Memorandum submitted by CARE (CP 17)
EXECUTIVE SUMMARY
1. The Government has pledged to halve child
poverty by 2010. It has set a PSA target to reduce by a quarter
by 2004 the number of children living in households with equivalised
income below 60% of the contemporary median—this target
is based on the 1998-99 Household Below Average Income (HBAI)
tables.
2. In 1998-99 4.2 million children lived
in households with equivalised income of less than 60% median
after housing costs (AHC). To achieve the PSA target, this figure
must be reduced to 3.1 million by 2004, but by 2001-02 it had
been reduced to only 3.8 million. The rate of reduction looks
likely to be insufficient to enable the target to be met by 2004;
to enable it to be met shortly thereafter, and for the longer
term target to be met, the reduction must be speeded up.
3. Of those 3.8 million children living
in poverty in 2001-02, 1.7 million lived in lone parent households
and 2.1 million children in couple households. But there was a
marked difference between the two groups. Whereas 80% of the children
in poverty of lone parents lived in workless households, the comparable
figure for children of couples was 30%. In other words, the problem
of child poverty is primarily one of workless lone parents and
of couples in work.
4. The focus of many of the Government's
measures has been to reduce the number of children living in poor
workless lone parent families. Insufficient attention appears
to have been given to the problem of poor in-work two parent families.
Unless the equivalised incomes of these families can be increased,
it is difficult to see how the 2004 target can be met—let
alone the 2010 target.
5. The reason why the new tax credits, like
the previous credits, do not lift an in-work two parent family
out of poverty whereas they do so for most in-work lone parent
families is that they are not designed to target couples with
low equivalised income—the measure of income used for the
PSA target. The formula used to calculate equivalised income takes
account of the number of adults in the family whereas the tax
credits do not do so except for the purposes of calculating a
couple's income. Moreover, many in-work families living below
the poverty line do not get the full benefit of the tax credits
because of the taper.
6. Unless structural changes are made to
the tax credit regime, it seems unlikely that the Government can
meet poverty targets expressed in terms of equivalised income.
What is needed is not only additional expenditure but better focussed
expenditure. This means doing something for two parent families
in work but living below the poverty line.
7. One possibility would be to increase
the couples element in the Working Tax Credit: an alternative
would be a higher taper threshold for couples. Any proposal must
be cost effective, i.e. it must be judged against the likely impact
on the number of children living in poor families: either of these
measures, while costly, would significantly reduce the number
of children living in poor in-work couple families. The child
element within the Child Tax Credit could also be increased for
teenagers in order to bring some families with teenage children
out of poverty.
INTRODUCTION
1. The Government has pledged to end child
poverty within 20 years and to reduce it by half by 2010. It has
a Public Service Agreement ("PSA") target to reduce
child poverty by a quarter by 2004, ie to reduce by a quarter
the number of children in low-income households (below 60% of
contemporary median household income (Great Britain))[191].
2. The Department of Work and Pensions ("DWP")
has stated[192]
that the PSA target is explicitly based on the 1998-99 Household
Below Average Income ("HBAI") baseline figures and methodology
so that this target would not be subject to any methodological
change. HBAI presents figures both on a before housing costs ("BHC")
and after housing costs ("AHC") basis and, until this
year, including and excluding the self-employed. Ministers have
normally used the AHC figures[193].
and the figures in this paper are on this basis unless otherwise
stated.
3. In its response to the April 2002 Consultative
Paper on measuring child poverty, the DWP accepted that income—and
particularly relative income—was central to any approach
to measuring poverty although, of course, it is not the only element.
Access to education, decent housing, good quality health services
and a safe environment, as well as income, all affect the quality
of a child's opportunity.
4. The Government has introduced a range
of measures aimed at reducing the number of children in low-income
households. For those in work—and they are the focus of
this memorandum—tax credits are the principal instruments
for raising the income of low income families. For 2002-03 and
earlier years these were the Working Families Tax Credit and the
Children's Tax Credit; for 2003-04 and later years they comprise
the Working Tax Credit ("WTC") and Child Tax Credit
("CTC"). However none of these credits are particularly
well structured to reduce the number of children living in poverty,
and it seems unlikely that the Government will be able to achieve
its PSA target without making structural changes to the new tax
credit regime. The projected cost of tax credits in 2004-05 is
£14.9 billion and in 2005-06 £16.3 billion[194].
