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The coalition and families with children - a taxing issue?

Gavin Kelly
Date: 21. January 2013 / Category: Coalition

This blog originally appeared on the New Statesman  

Often it takes the deadline of an impending announcement to really expose underlying tensions about the future direction of policy. 

The coalition’s recent sorry saga on childcare policy – breathless briefings about a major expansion in tax-relief meant to herald the coalition’s renewed vitality, followed by an awkward silence and then the inevitable stories about who is to blame for the lack of progress - is a case in point. Never mind what this tells us about the coalition’s aptitude for media management, it also reflects something important about underlying attitudes towards the nature of the tax and benefit system.

There have, of course, always been different objectives in our welfare system with different parties placing varying amounts of weight on them: social insurance or poverty reduction; targeting individuals or households. But when it comes to the question of how to support families with children through the tax and benefit system the current government seems to be in more of a muddle than most. Which in some respects is odd given that there is actually a fair amount of agreement within it.

To unpick this we need to consider that different governing logics are shaping current tax and benefit reforms. First, there is the agenda of targeting financial support at poorer households and doing this in a way that seeks to support work incentives. That’s the logic of Universal Credit (leave to one side whether it will be successfully delivered); just as it was for much, though not all, of the tax credit system that was built up under Labour. Both coalition parties agree there is still a role for this approach; but both think it should be a much diminished one (in part because of fiscal constraints, but not only because of this). Hence spending in pursuit of this objective has been cut back sharply and child poverty is set to climb steeply as a result.

Then there is the agenda of ensuring ‘fairness’ for individual tax payers as opposed to households. This second logic results in the personal tax allowance being prioritised. It is completely blind to household income or family circumstance: it matters not a jot to the size of your tax allowance whether you have no children or five. Again, both coalition parties have agreed it is right to spend very large sums of money on supporting individuals in the tax system – though the Lib Dems have been in the vanguard. The unnecessary collision between raising the personal tax allowance on the one hand, and the design of the Universal Credit on the other (something that has been highlighted before on this blog), meaning that low income claimants will lose the majority of any gains arising from future increases in their tax allowance, perhaps reflects the different political homes of the two flagship policies.

There is a third and contrasting logic that says the tax and benefit system should be designed to recognise the financial pressures facing different types of households, for instance those with children compared to those without. This is sometimes referred to as a ‘tax-rebate’ objective – the point being that it’s not right to ask a family with three children to pay the same tax-bill as the single person on the same earnings (‘tax-rebate’ is in fact a misnomer as it’s about the additional costs a household may face whether or not they are supported through the tax or benefit system).

It was this ‘rebate’ argument that led to child tax allowances being created in the People’s Budget by Lloyd George, renewed by Beveridge (alongside the family allowance), and then replaced by their more progressive and female-friendly successor, Child Benefit, ushered in by Barbara Castle in the mid-1970s. It was also this logic that underpinned a poorly explained part of Labour’s tax credit system: the ‘family element’, which was in effect a form of flat-rate payment, a bit like a tax allowance, which went to the majority of families with children though not the richest. This majoritarian component of tax credits was never really communicated in ‘rebate’ terms - and for both political and administrative reasons it was probably a mistake to include it in the tax credit system. Either way, that’s the role it played.

Support for this ‘rebate’ argument has recently also been in sharp retreat – at least when it comes to the benefit system. Child benefit has been frozen and clumsily affluence tested, and tax credits stripped away from middle income households. The result is that there are now two systems of means-tested support for families in operation at different parts of the income distribution. Again, both coalition parties have agreed to these changes - though I very much doubt either would have designed from scratch what has emerged as a result.

So far this describes a picture of politically harmonious messiness on the question of how the tax and benefit system should support families. But sharper coalition tensions emerge when it comes to using the tax (as opposed to benefits) system to give recognition to different types of households. The Conservative Party is, of course, formally committed to a tax allowance to support marriage – a proposal which the Lib Dems can’t conceal their contempt for (along with, in private at least, a number of ‘liberal’ Tories). Tellingly, some influential voices on the right are pushing for the (re)creation of child tax allowances as opposed to a marriage allowance. Meanwhile, in a new twist to this ‘rebate’ logic, David Cameron and George Osborne want to use the tax system to support families with children so long as this is specifically for the costs of childcare, not those incurred more generally in raising a child. Tax-breaks (good thing) rather than tax credits or cash benefits (bad thing) are the order of the day: tax-break universalism appears to be alive and well; benefit-universalism is very last season.

On this note, at least, the Lib Dems appear, for now, to demur – hence the current childcare impasse (though doubtless a compromise will eventually be reached). Some, at least, are acutely aware that tax-reliefs - while often quite popular - are almost inescapably regressive. They exclude those who don’t work along with the rapidly growing numbers of the low paid who earn too little to pay tax – together amounting to roughly 40 per cent of the working age population. They are tilted against even larger numbers who earn too little to take full advantage of the relief on offer. And, of course, tax reliefs do much more for dual earning households who tend to be better off than their single earning counterparts. (It’s noteworthy, however, that the same Lib Dems have a tin ear when much the same arguments are applied to the personal tax allowance itself). Whether you love or loathe it, the policy of ‘taking people out of tax’ accentuates the distributional impact of tax-breaks.

The result? Either Lib Dems reconcile themselves to the fact that the biggest gains from tax-breaks will be captured by higher income households - all the more so because of their own flagship tax policy - or they push back against the proposed use of reliefs and make an argument for the direct funding of universal childcare services as a central element of the welfare state. Which, as it happens, is the sort of argument they would have to sign up to if they find themselves in any sort of governing arrangement with Labour after 2015.

For now, we are left with the appearance of coalition confusion on how best to use the tax and benefit system to support families. Though, perhaps it’s less confusion and more that there are different parts of government who are each clear about the variety of welfare logic they want to prioritise - and no part of government capable of successfully reconciling them. Whoever wins the next election will inherit a system of support for families that no party will feel comfortable with.

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