Taxation of Low-income Families

Gregory Campbell Excerpts

Wednesday 16th January 2019 Westminster Hall

[Jeremy Lefroy (Stafford) (Con)]

I beg to move,

That this House has considered taxation of low-income families.

It is a great pleasure to serve under your chairmanship, Sir David. As a Conservative and a Christian, I believe passionately in the importance of caring for those families who find themselves at the bottom of the income distribution. It is vital that there is a proper, decent safety net to enable families where the adults either are not in work or cannot work to have a decent standard of living, to live in proper homes and to have a proper income. At the same time, making work pay has been a priority for the Conservative and Conservative-led Governments since 2010. In this context, the effective marginal tax rate—the proportion of any additional £1 earned that one would lose in the form of tax, national insurance and lost benefits—is the key consideration.

If we look at a one-earner, two-parent family with two children, paying income tax and national insurance and in receipt of tax credits, we see that they face an effective marginal tax rate of 73%. That means that, as they look at the prospect of earning more, they will be confronted by the fact that they will get to keep only 27p from every additional £1 earned. If a 73% higher rate tax was introduced—I recall when it was well into the 80s; indeed, on unearned income it was 98% at one point—there would be an outcry from higher earning people and probably from the whole public. Yet that is the effective marginal rate of tax that we, though the system that we in Parliament are responsible for, expect low-income families to pay.

[Mr Gregory Campbell (East Londonderry) (DUP)]

I congratulate the hon. Gentleman on securing the debate. This is an issue that I and many others have taken an interest in for a long time. Does he agree that, particularly for those who are on full-time low pay, or part-time pay, if we gradually moved toward a position where the first £15,000 per annum was tax-free and there was no requirement to pay national insurance contributions on it, that would be a huge incentive against the black economy, as well as promoting people’s getting out of the working tax credits system and into employment, to try to work their way up through the salary chain?

[Jeremy Lefroy]

The hon. Gentleman makes an extremely important point. I shall refer to three reports today, but this one, “Make Work Pay: A New Agenda for Fairer Taxes” by the Centre for Policy Studies, suggests a tax and national insurance-free income of, I think, £12,000 a year, which is similar to what he suggests. I have a lot of sympathy for that. I would counsel against those who say that national insurance is a thing of the past and totally irrelevant; I believe in the importance of a social insurance contribution-based system, provided that it is progressive and proportionate, and I would not like to lose that, but I entirely agree with the principle of what he says.

Lest anyone wonder whether these high effective marginal tax rates are just an anomaly that, for some curious reason, only impacts one-earner, two-child families on 75% average wage, the point must be made that our high marginal rates are a problem for all family types: single parents, single-earner couples and dual-earner couples. One in three in-work families with dependants are likely to be facing high effective marginal rates. That is 2.5 million families—or 1.6 million couples—of whom 1 million are single earners, 600,000 are dual earners and 900,000 are single parents.

Put simply, any family paying tax and national insurance and receiving tax credits will be looking at an effective marginal tax rate of 73%. Families that, in addition to receiving tax credits, also receive housing benefit and council tax benefit will be looking at a marginal rate of 96%. Under universal credit, the 73% rate will increase slightly to 75%, but the 96% rate will come down to 80%. A 16% drop is significant, but an 80% effective marginal tax rate is still far too high. There is a lot that I would like to say about improvements that I would propose to universal credit, but that is a debate for another day.

Instead of encouraging aspiration, the combined impact of our tax and benefits system suffocates aspiration, trapping families in poverty. That is a burning social injustice that must be addressed. Much of the cause of our high effective marginal tax rates, particularly for single earner couples, is as a result of the introduction of independent taxation in 1990. Since then there has been little or no recognition of family responsibility in the tax system. Not recognising that responsibility in income tax, through a system such as elective joint taxation, has led to a tax arrangement that is anti- aspirational. It is interesting that the former Chancellor, Lord Lawson, wanted to include some kind of joint responsibility in the new system when it was introduced, but it was opposed by the then Prime Minister.

