It has become popular to believe that taxation ought to be “progressive” — in other words, that those with higher incomes should pay a higher proportion of those incomes in tax. This has come to replace an older notion, which was that the amount one paid in tax should be related to the ability to pay. These concepts are not the same. In particular, the ability to pay depends on one’s (allowable) obligations in terms of costs. For example, a single childless person on £40,000 a year would be better able to pay £15,000 in tax than a lone parent of two children on that same £40,000.
But this concept of ability to pay has virtually no role in our tax system. The tax system has come to regard having a child as a consumption decision. Recent reports suggest that having a child now costs more than £200,000. From the tax system’s point of view, you could choose to spend £200,000 on a second-hand Ferrari, or a yacht, or a child — it’s all the same, as far as the taxman is concerned.
This was not always so. A famous paper by Patricia Morgan detailed how, over the 1960s, 1970s and 1980s the balance of taxation changed dramatically, with taxes on families rising rapidly throughout the period and taxes on single childless people rising much less through the 1960s and 1970s then falling through the 1980s.
That happened partly because there was the explicit removal of tax reliefs to the benefit of couples (e.g. the Married Couples Allowance), partly because the incidence of many “anomalous” reliefs (e.g. MIRAS) removed in periods when chancellors sought to raise tax had actually had an incidence skewed sharply towards couples with children. But the single most important change was the initial downgrading of the child tax allowance during the 1960s and early 1970s, its conversion into a flat payment mis-baptised “child benefit” in the late 1970s, and then the freezing of that tax allowance/”benefit” during the 1980s. (This was in stark contrast to the treatment of child tax allowances in the 1920s and 1930s, when they rose continually even when much else was cut.)
Now some readers will doubtless be inclined to respond: “Why should I pay for others to have high benefits to pay for children they can’t afford?” But I am not discussing benefits here. It isn’t a question of the state paying anyone to have children. The question is how much tax people should have to pay. And the thought is that if you have dependents, your ability to pay taxes is less, so you should pay less tax. And note that this point is independent of precisely how much income you have — someone on £100,000 that has two children is less able to pay £40,000 in tax than is a childless person on £100,000.
The last element of the tax system that acknowledged this issue in any way was the mis-baptized “child benefit”. But the proposal to remove child benefit for higher rate tax payers, finally converting child benefit from a residual flat-rate tax allowance into a welfare benefit (and hence something not to be paid to the wealthy), removes even this vestigial in-principle acknowledgement.
Child benefit is an anachronism. It came into existence in the 1970s on the assumption that mothers would stay at home and look after the children, experiencing the costs of child support, but that men would earn the money so gaining the benefits of a child tax allowance. To negotiate this problem, the child tax allowance was converted into child benefit to be paid directly to the mother. But these assumptions are now quaintly outdated.
Over the longer term, child benefit in its previous form as a flat-rate tax allowance must surely be abolished. Since it has now been redefined as a welfare payment, it must eventually be restricted to levels much lower down the income scale than £40,000.
But that would still leave the question: is a child a consumption choice, like a Ferrari; or is it a dependent person that increases the costs and reduces the ability to pay tax of whoever is supporting it? This is nothing to do with deficit reduction. It is a question of the balance of taxation to be paid between the childless and those with children. Recent decades have seen that balance shift hugely away from taxing the childless and towards taxing parents. Is that a concept the Coalition is happy to leave in place?
Andrew Lilico is Policy Exchange's Chief Economist.