HBAI FIGURES
5. It is necessary to look at the HBAI figures
in some detail in order to understand the difficulty the Government
is likely to have in meeting the 2004 PSA target or its more ambitious
longer term targets, even though it is planning to spend over
£16 billion pounds on tax credits.
6. HBAI measures household disposable income.
The assumption is made that all individuals in the household benefit
equally from the combined income of the household. Income before
housing costs (BHC) for this purpose is taken as comprising:
— net earnings from employment or self
employment;
— all Social Security benefits (including
Housing Benefit and Council Tax Benefit) and tax credits;
— maintenance payments received directly;
— cash value of certain income in kind,
eg free school meals.
Income is net of:
— national insurance contributions;
— domestic rates/council tax;
Income after housing costs (AHC) is derived
by deducting the following:
— rent (gross of Housing Benefit);
— mortgage interest payments (capital
repayments are not taken into account);
— structural insurance premiums;
— ground rent and service charges.
7. Household weekly income is then adjusted
to take account of the size and composition of the household.
Income adjusted in this way is called "equivalised income".
The DWP explains[195]
that the adjustments reflect the common sense notion that a household
of five will need a higher money income than a single person living
alone to enjoy the same standard of living. Household money income
is either increased or, more generally, decreased in accordance
with long established standard scales (McClements scales). To
give an example, the AHC equivalence value for a household consisting
of a married couple with two young children (aged one and three)
would be 1.25 (0.55+0.45+0.07+0.18). Net weekly income for this
household is then divided by 1.25 to arrive at the measure of
equivalised household income. Two separate scales are used—one
for income before housing costs (BHC) and one for income after
housing costs (AHC). The scales used are set out at Appendix 1
together with details of the Modified OECD scale.
8. In 1998-99 4.2 million children were
living in households (including the self employed) with equivalised
income after housing costs below 60% of median. The DWP has advised
that this figure breaks down as follows:
|
| Number of children
|
| millions
|
|
| Lone parent households | 1.82
|
| of which | |
| in full time or part time work | 0.37
|
| not working | 1.45
|
| Couple households | 2.42
|
| of which | |
| one or more parents are in full time or part time work
| 1.63 |
| (including self employed) |
|
| not working | 0.79
|
|
9. In 2001-02 there were 3.8 million children living
in households (including the self employed) with equivalised income
below 60% of median. This figure breaks down as follows:
|
| Number of children
|
| millions
|
|
| Lone parent households | 1.70
|
| of which | |
| in full time or part time work | 0.36
|
| not working | 1.35
|
| |
| Couple households | 2.11
|
| of which | |
| one or more parents are in full time or part time work
| 1.45 |
| (including self employed) |
|
| not working | 0.65
|
|
It can be seen that in 2001-02, of the 2.1 million children
living in poor two parent families, 70% lived in households in
which one or more of the parents were in paid work and therefore
potentially entitled to the full range of tax credits. Of the
1.7 million children in poor lone parent families only 21% were
in families where the parent worked. Looked at another way, almost
80% of the children in poverty whose parent or parents work lived
in two parent families. A similar picture is presented by the
BHC figures—the BHC percentage is 84%[196].
It will also be seen that the number of children in poverty in
lone parent households has scarcely fallen since 1998-99. The
reasons for this are not entirely clear—there are a number
of possibilities. The parent may not be working 16 hours a week
or may have savings in excess of £6,000. In both cases this
would result in an in-work family not getting tax credits in the
years concerned. Another possibility is that these are families
with teenaged children (see para 26)
10. As the Institute of Fiscal Studies (IFS) has pointed
out[197], in 2001-02
the Government was less than half way towards meeting its target.
To achieve the PSA target, the number of children living in low-income
families (as defined) would need to come down to 3.1 million.
When the last set of HBAI figures were published, the IFS said
that, if the rate of decline in child poverty observed since 1998-99
continued for three more years, the Government would miss its
target.
WHY THE
GOVERNMENT MAY
MISS ITS
TARGET
11. The focus of many of the Government's measures to
reduce the number of children living in poor families has been
children living in workless lone parent families. This is understandable
given the significant increase in the number of workless lone
parent families in the eighties and nineties and the fact that
children are at a greater risk of being in poverty if they live
in a lone parent household than if they live in a two parent household.
As, however, the above figures show, there are more children
living in poor two parent households than in poor one parent households.
