Family and Tax
Supporting families – and marriage in particular – has been a key aspect of CARE’s work for many years. We believe the benefits of marriage reach far beyond husband and wife to wider family and society as a whole.
With this in mind, we have campaigned to ensure the government recognises this, specifically through the tax system, by introducing transferable allowances for married couples. To support this work we have been at the forefront of research into how families fare in the UK tax and benefits system.
The present tax system
In the United Kingdom we used to recognise marriage in our tax system up until the year 2000 when recognition was removed.
In taking this step we broke away from international best practice. Britain became the only OECD (Organisation for Economic Co-operation and Development) economy of its size not to recognise marriage in its tax system. As of 2012 only 19.3% people living in OECD countries lived without the recognition of marriage in its tax system and most of those lived in either the UK or Mexico.
Without recognition of marriage in the tax system it came as no surprise to CARE that since 2000 married couples in the UK have been given a harder time when compared to married couples across the OECD area as a whole on average. CARE research over many years has demonstrated that one-earner married couples with two children on an average wage in the UK have had to bear a significantly greater portion of the tax burden than is the case across the OECD on average. In 2012, for example, a one-earner married couple with two children on an average wage bore a tax burden that was 45% greater than the OECD average.
In the failure to recognise marriage in the tax system we witnessed a radical individualism which made Britain’s experience quite distinct. Whereas across the OECD on average the tax payer in a one-earner married family tends to have a tax burden of just over half (55%), that of a single person on the same wage with no family responsibilities, in the UK the burden he is asked to bear is much closer to that of a single person with no family responsibility, 80.4%.
Why is this a problem?
This situation is a serious cause for concern on three bases:
First, family breakdown: Given that one of the drivers for family breakdown - which is very costly to the Exchequer - is financial pressure, the failure of British public policy to support marriage in the tax system clearly does not help.
Second, choice: Over many years polling has consistently revealed that far larger numbers of people want to marry than actually get married. This prompts important public policy questions about obstacles to marriage in which the failure to recognise marriage in our tax system, which means that it is harder to choose to marry in this country than across the OECD on average, must again be a cause for concern.
Third, choice and being able to do what is good for society: Quite apart from the argument that there is no merit in politicians making it harder for people to do what they want to do (so long as it isn’t illegal), in this case there is the small point that we are also discussing a choice that would, for the reasons set out above, be very good for society as a whole.
Given: a) the significant public policy benefits of marriage over cohabitation and b) the strong aspiration to marry, the fact that our failure to recognise marriage in the tax system makes the decision to marry more burdensome in the UK than is the case across the OECD on average is not good public policy. At minimum the public policy benefits of marriage mean that our fiscal arrangements should not make it harder to marry in this country than is the case across the OECD on average. Mindful of the public policy benefits, however, there is actually a strong case for incentivising marriage. When one recognises, however, that the obstacles to marriage are not limited to the lack of recognition of marriage in the tax system but extend to the presence of the couple penalty in the benefits system, which creates a very significant financial incentive for couples to live apart, one realises that there is no ‘danger’ or our actually creating a fiscal incentive to marry. Recognising marriage in the tax system is really about working to erode the incentive not to marry, not about creating an incentive to marry.
The couple penalty and UK public policy
CARE’s fiscal policy consultants have worked over many years to highlight the problem of the couple penalty. The net couple penalty was calculated by the Institute of Fiscal Studies as being worth £34.3 billion in 2010-11. The Marriage Foundation suggests that the couple penalty is worth up to £7,100 if you have one child and £9,985 if you have two children and £11,917 if you have three children. Given that social science research demonstrates that it is not in the best interests of children to be raised in single parent homes, it is quite wrong to use tax payer’s money to create an incentive for couples with children to live apart.
Our Work
We have campaigned for the reintroduction of recognition of marriage in the income tax system, since it was removed in 2000. After an absence of 15 years, that recognition returned in April 2015, but only set at ten per cent.
CARE's research shows families in the UK now face the highest marginal tax rate in the western world, placing a huge and discriminatory tax burden on families across the UK. Our report reveals that the tax burden faced by one-earner married couples with two children on the average wage is 20 per cent higher in Britain than the rest of the OECD. But the picture for British one earner married couples with two children on 75 per cent average wage – those the Government has described as the just about managing, face the highest effective marginal rate in the developed world, a crippling 73 per cent.
This means that when such a family increase their incomes, they will only get to keep 27 pence from every additional pound earned. The rest will go to the government in tax, national insurance and lost benefits.
It found that a one-earner married couple with two children on average wage pays 70 per cent more tax than a comparable French family, more than twice as much as a comparable US family and 15 times as much as that on a comparable German family.
By contrast the tax burden on a single person with no children on average wage is 9% less than the OECD average and 18 per cent less than the average for the 22 EU countries that are OECD members.
Increasing the marriage tax allowance to make it fully transferable would be a significant step in the right direction. Such a move also carries public support. ComRes polling for CARE found that nearly six in ten (58 per cent) people support an increase in the marriage allowance, compared to just 20 per cent who are opposed.