Taxation of Low-income Families

Jeremy Lefroy 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.

[Michael Tomlinson (Mid Dorset and North Poole) (Con)]

I congratulate my hon. Friend on securing this important debate. Despite all the other things going on, this is hugely important. He mentioned a burning injustice—all our ears will have pricked up at that phrase and he is absolutely right. I and other colleagues signed a new clause to the Finance (No. 3) Bill, which was not selected for debate, but does he agree that this does not need an Act of Parliament for the Chancellor to review it, and that the Chancellor can still review it despite the fact that the new clause was not selected or debated and is not part of a formal Act of Parliament?

[Jeremy Lefroy]

My hon. Friend is absolutely right, and that is why both the debate and that report are so important in showing the Chancellor that this issue is vital for many colleagues across the House.

I will finish with the fact that it is surely very telling that in 1990, just as independent taxation was introduced, far from 73%, the effective marginal tax on a one-earner family with two children on 75% of the average wage was just 34%, close to the average 33% effective marginal tax rate on such families today across the OECD as a whole. We are a total outlier in this respect, and in the wrong direction. If we managed without such aspiration-killing tax rates on working, low-income families in the past, we can and must do so again.

I very much hope that the Minister, for whom I have the highest regard, agrees and will tell us that the Chancellor is willing to review our marginal tax rates, as my hon. Friend the Member for Mid Dorset and North Poole (Michael Tomlinson) mentioned, and bring forward strategies to gradually bring them in line—I realise this is a huge ask— with the OECD average over the years, so that we can become an aspirational economy once again.

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[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.

[Jeremy Lefroy]

My hon. Friend makes the incredibly important point that this is certainly about children, but is also about carers. The enormous number of unpaid carers in this country do a massive amount for our country and society, but the current system does not help them, either.

[Fiona Bruce]

That is absolutely right: they do indeed.

We talk about cripplingly high effective marginal tax rates, but actually it costs money to go out to work. Often, it costs money to clothe oneself for work and to travel to work, and it is more expensive if one has to buy lunch out, so some people will effectively earn nothing when they go to work. That cannot be right. As my hon. Friend has said, what is proposed will help different types of family: single parents, married couples and couples in which one person works or one person provides care for other members of the family. Work is good—we know that—but it costs, and it is outrageous that some of the poorest in our society face some of the highest tax rates. One of the highest priorities of the Conservative Government should be to tackle and solve this burning social injustice.

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[Chris Green (Bolton West) (Con)]

It is a pleasure to serve under your chairmanship, Sir David. It is a pleasure to follow my hon. Friend the Member for St Austell and Newquay (Steve Double), who highlighted something of immense importance: the ability of a family member to be able to care, not only for children, but for elderly relatives and other members of the family who need that support. It is so important that the state and society recognise the importance of carers. We have to enable them to care without being under too much pressure, financial or otherwise.

I welcome this debate, introduced by my hon. Friend the Member for Stafford (Jeremy Lefroy), on the taxation of low-income families. I am delighted that the strengthening families manifesto has been published today. I believe that the family is the building block of society—the foundation on which society rests. Family is the source of our health, wealth and happiness. That may be contrary to what many people believe about Conservatives. People often see Conservatives as hyper-individualistic—it is all about the individual. However, I believe that the foundations of much Conservative philosophy and Conservative values rest on the importance of the family.

It is vital that the Government recognise in their policies that work pays. I will not go into the details, which my hon. Friend the Member for Congleton (Fiona Bruce) went through so effectively, about the impact that the tax system can have on a low-income family, especially someone earning 75% of the average wage—it can be such a disincentive to work. We ought to be looking at the advantages that having a good job and place of work can give to someone as a role model in the family. If we hinder their ability to take those additional hours and to be at work more, we are effectively denying people the opportunity to gain experience at work. They do not feel there is an incentive to work, so they do not get that experience.

That also sends a message to the employer. Employers want to invest in their workforce, to give more skills to the people in their company or organisation. However, if someone is working relatively few hours, there is less return on that investment. If someone can work more hours, they are more likely to secure training provided by that company. If someone has more experience and training, that individual may be able to get a promotion or a better position at work, or may have the opportunity to change companies and find a different position. That is a huge incentive. It has been mentioned that the current tax system crushes that aspiration. It is so important that we change that for this really important sector of society, to give those people an opportunity to aspire and improve themselves. That attitude and those values will then permeate through the family and the wider community.

The manifesto published today provides a huge opportunity for the Government to change their policy. With their ideas of making work pay and supporting families, the Government are sympathetic to that. I recognise the current economic challenge, with many demands on Government time and money, but given the return on this investment—the improvement in society—it is worth changing the taper and improving it for those low-income families.

[Jeremy Lefroy]

My hon. Friend makes an important point about the money. These things do not come without a certain loss of revenue. Does he agree that one area to look at—it is interesting that the Centre for Policy Studies suggests that we look at this—is the higher-rate tax relief on pensions. As Members of Parliament we all declare an interest, because we are all taxed at the higher rate and all have pension contributions. That is given to people who already benefit from the 20% allowance and then there is another 20% on top of that. Although some restrictions have been introduced in recent years, that is an enormous cost to the Exchequer, to the benefit of people earning double or triple the national average wage.

[Chris Green]

My hon. Friend makes a superb point. It is a significant problem that apparent inconsistencies in the tax system give people who are already doing pretty well a further advantage, yet poorer people not do not receive that advantage. Looking more broadly at society, a few years ago there were riots in London and other cities around the country, and we are currently concerned about rising crime and the people causing those problems. We also have to look at how we can strengthen families, because I think that a certain societal cohesion comes from a strong family. That has so many other impacts across society. We may not immediately see income return, but in a stronger, healthier society the returns will be immense, not only for society, but for the Exchequer.

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[Jeremy Lefroy]

I thank all Members for their contributions today. Extremely important points have been made. I thank the Minister for his commitment to look at this area, and I thank my hon. Friend the Member for Congleton (Fiona Bruce) for driving this forward, together with other colleagues here today. I also thank the hon. Member for Glasgow Central (Alison Thewliss) who made important points. I do not agree with all of them, but two need looking at, including the two-child limit, about which I have concerns. I am really pleased about the announcement made this week, but we need to go further. Secondly, I entirely agree with her on bringing families together. I have experience of that in my own constituency.

I also agree with the hon. Member for Bootle (Peter Dowd), who speaks for the Opposition. The Labour party did some extremely important things. Some were reversed, some maintained, and some I would like to see brought back. We need to go further. He is absolutely right: there is no monopoly of virtue or vice in this area in any party. We all have to work on this for the benefit of our constituents.

Question put and agreed to.

Resolved,

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

Sitting adjourned.