The evidence we present below suggests that insufficient attention
has been given to the problem of poor in-work two parent families
and as a result the Government may have difficulty in meeting
its PSA 2004 target. It is difficult to see how it can reach,
let alone go beyond, this target in later years without dealing
with the problem of in-work families who, not withstanding the
new tax credit regime, will have equivalised incomes below, often
well below, 60% of median. The present mix of policies seems unlikely
to reduce this number significantly.
12. The great majority of children living in poor lone
parent households are in households where the parent does not
work. As, however, the Committee's report "Childcare for
Working Parents"[198]
showed, many lone parents still find it difficult to take up paid
work. Childcare problems are clearly one factor, but for some
the gains from moving off benefits and into paid work can be modest
and, when childcare costs are taken into account, the lone parent
can actually be worse off. It seems unlikely therefore that, despite
the welfare to work policy, the number of children in workless
lone parent households is going to come down quickly. If, however
a lone parent with two young children is able to work 16 hours
a week, the tax credit regime should in most cases lift the family
above the official poverty line.
13. The position with two parent families is different.
The great majority of children living in poor two parent families
are living in households where one or both parents work. The problem
the Government faces in reducing the number of children living
in poor two parent families is that, even when the parent works,
many of these families are still in poverty even at relatively
high pre-tax incomes. For them tax credits do not deliver enough
income to raise their equivalised income above the 60% median.
On the other hand, this does mean that, if it wished, the Government
could take these families out of poverty by appropriate changes
to the tax credit regime. It is not dependent on action by the
family.
14. Table 1 below shows the equivalised incomes of families
selected for analysis in the DWP's Tax Benefit Model Tables for
June 2001 and compares this with the HBAI figure for 60% of median
equivalised income (AHC) for 2001-02. The figures are the amount
in pounds by which the weekly household equivalised income is
above or below the 60% median—negative numbers are in bold
type. For example, a lone parent family with one child aged one
living in local authority housing and earning £90 per week
would have had in 2001-02 an equivalised income of £56 above
the poverty line. By contrast a married couple family with one
child earning £90 per week would have had an equivalised
income of £28 below the poverty line.
Table 1
DWP TAX BENEFIT MODEL FAMILIES 2001-02; EQUIVALISED INCOME
IN POUNDS ABOVE OR BELOW 60% MEDIAN (AHC)
|
| | | Gross weekly earnings (£)
|
| Family Type | |
| 90 | 100
| 150 | 200
| 250 | 300
|
|
| Lone parent one child aged 1 |
(LA tenant) |
(Table 1.2a) | 56
| 61 | 93
| 119 | 143
| 168 |
| Lone parent one child aged 1 |
(private tenant) |
(Table 1.2.e) | 56
| 59 | 70
| 79 | 88
| 111 |
| Lone parent two children aged 2 and 4 |
(LA tenant) |
(Table 1.3.a) | 21
| 23 | 45
| 62 | 79
| 96 |
| Lone parent two children aged 2 and 4 |
(private tenant) |
(Table 1.3e) | 21
| 23 | 31
| 37 | 43
| 48 |
| Married couple one child aged 1 |
(LA tenant) |
(Table 1.5a and b) | -28
| -27 | -8
| 5 | 21
| 36 |
| Married couple one child aged 1 |
(private tenant) |
(Table 1.5c and d) | -28
| -27 | -12
| -7 | -2
| 3 |
| Married couple 2 children aged 2 and 4 | (LA tenant) |
(Table 1.6a and b) | -33
| -33 | -19
| -7 | 4
| 15 |
| Married couple 2 children aged 2 and 4 |
(private tenant) |
(Table 1.6c and d) | -33
| -33 | -21
| -17 | -13
| -10 |
| Married couple 3 children aged 8,10 and 12 |
(LA tenant) |
(Table 1.7a and b) | -42 | -42
| -28 | -19
| -10 | -2
|
| Married couple 3 children aged 8,10 and 12 |
(private tenant) |
(Table 1.7c and d) | -42 | -42
| -32 | -29
| -26 | -23
|
|
Data source: DWP Tax Benefit Model Tables June 2001, references
are to the DWP tables. None of the published DWP tables for lone
parents take account of the 30-hour credit.
