Supporting couples with children through
the tax system
Mike Brewer
Institute for Fiscal Studies
Outline
• Proposals
• Perceived structural problems
• Impacts
Proposals
Proposal
Stated goals
Higher WTC for couples with
children
Reduce poverty and reduce
“couple penalty” in tax credits
Use WTC to strengthen work
Reduce child poverty
incentives for second earners in
couples with children
Making (income tax) personal
allowance transferable for
couples with young children
Increase support for single
earner couples with children
Perceived structural problems
•
Tax credits are assessed on family income, with no additions for
second adult
• Some couples treated less generously than if parents (claim to) live
apart
• Couples need higher earnings than lone parents to escape poverty
(£240/wk vs £76/wk in 2004/5)
•
Income tax individually-assessed, so offers no support to full-time
carers
• Single-earner couple pays more tax than two-earner couple with
same pre-tax earnings
•
Reflect conflicting policy goals when designing tax system for families:
• Whether to redistribute to low-income families or individuals?
• Whether to have “couple penalties”, “couple premia”, or neither?
• How strong to make work incentives for 1st and 2nd earners?
• How to compare poverty risks for lone parents with couples with
children?
Which couples would gain?
Policies cost around £1bn/yr
% change in net income
3.5
£15/wk WTC for all couples:
1.5m gain
3
£40/wk WTC for 2nd earner:
0.6m gain
2.5
2
Transferable PA for couples
with children under 6:
1.3m gain
1.5
1
0.5
Figure shows average change in income of couples with children by income decile of whole population
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9
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How would it affect incentives?
•
Incentives to work
• Extra WTC for couples encourages 1st earner to work, but
discourages 2nd earner
• Extra WTC for 2nd earner encourages 2nd earners to work
• TPA discourages 2nd earner to work (while children under 6)
•
Incentives to earn more
• The policies that increase WTC mean more couples facing high
marginal effective tax rates (METR would rise to typically 70%, from
37%)
• TPA increases marginal effective tax rates of person who forgoes
PA, reduces METRs of some low-paid beneficiaries.
•
All policies increase support for couples with children compared to
• Couples with no children
• Lone parents