children and, if she did, however many children she had and however many CB's she received. Since the abolition of child tax allowances the tax system takes no account of the number of children a person has, but nor does one's taxable income. Once a person's taxable income depends on the number of children he or she has, it seems unreasonable in determining their tax liability to take no account of their responsibilities for their children.

  4.7 In any case the yield on this basis would be £m 40 only. It seems hardly worth doing.

(iii) The Supporting Parent

  4.8 Where, or in so far as, the caring parent is not a higher rate taxpayer, the question whether any liability was due might pass to the supporting parent where there was one. He (as it would normally be) would be liable if his own income plus CB received by the caring parent exceeded the higher rate threshold (or whatever figure was chosen) even though he did not receive the CB himself and it was not part of his income. The argument would be that he benefited indirectly from the CB because he would pay less to support the children than would otherwise be the case.

  4.9 Nevertheless this would:

    (i)  be in breach of the principle of independent taxation which the Government has said is to be maintained;

    (ii)  involve taxing people on income they did not receive;

    (iii)  require some loss of privacy for the caring parent since the supporting parent would have to be given some knowledge of her income and tax position;

    (iv)  in the absence of child tax allowances involve the same unfairness as would apply if the caring parent were liable—see paragraph 4.6 above;

    (v)  entail taxing some families where others on much larger incomes were not taxable eg a family where, after taking account of CB, one spouse had income of £35,000 and the other of nil would be liable, whereas a family where both parents had an income of £30,000 (ie family income was £60,000) would be exempt even though their income was £25,000 higher than that of the first family. This would be grossly unfair and have no regard to the needs of the children;

    (vi)  in practice discriminate against marriage, since a couple who were cohabiting or living together in a tighter or looser arrangement could, through ignorance, misunderstanding or fraud, fail to recognise when liability arose.

  4.10 However, the yield would be much greater—some £m450—and, since the income of the parents was not aggregated, one element of independent taxation would remain.

(iv) The Parent Jointly

  4.11 To overcome some of the disadvantages listed above, it would be possible, despite what the Chancellor said to the Select Committee on the Treasury quoted in para 4.3. above, to abandon the principle of independent taxation for the sole purpose of taxing CB. No-one would then be liable on income they did not receive and families would be treated equally in this respect however their income was split between the parents. However, the other disadvantages listed in pare 4.9 would remain.

  4.12 Some way does have to be found for treating fairly single earner families and two earner families. The WFTC does this by aggregating family income. The problem is to find a way of achieving the same result within the context of a system of independent taxation. What would be completely unacceptable would be to end up with a system and a limit which took no account of the size of the family or family income.

  4.13 A good case could be made for choosing an income threshold which had regard to the family's "equivalised income" i.e. the DSS adjusted figure which takes account of the size and composition of the family.[49] This measure of income is used for measuring the distribution of incomes and forms the basis of most statements about poverty. It might be thought that CB should only be taxed if the family fell, for example, into the top decile of the income distribution.

  4.14 Gross income is a poor guide as to where a family would fall in the income distribution. The Parliamentary Under Secretary of State at the Department of Social Security has said, for example, that a lone parent with one child with a gross weekly income of £400 (£20,400 pa) would fall within the top decile of the income distribution. A single earner married couple with two children would need an income of £931 per week (£48,214 pa) to fall within it. A couple with two children aged four and six on £400 would fall within the lower half of the income distribution.[50] DSS has told us that a married couple with two children aged 4 and 6 on £600 per week (£31.200 pa i.e., a family which could be caught by a proposal to tax CB's received by the non earning spouse of a higher rate taxpayer) would fall in the eighth decile, the same decile as a lone parent on £300 per week (£15,600 pa).

  4.15 These figures demonstrate clearly why the use of a threshold tied to gross incomes would be most unfair, and why, if this were a practical option, equivalised incomes would provide a much fairer basis for taxing CB.

(v) The Parents Jointly If They Have Opted To Be Assessed Jointly

  4.16 If however, the Government are wedded to the idea of clawing CB back from affluent families through the ordinary tax system, the objections to doing so would be far less if a married couple were able, if both spouses so wished, to opt for joint assessment, or at least for their tax allowances to be spread between them as they wished under a system of transferable allowances. This would bring their tax liabilities closer into line with those of two earner couples and would make it easier to have a common threshold. There would still be some anomalies but these would be less glaring. There are also, of course, many other arguments for adopting this basis as we set out in our earlier evidence to the Committee.[51]

  4.17 The real problem is that the Government have got themselves into a quagmire by trying to bring together the tax and benefits systems without first sorting out the different basis on which each is assessed. The WFTC will be the first casualty of this lack of foresight. The taxation of CB could be the second.


  5.1 Unlike other benefits and the child tax allowances which CB replaced, CB does not increase with the age of the child. However, a higher rate of CB is paid for the first child (£11.45 compared with £9.30).

  5.2 Child benefit, and family allowance before it, have always been seen as contributions to help meet the needs of a child rather than as a benefit paid to cover the cost of a child. A Rowntree Report[52] has suggested that CB meets approximately one fifth of average spending on a child and it has confirmed that children do have more spent on them as they get older although less than has hitherto been assumed. The McClements scale used by the Department of Social Security to determine the comparative level of benefits also assumes that the cost of children does increase with age.

