It’s time for a full review of the income tax system
The current tax system is discriminating against families, says James Mildred, Head of Communications at CARE.
This week, CARE published its latest report, The Taxation of Families – International Comparisons 2018. We’ve been publishing such reports since 2008 and the latest one is the 12th we’ve produced. The message over the years has been remarkably consistent, demonstrating that the UK gives one-earner families, especially married one-earner families, a particularly rough ride compared with other OECD countries.
The onset in independent taxation happened in 1990. It was a crucial step in the modernisation of our fiscal arrangements. At CARE, we have no desire whatsoever to return to the days of the ‘married man’s allowance’. However, the form of independent taxation the UK went for is an unusually individualistic one, which takes next to no account at all of family responsibilities.
By comparing the way different OECD countries share out the tax burden between those with family responsibilities and those without, CARE’s research uniquely demonstrates how the current tax system is discriminating against families. In fact, our latest report shows that we have a tax system that traps families on low and modest incomes in poverty and into a long-term dependent relationship on the state.
The report shows that a UK one-earner married couple with two children on the OECD average wage for the UK (£39,328) faces an overall tax burden that is 28% greater than the OECD average. It is the same for a single parent with two children. By contrast, a single person with no family responsibilities fares a lot better, with an overall tax burden that is 8% less than the OECD average.
The UK income tax system, meanwhile, also places a heavy burden on one-earner families. At the OECD average wage, the UK income tax burden is 27% greater than the OECD average for a one-earner married couple with two children and 23% greater for a single parent with two children. The UK one-earner married couple with two children pays 39% more than the equivalent French family, three times as much as the US family and more than 10 times as much as a German family.
Completing the ‘triple whammy’ families are currently facing is the UK’s eye-wateringly high effective marginal tax rates (EMTRs). Across the OECD, the EMTR on a one-earner married couple with two children on 75% average wage is around 34%. If the average OECD family of this type has an opportunity to earn more money, they will take home the equivalent of 66 pence in the pound, which isn’t too bad. By contrast the equivalent family in the UK (with an annual income of just under £30,000) faces an effective marginal tax rate of 73%, meaning that they only get to take home 27 pence in the pound. Not good. They lose most of every additional pound earned. But if the family is on housing support as well the situation gets even worse, rising to 90.6%, so they only earn 9.4 pence in the pound.
We are calling for a fundamental review of the system itself. It remains strangely paradoxical that the current situation should exist when there is a Conservative Government. The current situation as revealed in our report is anti-aspirational, philosophically illogical, anti-responsibility and is also very judgemental. The Government needs to step back and consider designing a new form of independent taxation that, taking account of family responsibility, does not call into being inflated benefits and a crippling effective marginal tax rate, but which rather lays the foundation for liberating Britain’s low income in work families to earn their way out of poverty to greater things.
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