Two-thirds of married couples EXCLUDED from Tories’ marriage tax allowance

by Stephen Tall on July 3, 2013

Fresh from capitulating to his backbenchers over Europe, David Cameron is having to give in again on the issue of the marriage tax allowance. Evan Harris has already spoken out against the Tories’ plans here on LDV this week, highlighting how the policy harks back to the 1950s’ concept of nuclear households with (male) ‘breadwinners’ and (female) ‘stay-at-home’ spouses.

In the lead-up to the 2010 election, the IFS also looked hard at the policy, producing a devastating indictment of the policy’s flaws.

First, it sets out how it works: ‘up to £750 of the income tax personal allowance [will be] transferable between adults who are married or in a civil partnership, so long as the higher-income member of the couple is a basic-rate taxpayer.’

Who would benefit from the marriage tax allowance?

A minority of married couples. In fact, as at 2010, 8.3 million of 12.3 million married companies will be EXCLUDED from the policy, including 6.2 million married couples with someone at work. Just 29% of non-pensioner married couples benefit at a cost to the taxpayer of £550 million a year.

Who doesn’t benefit from the marriage tax allowance?

An overwhelming majority of married couples.

Three sorts of married couples will not benefit from this policy:
• First, those couples where both adults each have an income greater than £6,555 and where there is therefore no unused allowance to transfer.
• Second, those couples where one adult has an income below £6,555, but their spouse pays income tax at the 40% rate or higher.
• Third, those couples where both have an income below £6,555, because such families would pay no tax in the absence of the policy and so neither partner can benefit from a higher tax allowance.

What does it do for work incentives?

To be fair, it helps the first potential earner in married couples, as long as they’re a basic-rate taxpayer. BUT it ‘reduces the incentive to work at all for some actual or potential second earners in married couples’ (especially those whose spouse’s income is less than £43,955, and whose own income in work would exceed £5,805).

Will it encourage marriage?

the extent to which marriage decisions respond to financial incentives is not known with any confidence; many couples would not benefit from the policy even if they were married; and the incentives to marry (or not to divorce) provided by a policy whose maximum benefit is £150 a year must surely be weak relative to the other costs and benefits involved.

Will it help the children of married couples?

A bigger question is why any government would want to encourage more couples to get married, or provide greater support to married couples than unmarried ones. Research by the Centre for Social Justice shows that children born to parents who are married do better on a wide range of outcomes than children born to cohabiting couples (and indeed to lone parents), but it is not clear that this relationship between marriage and better child outcomes is a causal one. …

If encouraging marriage is seen as desirable primarily for the impact that it has on child development, it is not clear that a policy where pensioner families make up more than a third of the beneficiaries and receive 31% of the gains is well targeted. In fact, only 35% of the families who gain from the policy have children, and only 17% have children under 5.

Does it make the tax system simpler to understand?

The most striking feature of the policy is that it significantly complicates the income tax system, introducing new marginal rate bands into already increasingly byzantine tax schedules. … The policy represents yet another use of a tapered personal allowance, which is a complicated, confusing and untransparent way of simply increasing an individual’s marginal income tax rate over a small band of income.

So there you have it… the Tories’ much-vaunted marriage tax allowance will actively discourage both parents from working, do next-to-nothing to encourage marriage, be irrelevant to two-thirds of married couples, benefit only 1-in-6 married parents with young children, and complicate the tax system further. Full steam ahead!

(* Declaration of personal interest: I’ve been living with my partner for more than 5 years. I don’t think a £150 hand-out from the taxpayer is likely to change that state of affairs.)

* Stephen Tall is Co-Editor of Liberal Democrat Voice, a Research Associate for the liberal think-tank CentreForum, and also writes at his own site, The Collected Stephen Tall.