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To make his family policy fair, the Chancellor should introduce transferable tax allowances in the coming budget

By Paul Goodman
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Screen shot 2013-01-08 at 10.42.13The most simple way to support couples with children, an established aim of the tax system, is through a universal payment that is neutral between families that work in different ways, and which they can thus use for childcare as they want.  In practice, this means that transferred allowance or tax rebate called child benefit, or something rather like it.  In principle, such an arrangement recognises choice, an idea propagated by Conservatives for time out of mind.  And if a government wants to recognise marriage in the tax system, the means that is most neutral between one-earner couples and two-earner ones is a marriage tax allowance.

We don't yet know the details of the Government's childcare policy, but it's clear that this will be a good deal less elegant.  George Osborne has already curtailed child benefit for better-off people.  In the short-term, this is acceptable as a deficit reduction measure (though means-testing a payment as straightforward as child benefit is already bringing anomalies and more bureaucracy in its wake).  In the longer-term, the Treasury will try to continue this transfer of money from parents to other causes - part of the long squeeze on family incomes chronicled in detail by Patricia Morgan.  That should be resisted.

In the meantime, the Chancellor apparently plans to introduce tax breaks for childcare.  By definition, these would go to better-off people, usually mothers, who work in the labour market.  One way of viewing such a move is to see it as the Government taking money away from richer parents and then giving it back again - but only to those who work.  Such a scheme would obviously be discriminatory between parents who work and those who don't, and contradict the aim of removing child benefit from better-off parents to show that "we're all in it together".

Mr Osborne would thus have to introduce a second new measure to correct the bias.  This is a transferable tax allowance for married couples, as promised in the Coalition Agreement (though without the support of the Liberal Democrats, who will abstain.)  The Daily Mail reports today that Iain Duncan Smith, Owen Paterson and Chris Grayling want to see such an allowance introduced in the coming budget.  Such an allowance would be pro-poor: The Centre for Social Justice estimates that 70% of the gain would go to taxpayers in the bottom half of the income distribution.

Daniel Finkelstein, who knows the Chancellor's mind as well as any commentator, wrote in 2010 that Osborne looks on the transferable tax allowance policy with "detatched scepticism".  This dovetails with my memory of working with the Chancellor when I was Shadow Minister for Childcare.  Certainly, he and Elizabeth Truss, the Minister now responsible for it - who set out her ideas for change on this site yesterday - believe that the economy needs more women in the labour market, and note that an increasing proportion of women are working in it anyway.

In short, they think that where social trends lead, policy should follow.  But I suspect that the complicated new-childcare-tax-breaks-plus-transferable-allowance policy-in-waiting is also driven by something else - namely, the love of politicians to have something extra to announce.  Child benefit and a marriage allowance (or transferable allowances) would mean one announcement; new childcare tax breaks plus transferable allowances would mean two.  Oh, and just to make politics even less straightforward, Nick Clegg wants a hand in the policy and announcements.

The thought occurs that if the Chancellor really is determined to introduce new tax breaks for childcare, he might as well restore child tax allowances instead, scrap child benefit altogether, and let the child tax credit take the strain for those families that don't pay tax.  But at any rate, if he is set on these new tax beaks, he should complement them with transferable tax allowances in the coming budget - to be fair to one-earner and two-earner couples alike, and recognise that families work and live in different ways.


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