An income tax system supporting social spending to reduce gender inequality
Sue Himmelweit | Professor of Economics, Open University
The UK government reformed the tax treatment of married couples in 1990 by introducing ‘independent taxation’. This was a great victory for women, ensuring that everyone’s income tax was based on their own income alone, unlike ‘joint taxation’, where a couple’s incomes are aggregated and both partners pay the same tax rate. In a progressive income tax system, joint taxation results in lower-earning spouses paying more income tax, and higher-earning spouses paying less, than if they were taxed independently or than each would pay if they were single. Within couples, joint taxation therefore favours the higher earner, in practice usually the man, and magnifies any income inequality between spouses.
Independent taxation is also more egalitarian because in principle everyone gains in the same way from entering employment, through having their own personal allowance on which they do not pay income tax, and then starting to pay tax at its lowest rate. Under joint taxation, the couple gets a tax-free allowance, which one partner may use up entirely. This renders employment less worthwhile for a second earner, who gets no personal allowance and has to pay tax at the same marginal rate as their partner. Although in theory this applies to second earners of either sex, in practice, despite rising levels of women’s and mothers’ employment, couples are still more likely to question the value of a woman’s employment and to see childcare costs as deductions from the mother’s income. This is the other reason why achieving independent taxation was so important to women.
However, independent taxation has been eroded in various ways in recent years. The coalition government introduced transferable tax allowances (TTAs) for some married couples and civil partners, which allow an unused proportion of one partner’s personal allowance to be set against the higher earning partner’s tax liability. TTAs have similar employment disincentive effects to joint taxation. When a woman takes employment, the net gain to her household will be less if her partner had previously made use of some of her tax allowance. She may consider, before taking a job, that her partner will end up paying more tax as a result. Further, TTAs increases income inequality between partners, since it is the higher earner who gains from it.
Another coalition government policy, to ‘withdraw’ child benefit from higher-earning parents, has eroded independent taxation at higher income levels. It is meant to work by collecting an amount equal to the child benefit, which is paid to the mother by default, in extra tax from a parent with annual income above £50,000. Among couple parents, that high earner is more likely to be a man, who is thereby taxed on income that is not his own. To avoid this situation, some women have stopped claiming child benefit, with deleterious effects on their eligibility for the national insurance credits for caring on which their pension rights may depend. This policy also discourages parents, but not others, from increasing their income and becoming subject to these additional taxes.
The benefit of independent taxation is also reduced by the means-testing of benefits and access to some public services. Like joint taxation, means-testing, which is always calculated on joint income, makes the net gains from employment of one partner depend on the other’s income. Means-testing similarly discourages paid work, especially for second earners on low earnings or with childcare costs (since childcare subsidies in the social security system do not cover all costs). Not only does that increase poverty levels, since dual earning is increasingly necessary to keep families out of poverty, but it works against gender equality. Despite rising levels of women’s employment, there remains a substantial gap between men’s and women’s employment rates, and a much larger one between the employment rates of fathers and mothers. Interruptions in employment render women economically dependent (which is undesirable for both them and their relationships) and harm their future employment prospects, making them less likely to get well-paid jobs and increasing the gender pay gap. Finally, we need to remember that a large proportion of relationships do not last. Women who have given up employment or taken a poorly paid part-time job during a relationship are in a particularly vulnerable position if they have to manage on their own – and so, of course, are their children.
The solution to these dilemmas is to have a social security system and social services that rely less on means-testing and more on a progressive tax system that raises more revenue to pay for them. However, policy in recent years has gone in the opposite direction, with the means-testing of benefits and access to public services being ramped up in order to reduce costs, while revenue from income tax has been cut. Successive increases in the personal tax allowance and higher rate threshold since 2010 have eroded the tax base, with most of the gains going to men; the 43% of adults who earn below the personal allowance, two-thirds of them women, have gained nothing from these give- aways. A more progressive tax system - bringing more people into income tax, initially at very low rates, with higher rates at the top end than we have currently - would not only generate much- needed revenue, but might also increase understanding among taxpayers of the importance of universal benefits and social services.
Independent taxation is also more egalitarian because in principle everyone gains in the same way from entering employment, through having their own personal allowance on which they do not pay income tax, and then starting to pay tax at its lowest rate. Under joint taxation, the couple gets a tax-free allowance, which one partner may use up entirely. This renders employment less worthwhile for a second earner, who gets no personal allowance and has to pay tax at the same marginal rate as their partner. Although in theory this applies to second earners of either sex, in practice, despite rising levels of women’s and mothers’ employment, couples are still more likely to question the value of a woman’s employment and to see childcare costs as deductions from the mother’s income. This is the other reason why achieving independent taxation was so important to women.
However, independent taxation has been eroded in various ways in recent years. The coalition government introduced transferable tax allowances (TTAs) for some married couples and civil partners, which allow an unused proportion of one partner’s personal allowance to be set against the higher earning partner’s tax liability. TTAs have similar employment disincentive effects to joint taxation. When a woman takes employment, the net gain to her household will be less if her partner had previously made use of some of her tax allowance. She may consider, before taking a job, that her partner will end up paying more tax as a result. Further, TTAs increases income inequality between partners, since it is the higher earner who gains from it.
Another coalition government policy, to ‘withdraw’ child benefit from higher-earning parents, has eroded independent taxation at higher income levels. It is meant to work by collecting an amount equal to the child benefit, which is paid to the mother by default, in extra tax from a parent with annual income above £50,000. Among couple parents, that high earner is more likely to be a man, who is thereby taxed on income that is not his own. To avoid this situation, some women have stopped claiming child benefit, with deleterious effects on their eligibility for the national insurance credits for caring on which their pension rights may depend. This policy also discourages parents, but not others, from increasing their income and becoming subject to these additional taxes.
The benefit of independent taxation is also reduced by the means-testing of benefits and access to some public services. Like joint taxation, means-testing, which is always calculated on joint income, makes the net gains from employment of one partner depend on the other’s income. Means-testing similarly discourages paid work, especially for second earners on low earnings or with childcare costs (since childcare subsidies in the social security system do not cover all costs). Not only does that increase poverty levels, since dual earning is increasingly necessary to keep families out of poverty, but it works against gender equality. Despite rising levels of women’s employment, there remains a substantial gap between men’s and women’s employment rates, and a much larger one between the employment rates of fathers and mothers. Interruptions in employment render women economically dependent (which is undesirable for both them and their relationships) and harm their future employment prospects, making them less likely to get well-paid jobs and increasing the gender pay gap. Finally, we need to remember that a large proportion of relationships do not last. Women who have given up employment or taken a poorly paid part-time job during a relationship are in a particularly vulnerable position if they have to manage on their own – and so, of course, are their children.
The solution to these dilemmas is to have a social security system and social services that rely less on means-testing and more on a progressive tax system that raises more revenue to pay for them. However, policy in recent years has gone in the opposite direction, with the means-testing of benefits and access to public services being ramped up in order to reduce costs, while revenue from income tax has been cut. Successive increases in the personal tax allowance and higher rate threshold since 2010 have eroded the tax base, with most of the gains going to men; the 43% of adults who earn below the personal allowance, two-thirds of them women, have gained nothing from these give- aways. A more progressive tax system - bringing more people into income tax, initially at very low rates, with higher rates at the top end than we have currently - would not only generate much- needed revenue, but might also increase understanding among taxpayers of the importance of universal benefits and social services.
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