In short, no, poverty is not just about income, but do read on! In much of today’s popular discourse, it is quite understandably assumed that the way to improve poverty rates is to improve the ‘take home’ (or post tax) incomes of those who are poorest, both in relative and absolute terms. Although under the previous administration poverty did fall between 1997-1998 and 2005-06, it began to rise again over the following three years[1] and, as a result, the much lauded child poverty targets were missed by some margin.[2]Taking this and the figures below into consideration, it is clear that any possible solution to reducing poverty in the UK will need to take into account a whole range of factors, just one of which income.

The figures above are compelling in that they show the UK to be comparatively generous with regard to the treatment of low earner households by the tax system.[3] These family types have a negative tax burden which means, in effect, that they receive more in benefits and tax credits than they pay in income tax and national insurance. This is primarily due to how the tax credit system (soon to be overhauled by the new Universal Credit) operates. It is interesting to note that households on the same proportionate income (50% of the average wage)[4] in some other developed countries do not enjoy such generous tax rates, although in many nations they are still below zero.

Herein lies the rub: despite the generosity of the UK tax credit system, child poverty has continued to rear its ugly head, both domestically over the past 10 years, and internationally (see graph below).[5] In other words, some other OECD nations, despite having tax and benefits systems which are relatively less generous, achieve significantly lower poverty rates. As the table below shows,[6] of the 20 countries with lower child poverty rates[7]than the UK, only three have more generous tax arrangements for one earner and lone parent two child households at this wage level. By way of explanation, the table below gives one rank for child poverty and one for tax burden. The higher the tax burden rank, the more negative the tax burden is for families on 50% average wage. With regard to child poverty, the higher the rank, the lower the poverty rate.

Why might this be the case? There are many reasons why poverty remains a significant issue for the UK, many of which need to be addressed: housing, education, tax and welfare to name but a few.

Let’s take a brief look at tax and welfare. The Joseph Rowntree Foundation (JRF), in their excellent and comprehensive publication, Monitoring Poverty and Social Exclusion 2011, note that being in poverty is not just about income and that household size matters too.[8] Thus, whilst the UK might be relatively generous with regard to tax and welfare, it is by no means the end of the story. The report confirms that increases in tax credits – particularly in 2008 and 2009 – have resulted in many families needing tax credits in order to avoid poverty.[9] Here we have a key problem: what happens when tax credits are withdrawn? The evidence available shows us that the high withdrawal rates of both tax credits and the Universal Credit will adversely affect work incentives for many people, not to mention the actual take home income for many households.

Don’t take it from me though, below is an excerpt from the aforementioned JRF report:

‘One factor influencing in-work poverty that is the direct responsibility of the DWP is the ‘taper’ on benefits. The combination of income tax, National Insurance and the benefit taper means that someone in work and getting tax credits faces an effective tax rate on any extra earnings of 73 per cent, way above the so-called ‘top’ rate of 50 per cent. With such a rate, extra work brings scant reward: someone in this situation on the minimum wage has to put in six hours overtime in order to make themselves £10 better off overall. Universal Credit is going to make this worse, putting the rate up to 76 per cent. Until 2010, the rate was ‘only’ 69 per cent.’[10]

So, how do we deal with this issue? I believe the solution lies in reducing the taper on the soon to be introduced Universal Credit. The Coalition will say that this is too expensive but I question this. If the Government can spare billions for other tax and welfare measures, such as increasing the personal income tax threshold (which is not a progressive measure that will help the poorest in society)[11]then why shouldn’t it commit to reducing the Universal Credit taper? By doing this, the Coalition would make significant inroads toward tackling the high withdrawal rates that are present with the current Universal Credit plans, meaning that those entering the workplace or increasing their hours are not threatened with losing their benefit. As a result, work can actually begin to be rewarding, lifting many households out of poverty.

Much has been made by both the current and previous Government about how to tackle child poverty (note the much talked about child poverty targets for example). Broadly speaking there are two ways in which this can be done. Both methods predictably centre on increasing the post tax income of a family, the first being through making changes to the benefits and tax credits system and the second being through doing more to incentivise work. In focusing on the latter, CARE has pointed out for a number of years that the Marginal Effective Tax Rates faced by working families (particularly married couples with one earner) is an issue which must be addressed. Indeed, as the graph below shows, this issue is particularly pertinent in the UK, where the problem is particularly pronounced for the very poorest in society.  As such, in 2010 (the latest year for which data is available) UK households were on average facing METRs that were only beaten by Slovakia[1].

