Children in the tax and benefit
system
Stuart Adam
Institute for Fiscal Studies
Aims
1. Understand the treatment of children in the tax and
benefit system
2. Useful case study
• applications of economic theory/reasoning
• issues arising in empirical research
Outline
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•
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Introduction, definitions, context
Why might we support children?
How might we support children?
UK trends in support for children
Support for children and child poverty
Child-contingent support
“difference in net (after taxes and benefits)
income between a family with children and an
otherwise-identical family without children”
•
•
•
•
restrict attention to financial support
not just support for poor families
not just things with ‘child’ in the title!
TAXBEN microsimulation model using the
Family Expenditure Survey
The policy context
Child poverty
• Child poverty in the UK high by European standards
• Long-term upward trend (though falling recently)
• Government’s child poverty pledge
• 25% reduction by 2004-05, from 1998-99 baseline
• based on Government’s chosen measure of child
poverty: “children in households below 60%
median equivalised income” (HBAI)
• Longer-term aspirations
• 50% reduction by 2010
• abolition by 2020
• but measure not defined yet
Why support children?
Equity arguments
1. Vertical equity
• Children as proxy for poverty
• Unfair on childless poor
• But mitigates disincentives
2. Horizontal equity
• Compensation for direct and indirect costs of
children
• Not unfair on childless poor after all
• Can think of as social insurance
Why support children?
Equity arguments
•
Challenge: childbearing can be voluntary and confer
utility
• Counters both horizontal and vertical equity
arguments
•
Two ways the challenge might be met:
• Childbearing not always deliberate rational
decision
• Children shouldn’t face consequences of parents’
actions
Why support children?
Efficiency arguments
3. Externalities
• to having children
• Intragenerational or intergenerational
• Support as a fertility incentive
• to spending on children
• Bad outcomes more likely for children in
poverty
• These impose costs on the whole of society
4. Capital constraints
• Can’t access parents’ future income
• Can’t access returns to investment in child
How might we support children?
• Does money help?
• Is it spent on the child?
• Do parents protect children from low income?
• Does that affect whether we want to support
them?
• The case for public services
• Does spending on the child achieve anything?
• Correlation isn’t causation
• How should it be delivered?
• Who should receive it?
Who should get how much?
Determinants of the level of support depend on
the rationale…
• Vary by income?
• Possibly for efficiency reasons
• NOT for equity reasons unless “care more about
children”
• Individual vs joint assessment – do couples pool
resources?
• Vary by number or age of children?
• Not all children cost the same
Average child support
£ / week per child, 2003 prices
£35
£30
£25
£20
£15
£10
£5
£0
1975
1980
Source: Adam and Brewer (2004)
1985
1990
1995
2000
Average child support
£ / week per child
£35
£30
£25
£20
£15
£10
£5
£0
1975
1980
1985
Child support
Source: Adam and Brewer (2004)
1990
1995
2000
Child support, earnings-indexed
Understanding the results
1. What is our baseline?
• Clearly not nominal level
• Price indexation? Average earnings? GDP? …
2. Results reflect changes in:
• Tax and benefit policy
• Characteristics of families with children
• Isolating the impact of policy changes
• Calculate support for children assuming that
families’ characteristics unchanged since 1978
Average child support
£ / week per child, 2003 prices
£35
£30
£25
£20
£15
£10
£5
£0
1975
1980
1985
Child support
Source: Adam and Brewer (2004)
1990
1995
2000
Child support, 1978 population
Decomposing changes
1978:
£14.36
Policy changes 78-99: + £2.88
Characteristics changes 78-99: + £4.31
1999:
£21.55
Policy changes since 99: + £11.02
2003:
Source: Adam and Brewer (2004)
£32.57
A brief history of child support
1909: child tax allowances
1946-48: welfare state programmes
1976-79: child benefit (CB), one parent benefit
(OPB)
1988: Fowler reforms: income support (IS),
family credit (FC), housing benefit (HB),….