Families in poverty pay thousands of pounds of income tax, but then have to be supported by very inflated benefits, which offset the failure to recognise family responsibility but with the very costly downside of cripplingly high effective marginal tax rates that suffocate aspiration as the inflated benefits are withdrawn. In 2014 I co-authored a report with my hon. Friend the Member for Congleton (Fiona Bruce) and two other colleagues, “Holding the Centre: Social Stability and Social Capital”, which touched on many of the issues we are debating today, although not in such detail on this particular subject. As we noted in the report, many of the Government’s—all Governments’—most important goals rely on the contribution of families. However, too often that contribution is under-recognised and the impact of policy on these relationships ignored, under all Governments.

The report pointed out the vital role that family relationships play in our economic prosperity, wellbeing and the life of our children, as well as the cohesion and social stability of our nation, where growth and prosperity are underpinned by fairness, responsibility and community. The stability of marriage and supporting aspirational families are integral parts of the social capital of our country that leads to social stability and economic prosperity. A Government who draw on and nurture the wealth of our social capital, supporting families and strengthening relationships, can give people confidence about their future prospects and the ability and opportunity to see aspiration fulfilled.

These issues are vital, and therefore I note with pleasure that the Strengthening Families Manifesto group of Conservative MPs, led by my hon. Friend the Member for Congleton and by Mr David Burrowes, the former Member for Enfield, Southgate, has recently held an inquiry into making work pay for low-income families. The report was published this morning to coincide with this debate. My hon. Friend will outline in greater detail some of the report’s specific findings and recommendations. I underline the call in the report for the Chancellor to review formally the effective marginal tax rate for families, assessing the reasons why work does not pay for so many families and evaluating the possible solutions, with a particular focus on the tax system and the recognition of family responsibility.

--- Later in debate ---

[Fiona Bruce (Congleton) (Con)]

I congratulate my hon. Friend the Member for Stafford (Jeremy Lefroy) not only on securing the debate but on the excellent way in which he touched on all the key concerns. We need to address what is surely one of the “burning injustices” that the Prime Minister referred to on the steps of 10 Downing Street. If there are any just-about-managing people, it is surely those striving to take their families off benefits, go into work and improve their families’ lives. We are particularly concerned about families with children.

Yet just as those people aspire to improve themselves, the system knocks and disincentivises them, as we have heard—the opposite of Conservatives encouraging aspiration. Effective marginal tax rates of 70%, 80% or even 90% surely cannot be sustained by a Conservative Government. However, this is not a new issue. We have sustained it. It has been known about for years. It has been eight years since the Conservatives entered Government and we have failed to address the matter.

For many of those years, CARE has held annual meetings about this issue and published annual reports on the taxation of families. I pay tribute to CARE for its assistance in the production of “Making Work Pay for Low-Income Families”, which, as my hon. Friend the Member for Stafford says, we are publishing today. It is being published by the Manifesto to Strengthen Families, the executive director of which is our highly respected former colleague, David Burrowes, and can be found on strengtheningfamiliesmanifesto.com.

I will give some examples that detail the complexity and show how low earners can end up paying such high effective marginal tax rates, losing so many of the benefits that they had once they start to earn. We need to change that. This example has been given by the Centre for Policy Studies, so we are not alone in raising this concern.

Imagine Jane, a 28-year-old single mother of one school-aged child. They live in Northampton. She receives benefits of £13,908 a year, comprising three elements: a standard allowance, a child element and a housing element. She starts work, earning £8,143.20 per annum. Her benefits are reduced by 63p for each additional pound she earns, which is the taper relief figure; interestingly, the CPS suggests reducing the universal credit taper rate to 50p as one solution. Jane’s effective marginal tax rate at this point is 63%. She then earns a little bit more, becoming liable to pay national insurance, putting her effective marginal tax rate up to 67%. She then earns a little bit more again, earning £12,850 a year—£1,000 over the current personal allowance rate—so is liable to pay income tax. Of that £1,000, she takes home just £251.60. She is being taxed at a 75% effective marginal tax rate. As my hon. Friend the Member for Stafford said, if that was the tax rate paid by multimillionaires on their highest earnings, there would be an outcry.