For the first time, this new research combines the average METR faced by four different families at 50% average wage; single people without dependants, one earner married couples with two children, lone parents with two children and married couples without dependants. Whilst there is obvious value in doing this, it is worth pointing out that due to differing size of the respective households, where each of these households lie in the income distribution would vary significantly.

For now however, it is important to put these findings into some sort of context. Based on these figures, the UK worker either entering work or increasing their working hours would only take home about 35 pence of every 1 pound earned due to  a reduction in received benefits and an increase in income tax and national insurance. Both the Government and anti-poverty campaigners need to think long and hard about how to effectively combine a system where work is both financially rewarding for the very poorest in society and where benefits are not stripped away so quickly as to make the prospect of work daunting.

Yet this isn’t quite the full story. What about when we add child poverty rates[2] and income inequality into the mix, how does this affect the overall picture? Correlation doesn’t always mean causation, and a lack of correlation doesn’t necessarily mean an absence of causation, but it is interesting to note that the countries with the lowest METRs do not necessarily have the lowest child poverty rates. Indeed, as the graph below shows, there appears to be little correlation between the two.

What are we to conclude then? That the METR has no impact on the child poverty rate of a nation whatsoever? Not exactly. As an intriguing 2006 Joseph Rowntree foundation report has pointed out, incentives to work may well have a bearing on reducing child poverty[3]. Furthermore, work done by the OECD tells us that efforts to boost work incentives for the poorest families would be particularly effective in the UK.[4] Yet both pieces of research mentioned above argue that other things as well as a METR faced by a particular group of the population also have a part to play in a nation’s child poverty rate – the benefits and tax credits system for example. Hence, it is arguably not sufficient for the Government to concentrate all their attention on the METRs faced by the poorest in society, although this is clearly a factor that needs to be addressed.

Interestingly, something that does have a greater (although by no means perfect) correlation with child poverty is income inequality[5] (expressed by the Gini coefficient).  See the graph below.[6]

So, where does this leave us?
First, there will always have to be a trade off between work incentives and benefits, both of which must exist in some form in any national economy. The real dilemma comes in deciding where to draw this line.
Second, although METRs are not the be all and end all in tackling child poverty, they certainly play a part and this is why the UK’s incredibly high METRs faced by those on very low incomes should concern policy makers.
This goes hand in hand with the third and final big issue, namely that if the UK Government is serious about getting to grips with child poverty then it should investigate ways in which the gap between the richest and the poorest can be reduced.

CARE’s latest report, ‘the taxation of families 2010/11′, can be accessed here (PDF)

[1] Based on calculations made from Taxing Wages, 2011, OECD, p.109-142 (see more here: http://www.oecd.org/document/34/0,3746,en_2649_34533_44993442_1_1_1_1,00.html)

Social policy charity CARE has today expressed its disappointment in yesterday’s Budget.

The Budget provided the Government with the opportunity to recognise marriage in the tax system, to make our fiscal arrangements more sensitive to family responsibility and help those on low to modest incomes.

The transferable allowance for married couples promised in the 2010 Conservative Manifesto and confirmed in the 2010 Coalition Agreement will achieve all three of these objectives.

Instead, however, the Government chose to further increase the personal tax allowance and by more than they had initially suggested.

This is very unfortunate.

Increasing the personal allowance to £10,000 will disproportionately benefit those in the top half of the income distribution and make our fiscal arrangements more individualistic, whilst introducing a transferable allowance for married couples will disproportionately benefit those in the bottom half of the income distribution and make our fiscal arrangements more sensitive to family responsibility.

Happily the Coalition Agreement to recognise marriage through a transferable allowance still stands. We would urge the Government to now make its implementation an absolute priority.

Notes

1. To find out more about the relative merits of the transferable allowance policy compared with raising the personal allowance see CARE’s Pre-Budget Briefing: http://www.care.org.uk/wp-content/uploads/2012/03/Progressive-Fiscal-Policy_CARE-Pre-Budget-Briefing.pdf

CARE welcomes the Chancellor’s announcements in the Budget today that he will first raise the threshold for the withdrawal of child benefit to £50,000 and subsequently withdraw the benefit gradually between £50,000 and £60,000 to avoid a “cliff edge”. Serious problems remain however. The proposals are still not “fair”, as the Chancellor claimed they would be.

