Select Committee on Social Security Appendices to the Minutes of Evidence


Memorandum submitted by Ms Mary Campbell (ICC 09)


  1.1  The "issues to be addressed" listed in the Press Notice, whilst covering the essential elements of the proposed ICC, do not address three crucial issues: (a) The assumptions behind the choice and design of the ICC; (b) The unintended effects it is likely to have if implemented as proposed; (c) How it will interact with other child-related tax credits/DSS benefits. The proposed design of ICC creates/reinforces a powerful set of new financial incentives which have not been recognised in the public debate so far and may amount to social re-engineering of the family structure at certain income levels. If the Committee does not consider these assumptions and likely effects, its conclusions are likely to be impaired.

  1.2  Assumptions: The structure of financial incentives in the ICC suggests that its designers are basing policy on the following assumptions (inter alia): (a) Middle- and higher-income people with children should be severely penalised financially compared to people on the same incomes without children; (b) Financial disincentives for parents to live together, which have been an important factor in the growth of lone parenthood amongst those dependent on means-tested benefits, will not affect the behaviour of middle and higher-income parents; (c) Income levels fairly reflect the financial resources of almost all households. (Note that the childcare subsidies in WFTC also contain assumptions which have gone widely unrecognised: eg that, for parents, childcare is "leisure" for which parents should pay a high price if they choose to do themselves; and that children aged under two need no more parental attention or individualised childcare selection than those aged, say, 14.)

  1.3  Unintended effects: The unintended effects of these financial incentives are likely to include the following: (a) an increase in lone parenthood; (b) a disincentive for parents to be married; (c) a downgrading of the perceived value of parenting, especially among those on middle and higher incomes, with a further decline in the proportion of better-off women who give birth; (d) disincentives to increase earnings/incentives to structure family finances in particular ways.

  1.4  Interaction with other policies: The amount of new tax credit subsidy (via WFTC/CTC) is already large and ICC will merely be a part of this in households' budgeting plans.


  2.1  Middle- and Higher-income people should be severely penalised financially compared to people on the same incomes without children: Of course, the Government is quite right to focus policy on massively shifting money into the hands of lower-income parents. What is bizarre about the Child Tax Credit (CTC) and the ICC is the assumption that middle- and higher income parents should get no subsidy. CTC replaced the Married Couples Tax Allowance which was available to all regardless of income. Other tax allowances (eg the personal tax allowance, pension contribution tax allowances) are available to all regardless of income level (and, in absolute terms often benefit the richest most). I believe the government argues that withdrawing CTC/ICC as income rises is enabling it to offer more to those on lower incomes. Surely, on this logic, there is a far stronger case for the personal tax allowance, pension contribution tax allowances and so forth to be tapered away. Why have this rule only for parents, who are responsible for the future of the whole nation? The argument is also peculiar within the Government's overall policy of shifting money to families with children, in general (with more going to the poor). There are umpteen different ways in which the government could pay out the same amount to lower income families, whilst not taking it away from higher income parents or increasing the income tax rate rates: eg, convert the personal tax allowance into a tax credit; raise the HEL in NI (but don't abolish the HEL—that would also have unintended damaging effects!), restrict the tax offset for pension contributions to the standard rate. Richer families with children would be paying more tax—but not in ways that are limited to families with children. The majority of the money would come from richer families without children.

  2.2  Financial incentives for parents to live separately will not affect the behaviour of middle- and higher-income parents. Research evidence suggests that control of the meagre amounts available from means-tested benefits has been one factor in the increase if lone parenthood among the poor. (If a mother lives with a man, she effectively does not get paid benefits due for her or her children, even if the man she lives with is not their father.) ICC will be paid to the mother, and in this respect is far better for mothers living with a man than the means-tested benefit situation. But if parents live together, ICC will be withdrawn on the basis of joint incomes, not individual incomes: if the mother lives with a man who has income, her entitlement will fall as their joint incomes rise. If she lives alone, and earns part-time, she will continue to receive it. There will thus be a financial disincentive for parents to live together. There will be an even stronger disincentive for mothers to repartner: for the proposed new partner as well as the mother.

  2.3  Income levels fairly reflect the financial resources of almost all households. Of course, there are exceptions who cannot be planned for in any tax/benefit policy. However, the ICC taper proposals are based on the assumption that families with average-to-high financial resources today also have average-to-high incomes. Being a tax credit, there are no capital limits on the receipt of ICC, share options presumably will not count against receipt etc. The world of work has changed so much that the number of "exceptions" may represent a high proportion of the total, in other words, there are insufficient "normal" people for standard tax credit rules to be fair.


  3.1  An increase in lone parenthood. The disincentive for parents to live together will be different from the position of those on means-tested benefits, who cannot count on having any money at all (other than child benefit) if they live with a man. If the amounts of money involved were small, the disincentive effects would probably be negligible. But they are not (see 4.1 below). Two other factors also need to be considered: (a) In the case of ICC/WFTC etc effects, fathers and potential second partners as well as mothers will have a disincentive to live with mothers; (b) The families subject to the ICC/WFTC taper arrangements will be more able to afford two homes. It is not fanciful to foresee more cases where the father "officially" lives close to his work (in a pied-a-terre), while the mother lives in the family home, working part-time. No doubt, people will praise such separated parents for working together so amicably in the upbringing of their children!

  3.2  A disincentive for parents to be married. Such quasi-fraudulent arrangements (which will be impossible to police) will of course not hold water with the Revenue if the parents are married. (Note: I do not personally believe that marriage should exist as a legal entity—I believe joint legal positions should be triggered by the birth of a child, not marriage. Nonetheless, I note this because other people may consider a disincentive for people to get married is a bad thing.)

  3.3  A downgrading of the perceived value of parenting, with further decline in the proportion of better-off women who give birth. Other than child benefit, better-off women will get no financial help from government for child-rearing, despite the very high costs both in money and effort. The taxpayer subsidises pension provision, health care, education (even private education—through tax breaks, charitable status etc) and umpteen other good things available to the rich. Why not children, which actually benefit the rest of society instead of merely the individual rich? Already around a quarter (from memory) of better off women are saying they do not intend to have children. They have plenty of better life choices today. Does the Government really want to reinforce this?

  3.4  An incentive to structure family resources in a particular way and a disincentive to increase earnings. If the ICC is withdrawn purely on the basis of income, there will be strong disincentives for parents in the taper range to increase their incomes—and thus to increase their earnings. There will also be incentives for them to put savings only into capital growth or to take earnings in the form of share options etc. The details of this will depend on the exact structure: but one thing is sure—accountants and financial advisors are going to have a field day and those who are sharpest will get most subsidy.


  4.1  The amount of the new child-related tax credits available is already large. I do not have time to do the detailed sums. But I think that adding together the amounts available in various forms of child-related tax credit which will be subject to removal on a tapered basis as family incomes rise creates a total of over £5,000 a year, and may create as much as £10,000 (depending on size of ICC etc). For the taper group (£20,000-£40,000 household income) these amounts are substantial. If child maintenance paid by absent fathers is to be wholly or partially ignored for the purposes of ICC/WFTC entitlement (as some have suggested), the disincentive for parents to live together may become very strong indeed. The disincentive for mothers to move in with a second male partner (and for him to supplement her lost subsidy) will surely be overwhelming in many cases. Of course, if the mother's income is aggregated with the income of the absent parent for the purposes of calculating her entitlement, or child maintenance payments are taken into account in calculating the mother's entitlement to WFTC/ICC, then a whole other set of financial incentives/disincentives are created (as well as much angst).

October 2000

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