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Time to make the tax and benefits system work for low-income families, not against them



The COVID-19 pandemic has brought the UK’s tax system to a tipping point. Thanks to tremendous scientific efforts we can see the end of the medical burden, but the reality we now face is of a long-term financial burden.

This has led to the Chancellor already signalling that taxes will need to increase. This decision may be inevitable but the way we go about it is not.

In any case, low-income families are already facing increased financial pressures and burdens with significant job losses and economic pressure across the board. These families need support.

In this context I am pleased to introduce CARE’s latest Taxation of UK Families Report. This timely analysis highlights the burden faced by single earner families and puts into stark relief the need to reform and reframe the way income tax operates in the UK.

The evidence has shown every year, since our first report in 2008, that one-earner families bear a heavier share of the tax burden in the UK than in other countries. This is true both for single parents and for one-earner couples.

At the average wage as estimated by the OECD, the UK tax burden on single parents with two children is 26% greater than the OECD average, and 25% greater on one-earner married couples with two children.

The UK system of independent taxation linked with means tested benefits does not meet the needs of families in the 21st century. The result of decisions made in the 1980s and 90s is that families in the poorer half of the population, including those whose household income is below the widely accepted poverty line, now pay significant amounts of income tax.

The benefit system does rightly take account of household income and family circumstances. The fact that this support comes from the benefit system, however, means that families face punishing effective marginal tax rates (EMTRs), trapping them in poverty.

The priority for the Government in this moment should be to ensure that amidst significant economic pressure and looming tax increases that may well be required after COVID-19, the burden does not disproportionately fall on families in the ways that the income tax currently does.

The Government should find ways of rebalancing the distribution of income tax, ensuring that the income tax burden on low-income households with children is reduced, and in particular their marginal rates. It makes no sense to be levying income tax on these families which is then handed back to them through means tested benefits, especially when these involve steep tapers.

In 1990 a one-earner family in the UK on 75% average wage faced an EMTR of 34%. The same family in 2019 was facing an EMTR of 73%, trapping them in poverty.

The Government needs to rethink the way in which the income tax system works for families and the overlap with the benefit system. Marginal rates of 70% or 80% don’t just weaken incentives, they all but destroy them. Families facing these rates cannot lift themselves out of poverty or prevent themselves sliding into poverty.

Some might argue that aiming for a simple tax system should be our goal and that recognising family responsibility would make things more complicated. In principle, making our tax system simple is certainly highly desirable. To the extent, however, that the cost of doing so is a failure to properly recognise family responsibility in the tax system, this comes at too high a price.

It would be much better to have a tax system that is fair, and which does not trap people in poverty even if this came at the cost of more complexity. Given what is actually at stake, it would be a small price to pay.

CARE considers that this unprecedented time of change presents an opportunity to ensure that the tax and benefits system work together, not against each other. We are calling for the income tax system to be reviewed and reformed so that it takes account of the make-up of a family rather than just looking at the individual being taxed.

Taking the family into account will ensure that as UK society begins to pay off the debts created in this time of national crisis, this is done fairly and equitably and in a way that does not trap low-income families in poverty.

Download the full report here

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