Children in the tax and benefit system

1. Children in the tax and benefit system Stuart Adam Institute for Fiscal Studies

2. Aims • Understand the treatment of children in the tax and benefit system • Useful case study • applications of economic theory/reasoning • issues arising in empirical research Outline • 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

3. 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

4. The policy contextChild 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

5. Why support children?Equity arguments • Vertical equity • Children as proxy for poverty • Unfair on childless poor • But mitigates disincentives • Horizontal equity • Compensation for direct and indirect costs of children • Not unfair on childless poor after all • Can think of as social insurance

6. 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

7. 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 • Capital constraints • Can’t access parents’ future income • Can’t access returns to investment in child

8. 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?

9. 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 • Vary by other things?

10. Average child support£ / week per child, 2003 prices Source: Adam and Brewer (2004)

11. Average child support£ / week per child Source: Adam and Brewer (2004)

12. Understanding the results • What is our baseline? • Clearly not nominal level • Price indexation? Average earnings? GDP? … • 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

13. Average child support£ / week per child, 2003 prices Source: Adam and Brewer (2004)

14. Decomposing changes Source: Adam and Brewer (2004)

15. 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)

16. Total support 2003/4£ / week for a lone parent with 1 child Working tax credit IS Child tax credit Child benefit Note: assumes year-round minimum-wage work, child aged 1 year +, no childcare costs

17. The introduction of the CTC£ billion / year, 2003 prices Source: Adam and Brewer (2004)

18. The rise of means testing £ billion / year, 2003 prices Source: Adam and Brewer (2004)

19. 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

20. The child poverty context Source: IFS analysis using Family Expenditure Survey (until 1993) and then Family Resources Survey

21. Rising support, rising poverty Given the rising level of support for children, why has child poverty risen so fast and fallen so slowly? • 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

22. 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)

23. 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