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Tax Credits

Tax Credits. The case for structural reform. Don Draper. Child Poverty. Tax Credits were introduced primarily to deal with child poverty In the 90s over 4 million children (1 in 3) were living in poor families Growth in lone-parent households was one major reason

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Tax Credits

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  1. Tax Credits The case for structural reform Don Draper

  2. Child Poverty • Tax Credits were introduced primarily to deal with child poverty • In the 90s over 4 million children (1 in 3) were living in poor families • Growth in lone-parent households was one major reason • But there were more poor children in couple households

  3. 2003/04 • 3.5 million poor children • 1.5 million lone-parent households of which 1.2 million non-working • 2 million in couple households of which 0.6 million non-working

  4. Most poor children are in households where the lone-parent does not work or in couple households where one or both parents work • Tax Credits need to tackle both problems • Some poor couple families get no WTC or child related CTCs

  5. Why tax credits fail poor couple families • Families with the same income and same number of children get the same credits • But two-parent families need a higher income to escape poverty

  6. Table 2.3 HBAI 2003/04 AHC • Single with two children ( 5 and 11) needed cash income of £182 per week • Couple with two-children ( 5 and 11) needed £262 • Single in social housing needed to earn £86 pw • Couple in social housing needed to earn £336 pw

  7. 2005/06 • Lone-parent family: two kids –social housing – half avg. earnings cash income £56 above poverty line • Couple family: two kids –social housing half avg. earnings £33 below poverty line • Figures take no account of maintenance payments

  8. Ignoring second adult makes achieving child poverty targets more difficult and expensive. • Children live in families - what matters is family income • Second parent not ignored for out-of –work benefits, housing benefit and council tax benefit

  9. Family Structures • Some couples better off living apart than living together. • Not true in all cases e.g. those on out-of- work benefits • But many will be £40-50 pw worse off • Some £200 pw worse off

  10. “Support should be based on family need not family structure” Gordon Brown 1998 Budget • Tax credits fail this test • Need to be redesigned so that they meet this test

  11. Policy options • Lone–parent credits should not be reduced • But credits for poor couple households need to be increased • POSSIBLE OPTIONS • a credit for second adult (probably within CTC) • keep present credits but have a higher taper threshold for two adult families • income disregard for couples living together to match that given to separated couples under the maintenance payment rules

  12. Don Draper Family Tax Consultant e-mail: don@dgdraper.freeserve.co.uk

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