One-earner families, both couple and lone-parent families, benefit much less than two-earner couple families. Simply raising the threshold for withdrawal does not remove this anomaly.

‘Even with a £50,000 threshold, many of the families who will be losing their child benefit are not rich and certainly not in the top 15% of the income distribution’, said Don Draper consultant to CARE and joint author of the review of family taxation published by CARE last week.

On 6^th March, the Chancellor said, “I think it is fair to ask those in the top 15% of the income distribution to make a contribution to the fiscal consolidation.” (Hansard 6^th March 2012 col. 708)

The following day at Prime Minister’s Questions, in reply to the Leader of the Opposition, David Cameron spoke of “not giving child benefit to the wealthiest 15% of families”. (Hansard 7^th Mar 2012: col. 841)

Don Draper, independent fiscal policy consultant to CARE, said, ‘If the Chancellor wants to restrict the withdrawal of child benefit to families who are in the top 15% of the income distribution, the threshold for the withdrawal of child benefit will have to apply at an income level which is much higher than £50,000.’

The income a family would need to be in the top 15% will vary according to the number of adults in the family and the number of children. CARE understands that for a family to be in the top 15% for the income distribution it would need to earn approximately:

As the Chancellor’s proposals stand it appears that middle income families will lose child benefit. A one-earner family with three children and an income of £50,000 is likely to be in the 6th decile – i.e. they are less well-of than 46% of the population. No families in this situation should have any part of their child benefit withdrawn (which is what begins at £50k) when other much better-off families are keeping theirs.

Dan Boucher, Director of Parliamentary Affairs at CARE, said, ‘The child benefit proposals still are very unfair to one-earner families. The Chancellor needs to think again.’

Today’s Budget provides a wonderful opportunity for the Government to give effect to their commitment to marriage, emphasised as recently as last week, by supporting marriage through the tax system.

Recognising the benefits which marriage has for society, a commitment to do this through the provision of a transferable allowance was included in the 2010 Conservative Party Manifesto and, later, in the Coalition Agreement.  The Liberal Democrat proposal to raise the individual tax threshold to £10,000 was also included in the Coalition Agreement.

Whilst the implementation of the £10,000 tax allowance policy has begun, the promise to introduce a transferable allowance for married couples remains unfulfilled.  In fact the process has not even been started.

CARE’s Pre-Budget Briefing makes plain that the decision to prioritise increasing the tax threshold over a transferable allowance for married couples does nothing to make Britain ‘the most family-friendly country in Europe’ as the Prime Minister intended.

The policy of raising the individual tax threshold to £10,000 primarily helps those in the top half of the income distribution, making our fiscal arrangements even more individualistic and less sensitive to family responsibility than is already the case.  By contrast, the transferable allowance would primarily help those in the bottom half of the income distribution and ensure our fiscal arrangements are less individualistic and more sensitive to family responsibility.

Some figures from the taxation of families 2010/11 report, published by CARE last week:

-  The tax burden in the UK on a one-earner married couple with two children is 52 per cent greater than the OECD (Organisation for Economic Co-operation and Development) average – up from 39 per cent in 2009 (p.10).

-   The figures are even worse for those on 75 per cent average wage who face a tax burden 85 per cent higher than the OECD average (p.10).

-   In this context, it is no surprise that the tax burden on a one-earner married couple with two children on an average wage is 74.5 per cent of that placed on a single person on the same wage, whilst the comparable OECD figure is just 51.4 per cent (p.11).

So what now?

We cannot hope to fix Broken Britain when we give those families where one parent stays at home to look after the children such a rough ride.

Introducing a transferable allowance requires a budget resolution following the Budget.  If the Government does not take action this year it is imperative that they do so following the 2013 Budget if they are to keep their promise of introducing transferable allowances within the current Parliament.  Moreover, preparatory changes to IT infrastructure will be needed which could begin now.

