By Dr Patrick Nolan, Chief Economist, Reform
Lucy
Parsons has written on CentreRight explaining how, given the appalling
state of the public finances, it is time to take a fresh
look at tax policy. Tax rises are an inevitable, although unwelcome (as
comments on her article highlight), reality – with revenues needing to
increases to reduce the deficit and to remind the electorate that the reckless
public spending increases of recent years have to be paid for. But, as Lucy
notes, tax rises must be held to a minimum (indeed Reform argues that rises must
be lower than those proposed by all of the main political parties, including
the Conservatives) and should be coupled with reductions in the most harmful
taxes (such as National Insurance and the 50p rate).
Lucy also criticised the Conservative party policy of tax
breaks for married couples. This may surprise some readers of this blog as
there is a view that the UK, along with Mexico
and Turkey, is one of only three countries that makes no recognition of
marriage in the tax system. But this claim that the UK largely stands alone
among industrialised countries in not recognising marriage is quite simply
wrong.
There are a host of other countries that make no recognition
of marriage in their tax systems at all, including New Zealand, Sweden,
Finland, Greece and Hungary. Since the 1970s the clear direction of travel in
tax systems has been to move away from family taxation. In relation to income
taxes, for example, in 1970 it was possible to assess income taxes on a family
basis in two thirds OECD countries, but in the 21th Century this has (quite
rightly) fallen to around a third (and is continuing to fall).
Yet just because there is a growing international consensus against doing so does not automatically mean that recognising marriage in the tax system is wrong. It could be that this policy is right and governments in most industrialised countries are getting it wrong. But any rigorous assessment shows that this is not the case – plans to recognise marriage are poorly designed policy.
To explain it is useful to go back to what the objectives of
the policy are. Calls to recognise marriage in the tax system in the next
Parliament have been motivated by desires to both arrest the decline in the
proportion of married families in the UK and to improve child outcomes (through
encouraging a parent to remain in the home).
But it is possible to overstate the extent and costs of family
breakdown. Most families experience generally positive outcomes, children
brought up in nuclear families do not always do better than children brought up
by sole parents, and divorce may help avoid negative family outcomes (such as
in high conflict situations). Yet on average two-parent families fare better
than sole parent ones and these differences
in outcomes matter for social policy. So while there may be some case for a
concern with family breakdown (although this is often overstated) the mere
presence of a problem does not justify poorly thought-out policy.
Recognising marriage in the tax system would, for example:
- Fail to
address concern that marriage is increasingly becoming the domain of the middle
classes. Tax breaks for marriage would simply be another form of middle class
welfare, where most of the benefit goes to people who are not in need (and,
indeed, not the people that the policy claims to be concerned about).
- Fail to
address marriage
penalties in the income transfer system. The UK experience with working tax
credits shows that trying to remove disincentives in the tax system by grafting
on a new programme simply makes the welfare mess worse. A better approach is to
move to a flatter tax scale and/or reduce benefit levels – as with a flat tax
all different families are treated identically and so problems of marriage
penalties do not arise.
- Fail to
encourage people to get married. Advocates of recognising marriage are right to
acknowledge that “that nobody is
going to get married, or avoid divorce, just to benefit from a tax
allowance of a few pounds a month.” As well as financial incentives, people’s
decisions regarding marriage are influenced by many other factors, including
social norms, uncertainty and the administration of welfare and taxes.
- Fail to
improve outcomes for children. The strongest evidence shows that the most
important things in ensuring children get the best start in life are having a
parent in work and family income. Proposals to recognise marriage in the tax
system would not help reduce the number of jobless households or child poverty. For instance,
sole parents, a household type with a high incidence of poverty, would not
receive any assistance from the proposals.
- Fail to
reflect the way modern families live and stop the government from interfering
in family life. Administering this tax relief, for example, would require HMRC
to ensure that taxpayers who claim relief are actually eligible. This would
require rules as to what constitutes an eligible relationship and these rules
would need to be monitored and enforced. Rules would also have to be designed
to determine the treatment of couples that begin or end their relationship
during an income tax year. Do we really want a tax system where monitoring
changes in your marital status becomes the business of HMRC?
The scale of the challenges facing the public finances is now widely acknowledged. Given this, and the inevitable need to raise tax revenue to help repay some of this debt, it is now more important than ever for tax policies to be based on clear principles and a assessment of whether they would actually achieve their stated goals. The appalling public finances are no excuse for bad tax policy, and that is exactly what proposals for recognising marriage in the tax system represent.