Why a Transferable Allowance (TA) for Married Couples makes sense – Part 1

WhiteFollowing the furore in media circles over Tim Loughton’s amendment to the Finance Bill to include a transferable allowance, and George Osborne’s announcement last week that the Government will be announcing plans for this policy in his upcoming Autumn Statement, I thought it wise to offer a rebuttal to some of the more commonly used arguments used in the past couple of weeks against the transferable allowance.

1. “It sends out the message that one type of family is worth more than another.”[1]

Whilst most families of all types do a great job raising children, it is true that one-earner families, whom the TA will particularly help, are especially penalised in the current UK Tax and Benefits system and are as a result worthy of help through the introduction of a TA.

Recent research by CARE, for example, demonstrates that a one-earner couple with two children on the average wage faces a tax burden (that is, Income Tax plus National Insurance contributions) that is 42% higher than the OECD average. In addition, a one-earner couple with two children in 2011 had a tax burden that was 73% of a single person’s, whilst an equivalent household in the OECD had a burden that was only 52% of the OECD average[2]. The point here is not that the UK should have lower tax rates in general, but that the overall tax burden across different household types should be redressed, so that one-earner households pay a fairer tax burden. Introducing a TA for one-earner couples would help address this imbalance that is currently present in the UK Tax and Benefits system.

Furthermore, one-earner households with children also currently face Marginal Effective Tax Rates (METRs) that are much higher than those in the OECD and EU face. This problem is particularly acute for those one-earner families on 36%, (the 2011 minimum wage) 50% and 75% OECD average income. One-earner families at this level face METRs of 73%; meaning that for every extra £1 earned while in work (overtime for example) a hard-working household would only see 27p of that £1 come into the household.[3] So for these families, who are most certainly not well off, a TA would help alleviate this situation, reducing METRs by up to 20%[4]

Overall then, a TA is not about privileging one family type over another, but would help redress the current unfairness currently faced by one-earner families.

2. “It’s targeted at an extremely narrow group, the only people who will be able to claim this tax benefit will be married couples, where one partner earns above the income tax threshold and the other does not; whether the couple has children will be entirely irrelevant.”[5]

Figures from the DWP indicate that there are 2.2 million families where there is one-earner in work and where the other is not[6]. The majority (61%) of these families have significant caring responsibilities, a child under the age of 5, or a disabled person within the household[7]. Thus rather than this proposal affecting an extremely narrow group, millions of hard pressed one-earner families would be positively affected by this policy proposal.

What is more, just because one-earner families might in themselves not represent all the household types in the UK, it does not mean that they should not be helped, especially given their disadvantaged position in the UK tax and benefits system (explored in more detail in point 5). In other words, in campaigning for a transferable allowance for married couples, we are not saying that other policies that help other family types are ‘bad’ and should be stopped, but that this policy, which progressively helps one-earner families, should be enacted in conjunction with other family-friendly tax and benefit policies.

3. “IFS analysis suggests it would be available to only 32% of married couples, what about the other 68% of couples, are they not worthy of support?”[8]

This analysis is based on the assertion that a TA would only be eligible to basic rate taxpayers and capped at £750 per year[9]. Whilst under this model, it is the case that only certain married couples would be affected, these couples would be those who are basic rate tax-paying, hard-working households, thus those affected would be those married couples who are in the lower half of the income distribution (if indeed they have children). Hence, limiting it to these couples could be justified in that it helps those who are less well-off compared to those who are richer. In other words, it would be perfectly possible for a TA to be extended to couples including basic and higher rate taxpayers. However, if the aim was to introduce a policy that was particularly progressive, one might want to limit it to poorer married couples.

[1] Argument made by Catherine McKinnell MP, Westminster Hall debate on Transferable Allowances, 28th November 2012, Column 89WH, accessible here.

[2] Pearson and Binder, Taxation of Families – International Comparisons, London, CARE, p9, 2012

[3] Ibid, Appendix E

[4] Binder, Building an Aspiration Nation: How transferable allowances will help work pay, forthcoming 2013, CARE, London, p.16

[5] As footnote 1

[6] Figures derived from Department of Work and Pensions’ Family Resources Survey 2010/11

[7] Ibid

[8] As footnote 1

[9] Adam et al, Taxes and Benefits: The Parties plans, IFS, 2010, p.24.& Recognising Marriage in the tax system, 10/04/2010, Conservative Party website: http://www.conservatives.com/News/News_stories/2010/04/Recognising_marriage_in_the_tax_system.aspx

– See more at: http://www.care.org.uk/familyfiscalpolicy/why-a-transferable-allowance-ta-for-married-couples-makes-sense-part-1#sthash.cSioG8ul.dpuf

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