APPENDIX 5
Memorandum submitted by Ms Mary Campbell
(ICC 09)
1. SUMMARY
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. ASSUMPTIONS
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. UNINTENDED
EFFECTS
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. INTERACTION
WITH OTHER
POLICIES
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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