1998-02: OPB abolished. WFTC, children’s tax
credit introduced
2003: child tax credit (CTC)
Total support 2003/4
£ / week for a lone parent with 1 child
£120
£100
£80
IS
£60
£40
Working
tax
credit
Child tax
credit
£20
Child benefit
£0
£0
£200
£400
£600
£800
£1,000
Gross weekly income
Note: assumes year-round minimum-wage work, child aged 1 year +, no childcare costs
£1,200
The introduction of the CTC
£ billion / year, 2003 prices
£25
£20
£15
£10
£5
£0
2002
CB
Source: Adam and Brewer (2004)
IS/JSA
2003
WFTC/WTC
CTC
Other
The rise of means testing
£ billion / year, 2003 prices
£20
£15
£10
£5
£0
1975
1980
FA/CB
Source: Adam and Brewer (2004)
1985
SB/IS/JSA
1990
1995
FIS/FC/WFTC
2000
Other
Summary of empirical findings
•
Since 1975, support for children has become:
• More generous
• Less reliant on child benefit as means-testing
expanded
• Recent trend away from cash payments
• Increasingly paid to the mother
• More focused on younger children, one-child
households and (until recently) lone parents
•
Much of the increase happens in 1999-2003
The child poverty context
40%
35%
30%
25%
20%
15%
10%
5%
0%
1975
1980
1985
1990
1995
2000
Proportion of children in households below 60% median
equivalised income after housing costs
Source: IFS analysis using Family Expenditure Survey (until 1993) and then Family Resources Survey
Rising support, rising poverty
Given the rising level of support for children, why has
child poverty risen so fast and fallen so slowly?
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Latest changes not shown up yet
• roughly on course to hit (demanding!) target
Choice of poverty measure
• rising inequality in gross incomes
• relative poverty means chasing a moving target
References (1)
Trends in support for children
Adam, S. and M. Brewer (2004), Supporting families: The financial costs and benefits of children
since 1975, Bristol: The Policy Press. See www.ifs.org.uk/taxben/supportfam.shtml
The UK tax and benefit system
Adam, S. and J. Shaw (2003), A Survey of the UK Tax System, IFS Briefing Note no. 9
(www.ifs.org.uk/taxsystem/taxsurvey.pdf)
Leicester, A. and J. Shaw (2003), A Survey of the UK Benefit System, IFS Briefing Note no. 13
(www.ifs.org.uk/taxsystem/benefitsurvey.pdf)
Child poverty and the child tax credit
Brewer, M., A. Goodman and A. Shephard (2003), How Has Child Poverty Changed under the
Labour Government? An update, IFS Briefing Note 32
(www.ifs.org.uk/inequality/bn32.pdf)
Gregg, P., Harkness, S. and Machin, S. (1999), ‘Poor kids: trends in child poverty in Britain,
1968–96’, Fiscal Studies, vol. 20, pp. 163–87.
Brewer, M. (2003) The New Tax Credits, IFS Briefing Note no. 35
(www.ifs.org.uk/taxben/bn35.pdf)
Brewer, M. (2003) What do the child poverty targets mean for the child tax credit? An update,
IFS Briefing Note no. 41 (www.ifs.org.uk/inequality/bn41.pdf)
References (2)
Equity, efficiency and mean-testing of child support
Cabrillo, F. (2001), ‘Support for children and fertility rates’, paper presented at the 8th
International Research Seminar on Issues in Social Security, Sigtuna, Sweden, June.
Banks, J. and M. Brewer (2003), “Understanding the generosity of government financial support
for families with children” in J. Bradshaw (ed.), Children and Social Security, Ashgate,
2003. Available at www.ifs.org.uk/workingpapers/wp0202.pdf
Werding, M. (2001), ‘Child-related benefits throughout the family life-cycle: lessons from the
case of Germany’, ifo Studien, 3/2001, pp. 327–48.
Carneiro, P. and J. Heckman (2003), “Human Capital Policy” in J. Heckman and A. Krueger
(eds.), Inequality in America: What Role for Human Capital Policies?, MIT Press, 2003.
Available at http://lily.src.uchicago.edu/~klmcarn/FILES/harvard/HCP.pdf
Does money help?
Middleton, S., Ashworth, K. and Braithwaite, I. (1997), Small Fortunes: Spending on Children,
Childhood Poverty and Parental Sacrifice, York: Joseph Rowntree Foundation.
Gordon, D. et al (2000), Poverty and Social Exclusion in Britain, York: Joseph Rowntree
Foundation.
Lundberg, S., Pollak, R. and Wales, T. (1997), ‘Do husbands and wives pool their resources?
Evidence from the United Kingdom child benefit’, Journal of Human Resources, vol. 32,
pp. 463–80.
Duncan, G. and J. Brooks-Gunn (eds) (1997), Consequences of growing up poor, New York:
Russel Sage Foundation