Tax and Fiscal Policy

The case for a family-friendly tax system

The Christian group Care has regularly published a report on the taxation of families in Britain and other developed countries. Its last report concluded that single-earner married couples with two children on an average wage bear a tax burden that is nearly 50 per cent greater than the average in developed countries. This should be a cause for concern.

Catholics believe that the family is the prime vehicle for the provision of welfare. Within the family we provide for children and the elderly who cannot provide for themselves. It is also very clear that marriage – together with employment – reduces the chances of poverty. However, we have a tax and benefits system that discriminates actively both against marriage and against single-earner families and which also discourages full-time employment. This is not good economics, but Catholics should be especially concerned about this issue.

The debate is not helped by the confusion sown by many lobby groups, including Catholic organisations. Catholic Bishops, informed by the Catholic Social Action Network (CSAN), have argued, for example, that there are more poor people in work than poor people out of work and that work is therefore not a route out of poverty. This is a dangerous misuse of statistics. The main reason why there are more poor people in households with somebody in work than there are in households in which nobody does any work is that there are far, far more of the former than the latter. Also, the CSAN statistic counts as a working household any household in which anybody does any work at all.

The important question is whether work and marriage increase a family’s chances of having a stable and prosperous life and the answer is unequivocal. Amongst single parent households with children where the parent does not work, 54 per cent were in material poverty in 2009. In couple families where one parent works full-time and the other part-time just 2 per cent are in poverty.

If the Chancellor had presented a family-friendly Budget, he would have sought to end the way our tax and benefits system discriminates against families – especially against those families where the father earns the vast majority of the income.

Our tax system is designed to penalise households with just one earner. When combined with our welfare system, it strongly penalises marriage and commitment. Of course, marriage should be more than just about economics, but if the government is supposed to promote the common good, it should not be making life difficult for people to do the right thing. It is, perhaps, hardly surprising that, whereas 90 per cent of top earners with children are married, only around half of those on the lowest earnings are married: the tax and benefits system penalises marriage the most for those who earn the least.

Of course, any benefits system is going to give money to the least well off, and that is likely to include a disproportionate number of single-parent families. However, in most countries, the tax system helps to counteract this encouragement to not marry that arises within the benefit system. What should we do here?

George Osborne should radically reform the tax system and make the household rather than the individual the basic unit of taxation. The amount of tax-free income any household can receive should be determined by tax allowances based on the number of adults, the number of dependent adults (for example, disabled adults, elderly parents) and the number of children. Tax would then be charged on household income less the sum of those household allowances. Variants on this system are common in other EU countries which do not have the same structural anti-family bias as the UK tax and benefits system. A tax credit would be paid if household earnings were less than the total household tax allowance ensuring that the system was not biased against low-income households. This system would also replace child benefit.

Such a reform would mean that two households with the same income would pay the same tax and receive the same benefits regardless of whether the income was earned just by the father or split between the mother and father – in other words it would be neutral when it came to stay-at-home mums. This system would no longer penalise a working father who decided to marry the non-working mother of his child.

As the Church teaches and common sense (and good economics) confirms, the household is the most important vehicle for welfare. Parents and children do not live as individuals and they should not be taxed as individuals.

Unfortunately, neither our own Catholic Bishops’ Conference, which published a short pre-election letter, nor the Anglican Bishops, who published a 50 page pre-election letter, seem to show any great interest in the anti-family bias of the tax system. Certainly CSAN’s focus is on campaigning for maintaining welfare spending at the high levels they believe is necessary within our existing failed system. This is a pity. The best way for the state to allow families to flourish is by not penalising them. The results of doing the opposite are grim: currently, nearly 30 per cent of children are brought up in a household where nobody is working full time. This is not because of a lack of availability of jobs, this 30 per cent is concentrated heavily in single parents families. It is family circumstances, encouraged by the tax and benefits system, which leads to this problem.

Reforming welfare is not the only urgent task of government. Another issue never mentioned by CSAN or our Bishops is a reform of our planning system so that more houses can be built. The high cost of housing is keeping many families on the edge of poverty and it is entirely a function of our strict planning system. This is perhaps a topic for another column, but the issues of taxation, welfare and housing go together. For a thriving society we need thriving families. For thriving families, we not only need to bring an end to a tax and benefit system that encourages the fragmentation of households; we also need families who can afford the basics and are rewarded for working.

This article was first published in the Catholic Universe.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.