One aim of universal credit, which was intended to be simpler to understand, was to help ease the transition between welfare and work. It is certainly an improvement, but it has not solved the problem of people entering work and losing an average of 73% of their earnings, or even more. We appreciate that the Chancellor promised in his recent Budget to increase the work allowance by £1,000 a year, at a cost of £1.7 billion, which many of us asked for. However, that still leaves us with the problem that we have identified. Working claimants will lose most of the extra money that they earn when they increase their hours or progress in their jobs. It will just mean that they keep a little bit more of their money before they reach that point.

I remind colleagues that the Manifesto to Strengthen Families is supported by more than 60 Conservative parliamentarians; not a small group in our party. Some 20 of us tabled an amendment to the Finance Bill, which my hon. Friend the Member for Mid Dorset and North Poole (Michael Tomlinson) referred to, and it was very much as a result of that amendment not being selected that we called for the debate. However, we had been working on an inquiry into this issue for some time, chaired by David Burrowes. We took evidence from several organisations, including the Child Poverty Action Group, the Resolution Foundation and Tax and the Family, which all indicated in their evidence that they share our concerns on this issue. I will touch on one or two of the reasons why we really need to address it.

As we heard from my hon. Friend the Member for Stafford, the British effective marginal tax rate of 73% is the highest anywhere in the developed world, where the average is 33%. However, it is not only the very low-paid who are affected. Our inquiry found that families with earnings that appear high can also be affected. For example, a single-income family with three children earning £21,000 and paying rent of £157 a week could this year have a marginal tax rate of, incredibly, 96%. That does not come down to 32% until income reaches £40,776. Where housing costs are greater, that 96% rate could be even higher. I appreciate that something may be done to look at this, as my hon. Friend the Member for Stafford said, but that is not enough.

[Mr Gregory Campbell]

I commend the hon. Lady for her continuing interest in this issue. Does she agree that its effect on middle or average-income families earning around £22,000 to £26,000 per year causes particular resentment among people in that category? They are the aspiring families who want to earn more and contribute more to society, and they feel that they are being penalised as they do so.

[Fiona Bruce]

That is absolutely right. We outline in our report several reasons why this needs to be addressed. I will touch on four of them.

First, the hon. Gentleman is right that these arrangements are anti-aspirational. Secondly, we believe that they are illogical. While we as Conservatives celebrate the family—my hon. Friend the Member for Stafford said families are the bedrock of a strong, stable and flourishing society—we tax them as if they are individuals while at the same time operating a benefits system that views them as families.

Thirdly, the current arrangement is anti-choice. The best systems of independent taxation give couples the choice as to whether the two people are taxed independently or jointly. Fourthly, it appears judgmental. Any family in which the second earner is either not in work or earning less than their personal allowance will be hit hard and judged for that arrangement. My right hon. Friend the Member for Chingford and Woodford Green (Mr Duncan Smith) gave evidence to our inquiry and commented that we find ourselves in the peculiar situation of saying that we are not very judgmental, but being very judgmental at the same time. We are judgmental about couples who choose for only one spouse to work. The huge impact of that was underlined in evidence to us from the Child Poverty Action Group, which said that it looks like

“having a second earner in the labour market in Britain today is necessary to get oneself out of poverty”.

To some extent, we are telling parents staying at home to look after children or relatives that they are making the wrong choice, yet, as our report says, it is in the long-term interests of Government and society to have stable families in which children are nurtured and cared for to give them the best start in life, and if, in some situations, that means taking time out from work, particularly when children are under five, surely that should be encouraged and accommodated.