Let’s wait and see what Mr Osborne has to say in a few hours time…

UK tax system tightens the screw on ‘squeezed middle’, warns major new report from social policy charity

CARE is publishing its fifth annual review by independent consultants of the taxation of families – The taxation of families 2010/11. This is one of the most comprehensive reviews of the tax burden on families that anyone has yet made.

Like its predecessors, it examines the tax burdens on various households, and compares the position of families with that of taxpayers without family responsibilities. It includes comparisons with families in other OECD countries. Whereas previous reviews have focused mainly on families with an ‘average’ wage, this year’s looks at incomes ranging from 50% to 150% of an average wage.

The report’s key conclusions are:

• Politicians who have warned of the additional burdens faced by the “squeezed middle” have a point. Commonly taken to mean families with children on incomes between £20,000 and £45,000 a year, this new analysis suggests they are right to be feeling the pinch. It says there has been a gradual shift in the tax burden from single people and others without children to middle income families with children.
• Tax as a percentage of income paid by a one-earner married couple with children on an average income has doubled since the mid-1960s as part of a gradual trend in which tax reliefs such as the married couples allowances and child tax allowances have been phased out. But low income families have seen their tax bills fall.
• Increasing the tax threshold is not a cost efficient way of helping the least well off middle income families, many of whom will be basic rate one-earner couple families. Most of the benefit of a threshold increase goes to taxpayers in the top half of the income distribution, many of whom will be in two income families and/or without family responsibilities.
• A transferable allowance, as envisaged in the Coalition Agreement, would be a good way of reducing the tax burden of those families whose budgets are under the greatest pressure. It would not involve abandoning independent taxation. It would be a cheaper option than threshold increases, and would result in a more equal sharing of the national tax burden. 70% of the benefit of transferable allowance would go to families in the poorer half of the population. It should be confined to married couples.
• There has been a lack of consultation about the withdrawal of child benefit from households with a higher rate taxpayer. The report demonstrates that, because of the failure of the tax system to have regard for family responsibility, the withdrawal of child benefit from those just inside the higher rate threshold will actually have the effect of pushing some families already in the lower half of the income distribution further inside and take others into the lower half of the income distribution for the first time.  In the House of Commons on 6 March 2012 the Chancellor of the Exchequer said: “I think it is fair to ask those in the top 15 per cent of the income distribution to make a contribution to the fiscal consolidation.” If that is his intention, then a measure which will adversely affect families in the bottom half of the income distribution is exceptionally badly targeted. The report also points out that the proposal is likely to discriminate against marriage because of the administrative difficulties of withdrawing benefit from many cohabiting couples.
• The switch from tax credits to Universal Credit should reduce child poverty and the couple penalty for low income couples, but many families will still find the return from paid work very low. A quarter of all families seem likely to face an effective marginal rate of over 76%, much higher than in any other OECD country. The loss of passported benefits and reductions in Council Tax Benefit could make that rate even higher. If a transferable allowance were introduced, it would reduce the marginal rate for middle income families and improve the return from work. Some families would see their marginal rate reduced from 76.2% to 32%.

In a comment on the report, Nola Leach, chief executive of CARE, said: “This report demonstrates clearly that the United Kingdom is out of step with its international counterparts in the way it taxes families.

“Concern about the plight of the “squeezed middle” is entirely valid. The detailed analysis in the report shows that single-earner middle income families with children, earning around the median national household income of £34,ooo a year are facing a gradually growing tax burden compared with single people and two-earner families.

“This is because the UK taxes people on an individual rather than a household basis and because tax reliefs such as the married couples allowance have been phased out.  Our tax system takes no account of having many dependants (such as spouses and children) rely on a single wage.

“The most recent proposal for an increase in the income tax threshold to £10,000 would not, as is commonly supposed, help hard-pressed middle income families. Most of the benefit would go to taxpayers in the top half of the income distribution and widen the growing gap between two-earner families and their one-earner neighbours.”

