Andrew Lilico: What recognition of the ability to pay should the tax system have?

Until today, the UK tax system contained at least some in-principle recognition that the level of tax one paid was related to the ability to pay.  Virtually every developed country has some form of child tax allowance – since responsibility for dependents reduces one’s ability to pay, and hence if the amount of tax demanded is related to the ability to pay, then those with children should pay less tax.

The UK used to have that too.  Until the 1970s there was a tax allowance that varied with income.  From the 1970s that tax allowance was converted into a flat-rate tax rebate called “child benefit” – though it remained a tax rebate, not a welfare benefit, which is why it was always administered by HMRC (not DWP) and why take-up was almost universal (unlike welfare benefits some of which only have take-up of just over 60%).  The real value of the “child benefit” tax allowance has fallen dramatically since the 1970s, as it was not raised in line with earnings.  And from today it has been abolished for those on relatively high incomes.

Since the “child benefit” tax rebate has now been abolished for those on higher incomes, there is some confusion in the tax system regarding its principles.  Why does a single childless person on £80,000 pay more tax than someone on £75,000?  The old idea used to be that someone on £80,000 had a higher ability to pay than someone on £75,000, and hence should pay more tax.  But clearly the tax system no longer believes that – someone on £80,000 with three children obviously has less ability to pay tax than someone on £75,000 with no children, yet the tax system does not any longer demand less tax of the person on £80,000 with children.  So higher tax demands are not sought of those with higher ability to pay.  But then on what basis are higher tax demands made of some people than others?  It is now most unclear.

If the tax system does not aspire to tax according to the ability to pay, why have an income tax at all?  Or is the idea that we seek to tax money where it exists, regardless of ability to pay that tax?  But then why income?  Many an old couple lives in a house they’ve already paid for and could sell.  Why not tax people on their fully-owned housing?    What about taxing anyone who lives in a £500,000+ house £100,000 a year?  A silly thought?  But why any sillier than taxing those on over-£50,000 income, regardless of their ability to pay?

In such discussions people often respond “Why should I, a childless person, pay for someone else’s children?”  But the issue isn’t about you paying for someone else.  The issue is how much tax the person with children is able to pay and how much tax we should demand from her.  “Ah, but some of my taxes go on her children’s education and healthcare.”  Fair enough – if you object to your taxes being spent on education and healthcare then vote against that.  But the tax taken from higher-income people will be spent on the education and healthcare of the poor, not just the rich.  A person on £75,000 with two children would almost certainly be better off in a world without state education or healthcare and hence no taxes paid for these things.  Her family are most unlikely to be net recipients of the welfare state – they will almost certainly be net contributors.  The issue isn’t about how much should be given to them; it’s how much should be taken from them to pay for the poor (and also to pay for the police, defence, etc.).

Thus, when some say: “Don’t have kids if you can’t pay for them!” that misses the point.  The question isn’t about how much the person on £75,000 pays for her own kids.  It’s how much she should be required to pay for the poor, the children of the poor, for defence, the police etc..

“But what if I took out a large loan to buy a yacht – then my ability to pay would be lower, also.  Does that mean I should pay less tax?”  Now we come to the central point.  Is a child a financial obligation akin to a loan or maintenance costs on a yacht or sports car?  The law does not generally treat a child that way.  If you don’t bother to maintain your yacht so it falls into disrepair, that’s your business.  If you don’t bother to feed or clothe your child, you will be put in prison.  If, say, you are a father and separated from the mother of your children, you will be expected to make a financial contribution – indeed the money may even be taken directly from your pay packet.

So the law does not regard paying for children as a discretionary obligation — something for you to take or leave as you find convenient.  A child is a person, not a consumption choice.  If you have children, you are required by the law to pay for them.  That legal obligation diminishes your ability to make other sorts of payment.  You will find it trickier to afford a yacht if you have children, and you will have less ability to pay tax.

So, by eliminating the last recognition in the tax system of the reduced ability to pay when one has children – namely the mis-baptised “child benefit” tax rebate – the tax system no longer requires higher tax from those with a higher ability to pay.  It is thus an open question on what basis more tax is required from someone on, say, £80,000 income than from someone on, say, £75,000.  If it isn’t because the person with £80,000 income has a higher ability to pay, why is more tax required from that person?