15. Two points stand out. The first is that if a lone
parent was able to work 16 hours a week (this was a necessary
condition for the WFTC), the tax credits lifted the family out
of poverty, as defined. To this extent the WFTC will have achieved
one of its objectives. The second point is that the WFTC failed
to lift comparable two parent families above the 60% line even
if the parent were in work. Even at £300 three of the ten
families selected for analysis by the DWP had incomes below the
60% figure. The Table 1.7d family (ie a married couple family
with three children aged eight, 10 and 12 living in private tenanted
accommodation) would have needed to earn £480 a week (£24,960
pa) to have an equivalised income in 2001-02 of more than £165
per week.[199] This
admittedly might be regarded as an extreme example.
16. Tables 1 and 2 deal only with one earner couples
because that is what the DWP Model Tables deal with. Figures for
a two earner couple in 2003-04 are given below.
Do the New Tax Credits Solve the Problem?
17. Changes have, of course, been made to the tax, tax
credit and benefit systems since 2001-02. In particular:
— An enhanced children's tax credit (so called "baby
credit") was introduced in April 2002
— There was a £2.50 increase in the WFTC basic
credit in June 2002.
— Child benefit was increased.
— New tax credits were introduced in April 2003.
— Under the new regime the child related credits
are not conditional on a parent working a minimum number of hours.[200]
These changes have not, however, changed the picture much.
Table 2 below shows the position in 2003-04 for families selected
for analysis in the DWP Tax Benefit Model Tables for June 2003.
We have assumed that the contemporary 2003-04 figures for 60%
median equivalised income after housing costs will be £181.
The DWP has told us that this is not an unrealistic estimate.
Table 2
DWP TAX BENEFIT MODEL FAMILIES 2003-04; EQUIVALISED INCOME
IN POUNDS ABOVE OR BELOW 60% MEDIAN (AHC)
| | | Gross earnings (£)
|
| Family Type | |
| 90 | 100
| 150 | 200
| 250 | 300
|
|
| Lone parent one child aged 1 | (LA tenant)
| (Table 1.2a) | 54
| 59 | 89
| 113 | 137
| 161 |
| Lone parent one child aged 1 | (private tenant)
| (Table 1.2.e) | 54
| 58 | 68
| 77 | 85
| 94 |
| Lone parent two children aged 2 and 4 | (LA tenant)
| (Table 1.3.a) | 20
| 22 | 37
| 54 | 70
| 87 |
| Lone parent two children aged 2 and 4 | (private tenant)
| (Table 1.3e) | 20
| 22 | 29
| 35 | 41
| 47 |
| Lone parent two children aged 14 and 16 |
(LA tenant) | | -30
| -28 | -7
| 5 | 18
| 30 |
| Lone parent two children aged 14 and 16 |
(private tenant) | | -30
| -28 | -13
| -9 | -4
| 0 |
| Married couple one child aged 1 | (LA tenant)
| (Table 1.5a and b) | -34
| -33 | -17
| -3 | 11
| 25 |
| Married couple one child aged 1 | (private tenant)
| (Table 1.5c and d) | -34
| -33 | -19
| -15 | -10
| -5 |
| Married couple 2 children aged 2 and 4 | (LA tenant)
| (Table 1.6a and b) | -37
| -36 | -25
| -18 | -7
| -4 |
| Married couple 2 children aged 2 and 4 | (private tenant)
| (Table 1.6c and d) | -37
| -36 | -25
| -23 | -19
| -16 |
| Married Couple two children aged 14 and 16 |
(LA tenant) | | -63
| -62 | -53
| -48 | -39
| -30 |
| Married Couple two children aged 14 and 16 |
(private tenant) | | -63
| -62 | -53
| -52 | -49
| -45 |
| Married couple 3 children aged 8,10 and 12 |
(LA tenant) | (Table 1.7a and b) |
-45 | -44
| -35 | -30
| -21 | -13
|
| Married couple 3 children aged 8,10 and 12 |
(private tenant) | (Table 1.7c and d)
| -45 | -44
| -35 | -34
| -31 | -28
|
|
Source: DWP Tax Benefit Model Tables April 2003
It will be seen that for most families the position has actually
deteriorated since 2001-02. A lone parent living in local authority
housing with one child aged one who works 16 hours a week earning
£4.50 per hour would have an equivalised income in 2003-04
of £228, ie £47 above the estimated contemporary 60%
median and a lone parent with two children aged two and four would
have an equivalised income of £197, ie £16 above.
