Truss is right about family tax reform

The Conservative leadership campaign has highlighted a difference in approach to taxation. Whilst the media has largely concentrated on candidates’ views around tax and spend policies, a major difference has emerged in how the UK tax system should be structured and whether the UK should become more like the tax system employed in other western democracies.

Last week, Liz Truss helpfully highlighted a fundamental unfairness in the UK tax system – how it fails to take account of the family unit. This flaw is not new – we at CARE have been campaigning on this issue for well over a decade. Our latest report, produced in partnership with fiscal policy experts Tax & the Family, argues that the current approach is inherently unfair. It states:

"The UK tax system does not treat families fairly. The amount of tax that they pay bears little relationship to how well off they are. Many families in poverty pay income tax. Some in the bottom half of the income distribution even pay higher rate tax and are liable for the HICBC. This problem, which has been ignored by successive Chancellors, is a serious one, and needs to be tackled.”

The central problem is this: the UK tax system taxes individuals and rather than households. That doesn’t seem earthshattering, however, when you understand the flaw in the system, putting it right could have far-reaching consequences and benefits, lifting families out of poverty, increasing household budgets and helping people get through the cost-of-living crisis.

In our society, we usually measure how well off someone is by the salary they earn. But how much you earn does not take into account the money you have to pay for the necessities of life. Your disposable income, what you can actually spend each month, is determined by the size of your family. The more mouths to feed in your household, the less disposable income you have.

The UK tax system takes no account of variables such as family size or ability to pay. This individualised tax system means a family with two children needs to earn twice as much as a single person with no children to have the same standard of living. This is not the way other countries approach taxation, as they recognise the challenges inherent to family life.

The failure of the income tax system to take account of the family is a contributing factor to poverty in the UK. Households with children are among the poorest in the country. But this is not a benefits crisis, two-thirds of children living in households that are considered to be in poverty, have at least one working parent.

In the UK, for the average one income family with two kids, to enjoy the same standard of living as a single person earning £25,000, that family would need to earn an income of nearly £60,000. If that same family has four children, their income would need to be £80,000 per year, and that would only allow that family to have the same standard of living as a single person on £25k.To put that in perspective, only the top 5% of earners enjoy a salary over £80,000 per year.

This seems an almost unbelievable flaw in the system but it has been there eating into family budgets since the 1980s. Given the number of families that a change in the system could help, it is shocking that it has not been a mainstream debating point until this week, when it was highlighted by Liz Truss. It is sometimes the most obvious injustices that are overlooked in politics.

The UK tax system does not need to be structured as it is. In fact, it’s an outlier compared to other Western democracies. In countries such as the USA, Canada, Germany and France, households are recognised, to varying degrees, as single units. This means that the family can be treated as one taxable unit rather than a number of individuals living under the one roof. This is the type of system that the UK should consider moving towards.

The next Prime Minister needs to consider a suite of measures to help Brits in today's challenging fiscal environment. A fairer deal for families, through progressive reform of the tax system, must be part of their plan.