  5.3 There are two cost elements. First, there are the direct costs, which the Rowntree study and the empirical work which underpins the McClements scale have attempted to measure. Secondly, there is the indirect cost to a family of a parent giving up work to care for the child or of paid childcare. Conventionally, CB has only taken account of the former and as others have noted[53] the receipt of CB does not take account of the latter and is available both to earning parents and to parents at home. Because these indirect costs are more likely to be incurred when the children are young there is a case for paying more benefit for younger children.

  5.4 We note that the Home Secretary said in the speech to which reference has already been made:

  "We shall provide additional support not on the basis of family structure [tie one parent or two] but on the basis of family need. We also inherited a benefit system which provided less help for children when families need it most—in the early years, when there is a cost to families it the mother stays at home or a cost in childcare it she goes to work."[54] (emphasis added)

  5.5 On this argument there should be a higher rate of CB for the first child or for children under school age. On the other hand, if the evidence is that expenditure does increase with age there is a case that CB like other benefits should increase as the age of the child increases. We note that in the same paragraph as that quoted above, the Home Secretary also said:

  "The case for additional support for children in poor families is strong but that support should he on the basis of the needs of the children."

  5.6 The arguments are finely balanced but in general (and subject to what we say in the next section) they do not point clearly towards introducing any element of varying the rate of benefit with the age of the child.


  6.1 The argument here is similar to that in Section 5—for many families the biggest cost of a first child is income foregone by the caring parent who gives up work to look after the child or the cost of childcare.

  6.2 A mother who wishes to stay at home to look after her own children rather than take paid work will do so when she has her first child and subsequent children will not affect that decision. A mother who wishes to remain in paid work will incur childcare costs. On the argument that CB is to support families there ought to be (as happens at present) a higher rate of benefit for the first child.

  6.3 If on the other hand childcare is to provide for the needs of children the case is for a higher rate for older children and not for the first child.

  6.4 On balance we think that there is an insufficient case for varying the rate paid for the first child whatever age he or she may be. However, there is a good case for increasing the benefit for one child under 5 in each family. This would help the parent who chooses to stay at home and care for her own children. It is important to ensure that all families should be treated equally and to strike a better balance between those who want to, or need to, purchase childcare and those who want to care for their children at home.


  7.1 CARE supports an increase in CB along with an increase in CTCs because we see these measures as among the best means of tackling child poverty and benefiting all children whatever their circumstances or family set up. Even if it is taxed in the hands of affluent parents, one of the advantages CB does have over the WTC is that for the majority of families it will not reduce the incentive to work or distort the choice many parents face between working and caring.

  7.2 Any increase in CB which is likely to be affordable will have little impact on the poverty and unemployment traps. This is for two reasons.

  7.3 First, in the very large majority of cases, the earning spouse in single earner married couples will not be eligible to receive CB. Similarly, in most cases of two earner couples the main earner will not be eligible to receive CB. Most of those receiving CB will either be the second earner in two earner couples or lone parents and in many cases these people will only be in part time work and not drawing sufficient income to bring them into the ambit of the poverty and unemployment traps.

  7.4 Second, for those within the traps, an increase in CB would not directly affect their marginal deduction rate. There might be some who, faced with an increase in their income which was not subject to deduction, would feel it less necessary to increase their earnings. By contrast others, with that greater cushion behind them, might be less concerned by the extent of the deductions from their earnings and continue to try and increase them.

  7.5 In our view the Government should certainly be trying to reduce marginal deduction rates—and because of the impact of housing benefit and council tax benefits the extent of the reductions in marginal deduction rates made in the 1998 Budget was considerably smaller than the Government suggested at the time. But this issue can be best tackled directly by lowering the tapers in the WFTC and in the housing and council tax benefits than very indirectly by an increase in CB. The failure of the Comprehensive Spending Review to tackle these issues was a disappointment.

  7.6 There is, as we have said, a good case for increasing CB along with CTCs as a means of reducing child poverty. The case for an increase in CB is not weakened by its impact on incentives or the welfare to work initiative.

Leonard Beighton and Don Draper

Tax Advisers to CARE

September 1998

45   Home Secretary's speech on 23 July 1998 on the occasion of the launch of the Lords and Commons Child Protection Group's Report-Home Office transcript of speech as delivered (paragraph 10). Back

46   Hansard 17 March 1998, col 1107. Back

47   Hansard 17 March 1998, col 1108. Back

48   Evidence to Select Committee on the Treasury: Q399, 31 March 1998. Back

49   See DSS analysis of Households Below Average Income 1979 to 1994-95 Appendix 4. Back

50   Hansard 18 March 1988, col 396-398. Back

51   See written evidence submitted by CARE (appendices 22 and 23 to the Committee's First Report (TAB31 and 31A) and the further memorandum dated 19 January 1998 (TAB49). Back

52   Small Fortunes. Back

53   Evidence submitted by "Full Time Mothers" in response to the consultative document Meeting the Childcare Challenge. Back

54   Home Secretary's speech, 23 July 1998, para 19. Back

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