18. The DWP tables do not enable comparisons to be made
where there is more than one earner in the family. The equivalised
income of a two earner couple will be higher than that of a comparable
single earner. However, the difference will not be as great as
might be expected because the income tax and national insurance
saving will to a significant extent be clawed back by a cut in
Housing Benefit and Council Tax Benefit. For example, a single
earner married couple with two children aged two and four living
in private tenanted accommodation on an income of £200 a
week, would have equivalised income of £158 ie £23 below
the estimated contemporary 60% median. Even if the income of the
couple was split 50:50, their equivalised income would increase
to only £165 and would still be £16 below the 60% median.
19. The negative figures in Table 2 do not reveal the
full extent of the problem the Government faces. Where a family
has a McClements factor of more than 1, its income will need to
be increased by more than the amount by which its equivalised
income falls below the 60% median. For example, Table 2 shows
that a married couple with two children aged two and four living
in local authority housing and earning £90 per week is likely
to have in the current year an equivalised income of £37
below the 60% median. The McClements factor for this family is
1.36. To raise this family's equivalised income to the £181
per week (estimated contemporary median) would need a cash increase
of £50 (£37x1.36). Table 3 below shows the increases
which Table 2 families with equivalised incomes below the estimated
contemporary 60% median would need to bring them up to that level.
Table 3
INCREASE IN WEEKLY INCOME REQURIED TO LIFT POOR TABLE
2 FAMILIES TO ESTIMATED CONTERMPORARY 60% MEDIAN
|
| | Gross earnings (£)
|
| Gross unequivalised income (%) |
| 90 | 100
| 150 | 200
| 250 | 300
|
|
| Lone parent-two children (14,16) | (LA tenant)
| 36 | 34
| 8 | |
| |
| Lone parent-two children (14,16) | (private tenant)
| 36 | 34
| 16 | 11
| 5 | |
| Married couple, one child (1) | (LA tenant)
| 36 | 35
| 18 | 3
| | |
| Married couple, one child (2) | (private tenant)
| 36 | 35
| 20 | 16
| 11 | 5
|
| Married Couple two children (2 and 4) | (LA tenant)
| 50 | 49
| 34 | 24
| 10 | |
| Married Couple two children (2 and 4) | (private tenant)
| 50 | 49
| 34 | 31
| 26 | 22
|
| Married couple two children aged 14 and 16 |
(LA tenant) | 105
| 103 | 88
| 80 | 65
| 50 |
| Married couple two children aged 14 and 16 |
(private tenant) | 105
| 103 | 88
| 86 | 81
| 75 |
| Married couple 3 children aged 8,10 & 12)
| (LA tenant) | 77
| 76 | 60
| 52 | 36
| 22 |
| Married couple 3 children aged 8,10 & 12)
| (private tenant) | 77
| 76 | 60
| 58 | 53
| 48 |
|
MAINTENANCE PAYMENTS
20. None of the tables above take account of maintenance
payments received. They also ignore maintenance payments made.
Maintenance payments received directly are treated as income for
HBAI purposes but not for income tax or tax credit purposes. The
most recent Family Resources Survey (2000-01) shows that 22% of
lone parents (4% of two parent families) receive maintenance payments.
Well over two thirds of parents who do receive maintenance payments
receive £25 or more per week—13% of lone parent recipients
get £100 or more. If a family does receive maintenance payments,
this will have a major impact on its equivalised income and may
be another factor which explains the comparatively small number
of children in poverty who live in lone parent households where
the parent is in work.
EUROPEAN ACTION
PLAN
21. The Lisbon European Council held in March 2000 called
for action on the eradication of poverty throughout the Union
by 2010. The European Union also uses equivalised incomes in compiling
poverty statistics but uses an OECD scale compiled on a before
housing cost basis. Appendix 2 shows the position that would apply
if the OECD scale were used.
WHY THE
TAX CREDIT
REGIME IS
FAILING POOR
FAMILIES
22. Tax credits are failing to lift out of poverty many
working two parent families and their children, even though they
do so for most working lone parent families. This was true of
the previous tax credit regime as it is for the current one. The
reason is that, as devised so far, the credits do not target effectively
families with low equivalised incomes. Yet this is the measure
of the PSA target.
23. The Government's poverty target is based on equivalised
income which takes account not only of joint family income and
the number of children but also the number of adults in the family.
Tax credits on the other hand ignore the number of adults in the
family. Unlike the out-of-work benefits and social security benefits,
such as Housing Benefit and Council Tax Benefit, no allowance
is made for the second adult. This means that a lone parent and
a two-parent family who are identical in all other respects (same
children, gross incomes etc) will have different equivalised incomes.
