Finance (No. 3) Bill

Lord Morrow Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Thursday 7th February 2019 Lords Chamber

[Lord Morrow (DUP)]

My Lords, in the time available to me, I would like to address an amendment tabled by some 20 Members of Parliament on Report in the other place. The amendment asked the Chancellor to review the effective marginal tax rate placed on low-income families in the UK. The amendment was not selected or debated, but I hope that by raising it today I can give expression to a matter that the other place clearly wanted to address in relation to the Bill. In doing so, I note that this is a matter which has caught the attention of noble Lords from other parties who would have liked to be here today to speak to it.

The effective marginal tax rate is the amount of any additional pound that someone would earn on top of their current income that would go to the Exchequer in the forms of tax, national insurance and lost benefits. It is a key measure of aspiration. If you know that if you work harder you will keep most of the additional money that you earn, there is an incentive to do so and take your family to better things. If, however, you know that most of the additional money you earn will go to the Government, the incentive to earn your way to better things will be substantially eroded.

It is always good to run an economy in which hard work is incentivised. This, however, becomes an imperative when dealing with low-income working families. Of all people, these are the ones we want to aspire and know that hard work can deliver. Indeed, they are the very people to whom the Prime Minister pledged herself on the steps of Downing Street in July 2016. It is therefore of huge concern to me that it is this income group in particular that our current fiscal arrangements do more to deprive of aspiration than any other.

The CARE and Tax and the Family report, The Taxation of Families— International Comparisons 2017, which was published last year, and the Manifesto to Strengthen Families report, Making Work Pay for Low-Income Families, published by MPs this year, show that low-income families in receipt of tax credits face a marginal effective tax rate of some 73%. This means that the families in question get to keep just 27 pence from every additional pound earned, with 73 pence going to the Exchequer in the form of tax, national insurance and lost benefits. A low-income family in receipt of tax credits, housing benefit and council tax benefit meanwhile faces a staggering effective marginal rate of 96%, meaning that they get to keep just four pence in the pound, with 96 pence going to the Exchequer in tax, national insurance and lost benefits.

If we placed a higher rate of tax of 73%, or—perish the thought—of 96%, on the rich, there would very properly be a national outcry. This, however, is the effective marginal tax rate that we place on low-income families. Rather than empowering these working families to raise themselves up, we push them down and trap them in relative poverty. Of course, I appreciate that some regard has been given to this problem and that under universal credit the 96% rate will come down to 80%. However, I find no comfort in this at all. Eighty per cent is higher than anywhere else in the developed world, and the 73% rate actually increases to 75%.

At this point some might say, “Hang on, is the effective marginal rate not just the inevitable consequence of providing benefits? If you don’t like the effective marginal tax rate, the simplest solution would be to abolish benefits”. I am absolutely not advocating that.

While I acknowledge that if you give benefits you create a marginal rate as income rises and those benefits are withdrawn, the problem I seek to highlight today is that our effective marginal rates are much higher than those anywhere else in the developed world. If we use OECD data to compare the way in which all OECD countries treat a one-earner married couple with two children on 75% of the average wage, the marginal effective tax rate that they face in the UK—that 73%, the lowest of the above rates—is already the highest of any country anywhere in the developed world. The OECD average is just 33%. This poses a very important question that I would like to set before the Minister today. If other developed countries—all of which have effective benefits systems—can have an average effective marginal tax rate of 33%, rather than 73%, so can we. As Fiona Bruce, the Member of Parliament for Congleton, urged recently in another place, “So must we”.

Interestingly, the 73% figure is also very high in the history of the UK. In 1990, the effective marginal rate on such a family was just 34%, practically the same as the OECD average marginal effective tax rate on such families today. The Manifesto to Strengthen Families report concludes that our unusually high effective marginal tax rates are the result, first, of Mrs Thatcher’s failure to accept the proposal of the noble Lord, Lord Lawson, for fully transferable allowance for married couples, and then Gordon Brown’s decision to remove the additional person’s allowance and married couple’s allowance in 2000. The effect was that, from that point onwards, the income tax system made no provision for family responsibility and had to compensate for that by inflating benefits. It is the withdrawal of those inflated benefits, on top of an income tax rate that ignores family responsibility, that creates our confiscatory marginal rates as the inflated benefits are withdrawn.

One response to this problem would be for the Government to try to find more money to further reduce the universal credit taper rate. While that would be welcome, a recent Centre for Policy Studies report shows that for those earning above their personal allowance, it would reduce the effective marginal tax rate to only 66%. This would mean that low-income families would continue to lose more of every additional pound earned to the Exchequer than they would take home. While I would not oppose attempts by the Government to look for more money to reduce the taper rate, I submit that this strategy does not really address the presenting problem.

Rather than looking for new money to help these low-income working families, what is really required is to look at distributing the current money allocated to help those families in a different way, so that it comes partly through the tax system rather than wholly through the benefits system. This would create two mutually reinforcing downward movements on the effective marginal tax rate. First, the income tax element of the effective marginal tax rate would fall as a result of households with family responsibilities being taxed less. Secondly, the benefits element of the effective marginal tax rate would fall as a result of there no longer being a need to inflate benefits, because of the prior change in the tax rate on those families. This would mean that when benefits were withdrawn, they would not create the confiscatory effective marginal rates experienced at present.

This is the central conclusion of the Manifesto to Strengthen Families and the Make Work Pay report. It is a conclusion to which the Government must now give their urgent attention because, ironically, although the very highest effective marginal rates will fall slightly under universal credit, people will become more aware of our confiscatory marginal rates than they were under tax credits. Under tax credits, if someone works overtime this month or takes a second job, it will affect their tax credit entitlement only next year and will not be clearly identifiable with the increased income. By contrast, under universal credit, working more hours or taking another job will affect the amount of credit received next month. The link between working more and receiving less will therefore be much more immediate and apparent. This will make our marginal rate problem much more difficult to sustain.

I am very glad that, although this matter was not debated on Report in the other place, it was the subject of a 90-minute debate a week later. I am delighted that in responding to the debate, the Financial Secretary to the Treasury, Mel Stride, the Member of Parliament for Central Devon, said:

“I will respond directly to the overarching request made of me this morning, which is that I go back to the Treasury with the report and the comments made in this debate and look genuinely and deeply at the issues raised. I can give an unequivocal commitment to do precisely that”.—[Official Report, Commons, 16/1/19; col. 399WH.]


I put on record in this place that, although I should have preferred the amendment moved on Report on effective marginal tax rates to have been accepted, I very much welcome that commitment. Can the Minister advise the House on what stage that promised investigation has reached? If it has not yet been concluded, there are those in this House who are also eagerly awaiting the outcome of those reflections. This is a matter requiring the Government’s urgent attention.