These conclusions are based on the report’s key findings:

• The burden on UK taxpayers without family responsibilities is not out of line with that in other countries, or with what it was in the 1960s. Nor does the tax burden on two income families seem to differ much from that in other countries. The tax burden on very low income families compares favourably with the OECD average.
• However, one-earner families on a middle income pay much more. In 2010 (the latest year for which figures are available) a one-earner married couple with two children and an income of £35,000 had a tax burden that was 52% more than the OECD average. At £26,000 (close to the median wage), the family paid 85% more than the OECD average.
• The tax burden on that family was twice what it would have been in the 1960s. This is because in those years there was a married tax allowance and child tax allowances on top of the (comparatively low) threshold.
• As well as paying more tax, these middle income families face an effective marginal tax rate of over 70%. No other comparable country has a marginal rate on middle income families as high as this. Canada (58%), Australia (55%) and Italy (53%) are the only other OECD countries with rates above 45%. The OECD average for this type of family is 39%.
• The unfair treatment of some families is evident from the position of different households in the distribution of income. Pre-tax income is a poor guide to how well off taxpayers are, because it takes no account of the number of adults or children in the household.
• The failure by successive governments to take the number of people in a household into account when making tax changes explains why the tax burden on some families has been allowed to rise much faster than that on other households, why the tax burden on these families is often much higher than that in other countries, and why some families on low and middle incomes are now so hard pressed.
• Except at the lowest incomes, one-earner families are much lower in the income distribution than singles and couples without children. A single person without dependents earning around £34,000 is in the ninth decile (i.e. he or she would be better off than between 80% and 90% of the population), whereas a single one-earner married couple with two children and the same pre-tax income is in the fourth decile (i.e. between 30% and 40% in the distribution).

Download a PDF version of the report.

Since Nick Clegg gave his recent speech about raising the threshold for paying income tax there has been heated and highly publicised political and social debate about how best to help poor families in the UK – culminating in last week’s Commons vote on the benefits cap.

The Deputy Prime Minister has for many months spoken of his firm commitment to what he called the “fundamental need for reform” of the UK tax system and the “rebalancing” that he says needs to take place. This intervention won him praise from within his own party and indeed from many outside it, including among economic commentators who share his concerns about the oppressive nature of the current tax regime and its failure to put work at its heart.

We all remember the outrage caused by David Cameron when he revealed that the current welfare system greets many people going into low paid work from benefits with a marginal tax rate of up to 96 per cent. He called this a “huge disincentive to work”- and endorsed plans to tackle a benefits system that was acutely trapping people on benefits.  It is in this context that we should see Clegg’s good intentions. But while his rhetoric might sound encouraging, the proposed policy solution fails to address the problems with our current tax system.

Although the Deputy Prime Minister’s desire to take more people out of tax is driven by his desire to help struggling families within the “squeezed middle” – the main mechanism being promoted for doing this is lifting the personal income tax threshold to £10,000. So for the first £10,000 you earn you would pay no income tax. Whilst initially this might sound good, the reality is that this proposal is not progressive for families. Indeed, as a recent report for CARE indicates, it has a disproportionately positive benefit for richer members of our society in the top half of the income distribution.

An alternative policy of introducing a transferable tax allowance for married couples is, as the report demonstrates, genuinely progressive in its design, benefitting poorer families disproportionately in comparison to their better-off counterparts. In addition, a transferable tax allowance would begin to alter the balance in our system from one which is almost wholly based on the individual to one more sensitive to family responsibility.

Despite all the positive and progressive effects of the transferrable allowance, there has been no mention of this by the Liberal Democrats in the debate around this issue. Needless to say, there was also no discussion of this measure in Nick Clegg’s address last Thursday.

The truth is that ‘pound for pound’, money spent on providing transferable allowances for married couples is a far more progressive means – both in terms of recognising family responsibility and helping those in the lower half of the income distribution – of spending taxpayers’ money than investing it in increasing the personal income tax allowance.

Furthermore, if Mr Clegg and his party want a new tax and benefits system to have work at its heart then he’ll need to address the cripplingly high marginal effective tax rates (METR) present under the current system.  If the Liberal Democrats really want work to pay, then it is imperative that they analyse how much income a family is left with as they rise up the income scale and are subjected to tax increases and benefits cuts.

Indeed, despite another flagship Coalition policy, the Universal Credit, having a positive effect of lowering the METR for some families, many families will still be left facing METRs of 76%. So for every £1 earned whilst in work, families will see only 24p coming into the home: perhaps the Lib Dems should look at how this could be improved further.

All in all, given the individualism of our tax system, with its lack of sensitivity to family responsibility, and the simultaneous shortcomings of our welfare system, with its failure to adequately incentivise work, it was good to see Clegg trying to kick start the debate on reforming our broken tax system.