The two-parent family would need to have higher earnings to have
the same equivalised income as comparable lone parent families.
Appendix 3 compares Tax Credits with out-of-work benefits and
also with Housing and Council Tax Benefits.
24. Another important factor is that many in-work families
do not get the full benefit of the tax credits. This is because
they are tapered out at the rate of 37 pence in the pound on pre-tax
weekly income above £97. Many in work families with equivalised
incomes below 60% of median do not fully benefit from the new
credits.
25. Chart 1 below shows the extent to which a Married
Couple with two young children living in local authority accommodation
is likely in 2003-04 to have equivalised income below the estimated
60% contemporary median.
26. A subsidiary factor is that the Treasury has given
insufficient weight to the additional costs of older children.
The McClements scale gives a weight of 0.38 to children aged 16
and over compared with 0.07 for a child aged under 1. The Child
element in the CTC is the same (£27.65) irrespective of the
age of the child. It will be seen from Table 2 that a lone parent
family with teenaged children will have equivalised income below
60% of median whereas comparable families with younger children
have incomes above this figure.
POLICY OPTIONS
27. An initial reaction is that that additional spending
on families will be required if the Government is to meet its
child poverty targets. This may well be the case, but what is
equally necessary is that the spending is better focused—ie
directed to those families with the lowest equivalised incomes.
28. It might be thought that the best way of reducing
child poverty among in-work families would be for the tax credit
system to be enhanced at all points, increasing incomes for all
families. However to do so would not only be very costly but perversely
it would not be very effective. Since child poverty is defined
as a relative concept, it will be reduced most quickly if the
incomes of those above the poverty level are not also increased.
Hence it will be both less costly and more effective in reducing
child poverty if any enhancements to the tax credit system are
concentrated on those families living below the poverty level.
The inevitable downside of this is that the marginal deduction
rate for those above the poverty level will remain high: this
reflects the continuing tension between universal and means tested
benefits.
29. For this reason we not believe that a general increase
in the CTC child element would be a cost effective means of tackling
child poverty: nor would a general increase in child benefit.
Nor again, given the present structure of the tax credit would
be an increase in the minimum wage, because for many families
at that level of income the marginal deduction rate is 85% or
even more.
30. By contrast, enhancements to the WTC for couples
would be more likely to be cost effective as their impact would
be less directly felt by those with higher incomes. We have considered
two possibilities:
(i) an increase in the couples element in the credit;
or
(ii) an increase in the threshold for couples after which
the credit is tapered.
We look at each in turn.
AN ENHANCED
CREDIT FOR
COUPLES
31. At present the couples element in the credit is the
same as the lone parent element, despite the fact that the incomes
of a couple are aggregated, and despite the higher weighting for
a couple within the McClements scale. As we pointed out in paragraph
23 above and as is illustrated in Appendix 3, the additional costs
incurred by a second adult are taken into account in making awards
to the out of work benefits and to Housing and Council Tax Benefit.
Hence to increase the couples element would bring WTC into line
with what is done in the benefits system generally. One option
the Committee might wish to consider is that the couples element
in the WTC should be double that of the lone parent element, ie
£57.40 compared with £28.70, so that, in addition to
the basic element of £29.19, the credit for a couple would
be £86.59 compared with £57.89 for a lone parent. This
would bring tax credits closer into line with the out-of-work,
Housing and Council Tax Benefits.
TAPER THRESHOLD
32. Alternatively, the tax credits for a couple should
be kept at the same level as those for a lone parent, but the
income at which they become subject to be withdrawn under the
taper should be higher for a couple than for a lone parent. It
seems inappropriate that families with children in poverty should
find that their tax credits are not paid in full. One option might
be to set the taper threshold at a level which would approximate
to the income level at which a typical two parent family might
move out of poverty if credits were paid in full. The difficulty
is however that this figure varies considerably according to the
size and composition of the family. It would not be possible to
fix the taper threshold in terms of a family's equivalised income,
but in principle it would be possible to set different taper thresholds
for different types of family. Table 4 below shows the income
point at which the families selected in the DWP Tax/Benefit Model
Tables would have incomes above the poverty line if tax credits
were given in full.
