Philip Booth unpacks the issues that our current taxation policies present for families. Is there a better way forward? 13/08/2024

We have a new government. Its first Budget will be in the autumn. Although the Labour Party has said little about its policies or underlying philosophy in relation to tax and welfare, the size of its majority does provide an opportunity for radical changes in the tax system. And there is certainly a strong case for change.  

The way the state designs our tax system is based on the assumption that we all live as atomised individuals with no social connections. Interestingly, the way our welfare system is designed implicitly assumes that we do live in families, or households. The combination of these two features (a tax system which takes no account of household or family income and a welfare system that does) creates strong financial penalties against family formation and caring for children or our elderly relatives in a family setting. This is analysed in detail in Taxing Families Fairly, published by Policy Exchange. 

But let’s go back to first principles. What is the basic building block of society? What is the starting point for how we should think about levying tax and providing welfare support? 

For a Christian, the answer to these questions is relationships and community, best demonstrated to us in the model of the family. All human persons have an individual dignity arising from being created in the image of God, but they are also created to live within society. We manifest this vision in many ways forming all sorts of social relationships. But the creation of a new family is different and more profound than other social relationships. In Genesis, it is stated: “…a man leaves his father and mother and is united to his wife, and they become one flesh.” Once a couple marry, they are not two, but one. The unity between husband and wife is an intrinsic part of God’s plan for His creation with the conception of children following, God willing. Christian teaching treats the family as a single unit. 

In Catholic social teaching, Pope John XXIII emphasised this point and its relevance for the role of the state in his 1963 encyclical entitled “Pacem in terris”, (meaning “Peace on Earth”), He argued that: 

“The family, founded upon marriage freely contracted, one and indissoluble, must be regarded as the natural, primary cell of human society. The interests of the family, therefore, must be taken very specially into consideration in social and economic affairs, as well as in the spheres of faith and morals. For all of these have to do with strengthening the family and assisting it in the fulfilment of its mission.” 

This perspective has been emphasised throughout Catholic social teaching down the ages. 

It is worth noting that some agnostic or atheist philosophers, who take an evolutionary perspective on the development of social institutions, such as F. A. Hayek, have reached similar conclusions. Hayek, for example, has written about the central place of the family as the integral building block of society. In The Constitution of Liberty (Hayek, 1960, page 90) he states: “[S]ociety is made up as much of families as of individuals and that the transmission of the heritage of civilisation within the family is as important a tool in man’s striving towards better things as is the heredity of beneficial physical attributes.”   

These other perspectives corroborate the Christian position on the central role of the family and shows how it relies on reason and experience as well as revelation and tradition. The intrinsic solidity and unity of the family should be widely accepted, though it is clear that it needs to be re–articulated at the current time. 

Progressive taxation works on the assumption that those with greater resources should contribute proportionately more to the provision of public goods and support for the poor. To base the resources available for taxing on an assessment of an individual’s income, rather than on an assessment of a family’s income, simply ignores reality. Of course, many households have only one member and so this debate is irrelevant for them. But, when people live together in a family (whether the adults are married or not), they share resources. Whether somebody is rich or poor, depends not only on their individual earnings but on the earnings of others in their household. Philosophically, it makes sense to levy taxes based on the capacity of the family or household as a whole to pay. 

Our current tax system does not work in this way. Consider, for example, a married couple with household earnings of £30,000 a year and pension contributions of £5,000 a year. If they were a dual earner family with each member of the couple earning £15,000 a year, they would pay no tax at all. However, if one member of the couple remained at home to care for children or an elderly relative, and the other member of the couple earned £30,000, they would incur a tax and national insurance liability of about £3,500. This may not seem like a large difference. However, the main earner in the single–earner family would have to work an extra eight hours a week at the minimum wage to have the same take–home pay as the dual–earner family.  

As earnings increase, the problem gets worse. A single–earner family earning £100,000 would have a marginal rate of tax of 62 per cent (made up of 2 per cent national insurance, 40 per cent main income tax rate and an additional 20 per cent income tax arising from the reduction of the personal allowance at that level of income) and would have paid 40 per cent tax on £50,000 of their earnings. A dual–earner family would not pay 40 per cent tax on any of their earnings. The former family would also lose all their child benefit (as a result of the so–called high income child benefit tax change); the latter would not lose any. 

Of course, most families lie between being single–earner families and families with an equal split of earnings. The practicalities, however, are that the more unequal the earnings of the members of a couple, the more tax the family pays. This situation is, quite simply, unjust. It is also problematic from the economic point of view because it distorts family decision–making. Our approach to taxation artificially encourages families not to have one of the adults working in the home (or working part time in the home) looking after their own children or elderly relatives. This undermines one of the fundamental roles of the family – of looking after those members who need care. It also leads to the marketisation and contracting out of care to others. It is clear from statements from senior figures in all main political parties, that our tax system is part of an over–riding philosophy of promoting paid work above work within the home. 

When the tax system is considered in conjunction with the welfare system, there is a penalty on family formation – on parents marrying, or even living together. Welfare benefits are assessed on the basis of family income and so, if a wage–earner marries a non–wage–earner (perhaps the mother of a young child), the latter can lose her benefits. At the same time, the wage–earner is still taxed as if he has no additional obligations. The couple will often actually lose money as a result of forming a stable home for their child.  

It does not have to be like this. In countries such as Germany and France, the tax–free allowances of the members of a household are aggregated before tax rates are applied. This means that the split of earnings between the members of a household is irrelevant for calculating the amount of tax paid. Two households with the same resources pay the same amount of tax no matter the split of earnings between the adults in the household.  

We could have had a system like that too. Our current tax system traces roots back to the mid–1980s when then Chancellor of the Exchequer Nigel Lawson sought to implement a tax system that would be “neutral and fair” to the individual. However, there was a caveat. In his memoirs, Lawson argued that, “…after careful study, I came to the firm conclusion that this should be a system of independent taxation, with the allowances freely transferable between husband and wife.” The premise was rather straightforward:  

“Everyone, man or woman, married or single, would have the same standard allowance. But if either a wife or a husband were not able to make full use of their allowance, the unused portion could be transferred, if they so wished, to their partner. […] It would end the present discrimination against the family where the wife feels it right to stay at home, which increasingly nowadays means discrimination against the family with young children.” 

This was never achieved, and the attempt by Nigel Lawson to implement some elements of this system have since been all but unwound. Rachel Reeves would do well to seek to emulate the desires of her predecessor, at least as far as taxation of the family is concerned. 

Interested in this? Share it on social media. 

Join our monthly e–newsletter to keep up to date with our latest research and events. And check out our Supporter Programme to find out how you can help our work.