My hope is that this debate will ultimately encourage the development of a system that both properly provides for those in need and rewards work as well. Disappointingly, however, the Lib Dem flagship tax policy of increasing the personal income tax threshold would have the highly regressive effect of helping better off families disproportionately in comparison to poorer ones.

The progressive transferrable tax allowance on the other hand would do the opposite. It would also begin to reform our system in the right way, laying down the foundations toward move to a system that recognises not just individual income but also family responsibilities.

This article was originally published on ConservativeHome here.

You can follow David Binder on Twitter at @davidpaulbinder.

That was one of the stark messages to come from recent EU figures, launched by the European Union’s statistical division[1], which shows that the percentage of children living with one parent in the UK is significantly greater than nearly all other European Union countries. Indeed, only Latvia, Estonia and Ireland have greater lone parenthood rates. When the constituent UK nations are separated, we see this rate increases yet more to 22% in Scotland[2].

More than 1 in 5 (20.6%) children in the UK are living with only one parent, compared to just 13.6% across the EU[3]. Yet this doesn’t tell the whole story, as the lone parenthood figure is as low as 6.5% in Romania, and in France the rate is just below the EU average (13.5%).

What is more, as well as the proportion of children growing up in lone parent households being greater than almost all other EU nations, the proportion of children growing up in married households is significantly less than the EU average (the UK rate being 65% compared to the EU average of 73.8%).

Whilst many lone parents do a great job in what are often very challenging circumstances, the very high lone parent rate in the UK does give cause for concern in that research has shown that lone parent households have a significantly higher risk of experiencing poverty than do other household types,[4] and that children from lone parent households tend to fare significantly worse than children in two parent households in all areas of life, whether it be in education, health or income level. Indeed, research conducted by the Centre for Social Justice shows that children brought up in lone parent households are 75% more likely to fail at school, 70% more likely to become addicted to drugs and 50% more likely to have an alcohol problem.[5] Furthermore, respected poverty research institution The Joseph Rowntree Foundation has found that children in separated families will experience a greater probability of living in poor housing conditions and will be more likely to develop behavioural problems than those not brought up in separated households.[6]   Thus, these latest figures from the EU do paint a somewhat troubling picture for the UK, and given the concerning outcomes associated with lone parenthood we would urge the UK government to look into why these rates are so high.  It is certainly very interesting that as things currently stand 95% of couples would be better off financially living apart than remaining together[7]. In relation to this at least, we are pleased the government has committed in the Coalition agreement to eradicating this strange phenomenon.

1. http://www.cpag.org.uk/povertyfacts/#causes

2. Building a Social Recovery? A first year report on the Coalition Government, Centre for Social Justice, 2011.

3. Rogers and Pryor, Divorce and Separation, Joseph Rowntree Foundation, 1998

4. Draper et al, p.42, The Taxation of Families 2009/10, CARE, 2011.

5. Iacovou and Skew, http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-11-052/EN/KS-SF-11-052-EN.PDF, October 2011

6. Iacovou and Skew, http://www.opfs.org.uk/files/one-parent-families_a-profile_2009.pdf, October 2011

7. Table 1, page 4, http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-11-052/EN/KS-SF-11-052-EN.PDF, October 2011

CARE’s response to Family and Parenting Institute (FPI) and Institute for Fiscal Studies (IFS) report on ‘The Impact of Austerity Measures on Households with Children’

The aforementioned report makes for bleak reading, particularly for families with children. CARE has been interested for a while about the effects of the Coalition’s changes to tax credits and benefits on families (the introduction of the Universal Credit, for example).

Some intriguing findings from the report include[1]:

a)    Between 2010-11 and 2015-16, 500,000 more children will fall into absolute poverty as defined by the Child Poverty Act (2010), where the poverty line is fixed at 60% of the median income in 2010–11. 300,000 of these children come from households where the youngest child is under five. The median household with a child under five faces a drop in income of 4.9 per cent by 2015-16.

b)    The UK’s poorest families with children lose the largest proportion of their income from tax and benefit changes. Before taking Universal Credit into account, families in the poorest income decile will be 10% worse off in 2014–15 than they would have been had no changes been made to the tax and benefit system. Even after the introduction of Universal Credit, this group loses more than average, at just over six per cent. In particular, lone parents not in employment lose more than 12% of their income on average as a result of tax and benefit changes to be introduced between 2010–11 and 2014–15, or £2,000 per year.

c)     The government’s plan to introduce Universal Credit will soften the blow for certain family types but will not be introduced fully in place for existing claimants until 2018. The report offers evidence that although Universal Credit strengthens work incentives for most individuals, it weakens the incentive for a second earner in a couple, typically the mother in a couple household, to take up employment.

