Dr Dan Boucher: Under this Government, we're one of the most unfriendly countries to single earner couples in Europe

Dr Dan Boucher is Director of Parliamentary Affairs for the charity CARE

After this year’s budget there was a bit of a backlash from stay at home mums (and dads) because of the lack of support afforded one-earner families. The proposal for child care tax breaks for all families apart from one-earners did not go down so well with stay at home parents.  However, George Osborne has since promised that an announcement on the long-awaited transferable allowance policy will be forthcoming in this year’s Autumn Statement, ahead of the 2014 Finance Bill.  This policy will directly benefit one-earner married families and cannot come too soon. Here are just some of the reasons why:

Is it right that two, two-parent families, each with two children and on identical household incomes should be taxed radically differently because of the choices the parents make about how that income is raised?

CARE’s research shows that a one-earner family on mean average wage (as defined by the OECD, 2011), £34,286, will pay £8,159 in tax. A comparable two-earner couple, by contrast, will not pay nearly as much. For example, if one member of the couple is on £20,572 (£395 per week) and the other is on £13,714 (£263 per week), then together they will pay £5,544.87 in tax. The simple truth is that one household with the same number of adults and children as the other will pay £2,1614.13 more in tax just because one parent stays at home to look after the children! Is that right?

Moving to one-earner families on £60k, the income level where child benefit is lost, the difficulties become even starker. A one-earner couple with two children on an income of £60,000 will pay £13,950 in tax. A comparable two child, two-earner couple family, each earning £30,000, meanwhile, will pay £8,768. After the Higher Income Child Benefit Charge is added, the one-earner couple's tax bill rises to £15,667. This is £6,899 more than that of the two-earner couple. Put another way, a one-earner family with two children and on an income of £60,000 already pays 59% more tax than a comparable two-earner couple, each earning £30,000. With the introduction of the HICBC, the one-earner couple will pay 79 per cent more tax.

That this is not great is underlined by the fact that other countries do things rather differently. Our analysis demonstrates that in 2011 a UK one-earner married couple with two children on average wage bore a tax burden (that is tax and national insurance net of benefit) that was 42 per cent greater than the OECD average. This basic insensitivity to one-earner families was underlined by the fact that the tax burden on one-earner married couples with two children on an average wage was 73 per cent of that paid by a single person on the same wage with no dependents, whilst the OECD comparable figure was just 52 per cent. This is hardly surprising when one realises that the UK is almost alone amongst large OECD economies in not recognising marriage in its tax system.

Now, one-earner couples have not found themselves saddled with a raw deal overnight. Things have deteriorated particularly over the last twenty years, something that the Conservative Party rightly recognised some time ago. In February 2009 Philip Hammond, then Shadow Chief Secretary to the Treasury, spoke to the Daily Express about, ‘the continuing bias in the tax system against two parent families where only one adult works'. No other European country penalises families in this way. If we want to end child poverty we must end this discrimination. That is why Conservatives have pledged to reintroduce a recognition of marriage into the tax system.

Mindful of the above difficulties, which have been made rather more stark as a consequence of the proposed child care tax breaks for two-earner and single parent but not one-earner families, the Chancellor’s commitment to make an announcement about transferable allowances in his autumn statement this year is particularly welcome.

In considering the case for this change, however, it is important to recognise the potential for this policy to bear much wider dividends than those considered above and the wider marriage arguments that have been rehearsed elsewhere. At the moment we are very unusual internationally in having a tax system that makes no provision for family responsibility. Instead our tax system rests entirely on the individual and there are no compensating provisions that allow for family commitments - be they spousal or parental. The complete insensitivity of our tax system to the family (which has only been in place since 2000) has meant that as a progressive country we have been compelled to compensate by inflating benefits. The boost that our benefits system has required, however, which has been met principally through tax credits, is such that it has created a new problem that did not exist in our benefits system before.

Specifically, the withdrawal of these inflated benefits has significantly increased our Marginal Effective Tax Rate (METR). The METR is the effective rate of tax that you would pay on each additional pound earned over and above your existing income, whatever that may be. It is here that the international comparisons are again really interesting. The METR on a one-earner married couple family with two children on 75 per cent average wage in the UK is a massive 73 per cent, the highest in the entire OECD. That is to say that for every additional pound earned, you only take home 27 pence! The average OECD METR, however, is just 34 per cent and very interestingly this was the UK figure in 1990 before family recognition was completely removed from our tax system and there was the compensating increase in benefits. At this rate you take home a much more substantial 64 pence of every additional pound earned.

It is because of this that redesigning the benefits system alone cannot solve the basic ‘making work pay’ challenge. While the Universal Credit is, for example, very helpfully removing some of the very highest Marginal Effective Tax Rates in the 90 per cents, other lower METRs have necessarily increased and indeed the average METR under the Universal Credit will be 76 per cent, slightly more than the current average. The only way to achieve a net reduction in the METR - absolutely key if we are to create an ‘aspiration nation’ - is by reforming both the tax and the benefits system together, which would require a joint Treasury-DWP initiative.

In restoring some recognition of family responsibility to our tax system, transferable allowances will ease pressure on the benefits system and this in turn will ease pressure on the Marginal Effective Tax Rate. It will be a very important first step to bring us back into line internationally both in terms of the tax burden on one-earner families and the Marginal Effective Tax Rates on some aspirational one-earner families.

Some might respond to the above by saying but isn’t the Government only offering a limited transferable allowance? Is this really likely to have much impact? It is true that the allowance offered in April 2010 was limited but we must not lose sight of two points. First, when introducing the policy in April 2010 David Cameron was very clear that he was disappointed that it could not be more generous at that time (referencing fiscal constraints) but that it was a ‘start’ and something that he intended to build on across the Parliament.

Even if it is implemented on the basis suggested in 2010 this will be hugely significant and very welcome. It will be a start. Second, while the Prime Minister has committed to recognising marriage, he is not stuck with the exact terms of his April 2010 commitment. We would hope that in 2014 he would be more generous with his transferable allowance, especially given that there may not be another occasion to build on them during this Parliament.

In order for transferable allowances to be operational by the next election, provision must be made for them in the 2014 Finance Bill for the year 2014-15. This would enable people to claim against them from the beginning of the 2015-16 tax year, meaning that they would be up and running from April 2015, a good month before polling day.

This piece is based on a presentation given by Dr Dan Boucher, Director of Parliamentary Affairs for the charity CARE to the Centre for Policy Studies on 16 July. A more comprehensive overview of the arguments for transferable allowances can be found here and here.