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Transforming Tax Credits to Combat Child Poverty: The Urgent Need for Structural Reform

This detailed case discusses the necessity for reforming tax credits to effectively address child poverty by examining family structures, income thresholds, and policy options. Through analysis, it highlights the gaps in the current system and presents viable solutions to better support low-income families and ultimately reduce child poverty rates significantly. By focusing on addressing the specific needs and challenges faced by poor couple households and lone-parent families, this study aims to spark discussions and drive meaningful change in social policy and tax credit structures.

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Transforming Tax Credits to Combat Child Poverty: The Urgent Need for Structural Reform

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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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