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
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
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:
(ii) advantages and disadvantages of CB;
(iv) rates of CB and the age of children;
2. POLICY CO-ORDINATION
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".
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. IS CB THE
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".
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
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".
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."
The Chancellor was not asked to elaborate.
4.4 The question is on whom the liability should
fall. There are five possibilities:
(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
hernormally of course herhands. 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 liablesee 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 greatersome
£m450and, 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.
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.
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
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.
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
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
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
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 mostin
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."
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. FIRST CHILD
6.1 The argument here is similar to that in
Section 5for 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. WORK INCENTIVES
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
7.5 In our view the Government should certainly
be trying to reduce marginal deduction ratesand 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
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
Hansard 17 March 1998, col 1107. Back
Hansard 17 March 1998, col 1108. Back
Evidence to Select Committee on the Treasury: Q399, 31 March 1998. Back
See DSS analysis of Households Below Average Income 1979 to 1994-95
Appendix 4. Back
Hansard 18 March 1988, col 396-398. Back
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
Small Fortunes. Back
Evidence submitted by "Full Time Mothers" in response
to the consultative document Meeting the Childcare Challenge. Back
Home Secretary's speech, 23 July 1998, para 19. Back