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Supporting couples with children through the tax system

Supporting couples with children through the tax system. Mike Brewer Institute for Fiscal Studies. Outline. Proposals Perceived structural problems Impacts. Proposals. Perceived structural problems. Tax credits are assessed on family income, with no additions for second adult

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Supporting couples with children through the tax system

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  1. Supporting couples with children through the tax system Mike Brewer Institute for Fiscal Studies

  2. Outline • Proposals • Perceived structural problems • Impacts

  3. Proposals

  4. 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?

  5. Which couples would gain?Policies cost around £1bn/yr Figure shows average change in income of couples with children by income decile of whole population

  6. 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

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