Table 4
GROSS INCOME NEEDED TO EXCEED 60% MEDIAN ABC (TAX CREDITS
GIVEN IN FULL)
|
| Family type | Gross income (£)
|
|
| Married couple one child aged one | (LA tenant)
| 152 |
| Married couple one child aged one | (private tenant)
| 217 |
| Married Couple two children aged two and four
| (LA tenant) | 181
|
| Married Couple two children aged two and four
| (private tenant) | 278
|
| Married couple three children aged eight, 10 and 12)
| (LA tenant) | 221
|
| Married couple three children aged eight, 10 and 12)
| (private tenant) | 340
|
|
| Note: Data extracted from DWP Tax Benefit Model Tables April 2003
|
33. In Chart 2 we take the family illustrated in Chart
1 and show how, the position would be improved if the WTC credit
for couples was £86.59 (as suggested in paragraph 31) and
the taper threshold for couples was doubled, ie increased from
£97 to £194.
Chart 2
ENHANCED CREDIT. HIGHER TAPER THRESHOLD AND PRESENT SYSTEM
COMPARED
Note: Data source DWP Tax Benefit Model Tables April
2003
34. It will be seen that of these two possibilities an
enhanced couples credit would be the more effective in reducing
the extent of child poverty among in-work couples with the lowest
incomes, but increasing the taper threshold would have a broadly
similar impact for couples with rather higher incomes. The proposals
would therefore reduce the number of children in poverty by much
the same extent, but at an increased cost the enhanced couples
credit would reduce the severity of the poverty for more children.
35. We recognise that both these suggestions to reduce
child poverty among couple families would be very costly. This
reflects the extent to which the current tax credit system discriminates
against couples and leaves their children in poverty where the
children of other families in comparable circumstances would be
above the poverty line. Any increase in the couples credit or
the taper threshold could be phased in over a period of years:
our suggestion of doubling them is illustrative and lower figures
could be taken at first at the expense of retaining more children
in poverty. If even with phasing the cost of our proposals was
too high, part of the cost might have to be clawed back by increasing
the tax charge or reducing the tax credit further up the income
scale.
36. Increasing the CTC child element by, for example,
£5, would appear to have little impact on the number of children
in poverty in families in work. Chart 3 below compares this proposal
with an enhanced couples credit and an increase in the taper threshold.
It will be seen that this proposal would have little effect on
the income level at which the illustrative family crosses the
60% median line. This is largely because of the very high marginal
deduction rate for a family in work of the tax credit taper together
with income tax and NIC.
Chart 3
ENHANCED CREDIT, HIGHER THRESHOLD AND £5 ADDITIONAL
CHILD CREDIT COMPARED
37. If the Government wished to reduce the number of
families with older children living below the poverty line in
both two parent and one parent families, one solution would be
to increase the child element within CTC for teenagers to bring
it more into line with the McClements scale. This would also benefit
larger families where some of the children are likely to be older.
38. A critical factor of any proposal for reducing child
poverty would obviously be its cost. It would be important to
determine not only what would be the cost to the Treasury of any
change to the structure of the tax credits, or indeed any proposal
to reduce the number of children living in poor families, but
also the cost effectiveness of the proposal, ie how effective
any change would be in reducing the number of children living
in households with equivalised income below 60% median.
39. However, whatever the cost may be, unless structural
changes are made to the tax credit regime along the lines suggested
in this memorandum, it seems unlikely that the Government will
be able significantly to reduce child poverty among families in
work and hence to meet poverty targets expressed in terms of equivalised
incomes.
191
Measuring Child Poverty paragraph 22. Back
192
Department for Work and Pensions, Analytical Services Division
Child and Family Branch letter 24 August 2001. Back
193
IFS Briefing Note No 32, section 2, third paragraph. Back
194
HM Treasury Tax Benefit Reference Manual 2003-04 edition. Back
195
HBAI 2001-02, Appendix 2. Back
196
Figures supplied by DWP. Back
197
IFS Briefing Note No 32. Back
198
HC 564-1. Back
199
The Tax Benefit Model Tables show the net income after housing
costs as £287.33. The McClements factor is 1.72 (0.55+0.45+0.23+0.23+0.26
). £287.33 divided by 1.72 gives an equivalised income of
£166.86. Back
200
The Working Families Tax Credit was paid to families where either
the applicant of their partner (if they had one) worked at least
16 hours a week and were responsible for one or more children
under 16 (or 19 if in full-time non-advanced education. Back
| 