This rather unpromising picture is reinforced by CARE’s own research. Indeed, CARE’s most recent report on families suggests that both lone parents with two children and married couples with two children on 75% of the average wage face Marginal Effective Tax Rates of 70%[2]. To put this into some perspective, for every extra £1 earned through work, the parent would only receive 30 pence of that due to losses in benefits and tax credits and tax increases.

This feeds into a wider point about a fundamental flaw in the UK income tax system, this being that it does not take proper notice of family responsibilities. That is, our income system is far too individualistic and does not take account of the number of dependents in a household when calculating how much an individual should pay in Income Tax. The graph below[3], illustrates this point by revealing where certain households sit in the Income Distribution. To go into a bit more detail, it would seem to make sense that when you have different households who enjoy the same income, they should sit in a similar place in the income distribution. Yet this is not the case. When we look at poorer households for instance, we see that while lone parents with two children and single people with no children are better off than about 40% of the population, one earner couples with two children are better off than just over 20%. This hardly seems fair. This of course is not to say we should penalise lone parent families in order to bring them in line with one earner couples with children. No, far from this scenario it would surely be much better to look at ways in which the situation of one earner families on lower incomes can be improved.

All in all, the FPI and IFS report should be commended for the attention it brings to the difficulties families are facing both now and in the future. But taking both this research and CARE’s work into consideration, what can be done? One idea, which would especially help one earner couples with children, particularly those who are poorer, would be the implementation of a transferable allowance. As the graph below illustrates[4]this is progressive and would begin to redress the balance in relation to the difficulties these families are currently facing and will continue to face in the future.

[1] http://www.familyandparenting.org/news/Press-releases/2012+Press+Releases/Families+with+children+will+be+worst+affected+by+falling+incomes+study+finds.htm

[2] Draper et al, The taxation of families 2010-2011, CARE, forthcoming 2012.

[3] Draper et al, The taxation of families 2010-2011, CARE, forthcoming 2012. Data derived from the IFS ‘where do you fit in’ software.

[4] Figure 4.4, Adam et al, Taxes and Benefits: The Parties plans, 2010 election briefing note no.13, IFS, 2010.

CARE has today released an important new report in response to the speech made by Liberal Democrat leader Nick Clegg this morning in which he criticised the Coalition Agreement commitment to recognise marriage in the tax system.

In his speech, Mr Clegg placed great emphasis on fairness and developing a progressive politics.

As CARE’s report makes plain, however, Mr Clegg’s alternative policy of raising the personal income tax allowance to £10,000, is far less fair and far less progressive.

75% of the benefit of the £10,000 allowance policy will go to those in the top half of the income distribution, whilst 70% of the benefit of the proposed transferable allowance will go to those in the lower half of the income distribution.

Britain’s fiscal arrangements are already very individualistic such that the tax burden on one-earner married couples on average wage with two children is 73% of that placed on a single person on the same wage, whilst the comparable average across developed countries – OECD (Organisation for Economic Cooperation and Development) members – is just 52%.

Nola Leach said, ‘The policy of increasing personal tax allowances to £10,000 may sound progressive, but as our report demonstrates it disproportionately benefits the richer members of our society and actually perpetuates the individualism of our fiscal arrangements. The transferable allowance by contrast disproportionately benefits the poorer half of the population and challenges individualism by recognising family responsibility.’

The other key thing that the report highlights is that, at a time when money is tight, very significantly, a transferable allowance for married couples is cheaper than a personal tax allowance. When the cost of increasing the personal allowance to £10k was introduced it was costed at a massive £16.8 billion which works out at approximately £4.1 billion per annum. The partially transferable allowance proposal from the Conservatives meanwhile was costed at just £550 million.

To access CARE’s report click here (PDF).