Don Draper is a co-founder of Tax and the Family.
Nigel Lawson’s influence on modern politics is hard to overstate. One consequence of that is that his name will always to linked with independent taxation. In his The View from Number 11, he wrote that, of all his tax reforms, the one least likely to be reversed was the independent taxation of married women.
When he became Chancellor in 1983, he inherited an income tax system that had its roots deep in the 19th Century. It was crying out for reform. A married woman’s income was treated as that of her husband, with the result that they paid more tax than if she was taxed on her own income. Couples where both had high incomes were most affected. Unsurprisingly, they were the loudest critics of the existing sustem.
Lawson therefore wanted to make the tax system fairer for families. His plan for independent taxation announced in his 1985 Budget. It introduced a system of taxation in which every one, man or women, married or single, would have the same standard allowance. But if either a wife or husband was not able to make full use of their allowance, they could transfer the unused portion to their partner.
In other words, he aimed to introduce a system of independent taxation with “transferable allowances”. That would make the tax system fairer for families as well as give married women independence. This plan was blocked by Margaret Thatcher. Nigel Lawson said that despite her oft-pronounced belief in the family, in practice, she strongly identified with two-earner couples.
I recall being told by someone who was in Number 10 at the time that the problem was that transferable allowances would have been too costly and made other tax cuts more difficult to afford. Both explanations may have been true. But, as a result, families today are bearing a totally unfair share of the tax burden. Many have an effective tax rate far higher than that any government has dared to impose on high earners.
His aim was that the income tax system should not discriminate against families where one spouse remained at home to care for young children. With transferable allowances, there would have been no discrimination against couples where, for whatever reason, one spouse was not in paid employment. He did not accept the distinction between “working” and “non-working” wives. Most so-called non-working wives were working at home but had no employer and received no wage.
A system of independent taxation with transferable allowances would be a more logical and straightforward system that would take more families out of poverty and unemployment traps than under the existing system. The ultimate aim was to get to a position where single-earner couples were entitled to the same allowances as two-earner couples. Because Lawson could not get this plan accepted he felt he had only been able to do “half the job”. He hoped his successors would complete the job.
The system we have ended up with, Nigel Lawson said, was inferior to independent taxation with fully transferable personal allowances but better than the old system. For the first time married women were given a fair deal. It is much less clear that families were.
In a 2013 foreword to a review of that Leonard Beighton and I wrote, Lawson that the case for fully transferable allowances was a strong as ever. He had hoped that a commitment given to them in the 2010 Coalition Agreement would be fully honoured. His view was that fully transferable allowances were a far more cost-effective means of reducing the tax burden on low-income households than across the board increases in personal allowances – or, which some of us would add, an across the board tax rate cut.
The very limited transferable allowance which married couples and civil partners have been able to claim since 2015 fell well short of what Nigel Lawson had proposed. The Treasury’s response to any proposal to reduce the tax burden on families is that this is incompatible with independent taxation. They have clearly not understood what Nigel Lawson had in mind.
The failure of income tax to take account of the family has resulted in liabilities becoming divorced from the ability of families to pay. At the time of the 2022 Spring Statement, the Treasury published a table showing where different households will be found in the income distribution.
The table showed that a couple with two children needed a gross income of over £50,000 to be in the fifth decile that is with an average standard of living whereas a single adult without children would have needed just over £22,000. In the current tax year, the single-earner couple earning £50,000 could be paying almost £7,500 income tax whereas the single adult with broadly the same standard of living will be paying just over £2000.
The failure of the income tax system to take account of household size has also resulted in in-work families becoming dependent on universal credits or tax credits with the result they have an effective tax rate of 69 per cent or a higher 78 per cent if a parent is repaying a student loan. Where families are on universal credit or tax credits married women have lost all the benefits of independence and privacy that they thought independent taxation had given them.
In 2018 Lawson was asked in a filmed interview still available on the Tax and the Family website what he thought about the German system of independent taxation in which couples had the option to be taxed jointly with the result that couples with two children do not start paying tax until their income is over 50,000 euros. This he said was what he had been aiming for in 1985.
It was, in his word,“ implicit” in his original proposals for independent taxation. It would be a fitting tribute to a remarkable Chancellor if in the next Budget his original plan for independent taxation was finally introduced.
Don Draper is a co-founder of Tax and the Family.
Nigel Lawson’s influence on modern politics is hard to overstate. One consequence of that is that his name will always to linked with independent taxation. In his The View from Number 11, he wrote that, of all his tax reforms, the one least likely to be reversed was the independent taxation of married women.
When he became Chancellor in 1983, he inherited an income tax system that had its roots deep in the 19th Century. It was crying out for reform. A married woman’s income was treated as that of her husband, with the result that they paid more tax than if she was taxed on her own income. Couples where both had high incomes were most affected. Unsurprisingly, they were the loudest critics of the existing sustem.
Lawson therefore wanted to make the tax system fairer for families. His plan for independent taxation announced in his 1985 Budget. It introduced a system of taxation in which every one, man or women, married or single, would have the same standard allowance. But if either a wife or husband was not able to make full use of their allowance, they could transfer the unused portion to their partner.
In other words, he aimed to introduce a system of independent taxation with “transferable allowances”. That would make the tax system fairer for families as well as give married women independence. This plan was blocked by Margaret Thatcher. Nigel Lawson said that despite her oft-pronounced belief in the family, in practice, she strongly identified with two-earner couples.
I recall being told by someone who was in Number 10 at the time that the problem was that transferable allowances would have been too costly and made other tax cuts more difficult to afford. Both explanations may have been true. But, as a result, families today are bearing a totally unfair share of the tax burden. Many have an effective tax rate far higher than that any government has dared to impose on high earners.
His aim was that the income tax system should not discriminate against families where one spouse remained at home to care for young children. With transferable allowances, there would have been no discrimination against couples where, for whatever reason, one spouse was not in paid employment. He did not accept the distinction between “working” and “non-working” wives. Most so-called non-working wives were working at home but had no employer and received no wage.
A system of independent taxation with transferable allowances would be a more logical and straightforward system that would take more families out of poverty and unemployment traps than under the existing system. The ultimate aim was to get to a position where single-earner couples were entitled to the same allowances as two-earner couples. Because Lawson could not get this plan accepted he felt he had only been able to do “half the job”. He hoped his successors would complete the job.
The system we have ended up with, Nigel Lawson said, was inferior to independent taxation with fully transferable personal allowances but better than the old system. For the first time married women were given a fair deal. It is much less clear that families were.
In a 2013 foreword to a review of that Leonard Beighton and I wrote, Lawson that the case for fully transferable allowances was a strong as ever. He had hoped that a commitment given to them in the 2010 Coalition Agreement would be fully honoured. His view was that fully transferable allowances were a far more cost-effective means of reducing the tax burden on low-income households than across the board increases in personal allowances – or, which some of us would add, an across the board tax rate cut.
The very limited transferable allowance which married couples and civil partners have been able to claim since 2015 fell well short of what Nigel Lawson had proposed. The Treasury’s response to any proposal to reduce the tax burden on families is that this is incompatible with independent taxation. They have clearly not understood what Nigel Lawson had in mind.
The failure of income tax to take account of the family has resulted in liabilities becoming divorced from the ability of families to pay. At the time of the 2022 Spring Statement, the Treasury published a table showing where different households will be found in the income distribution.
The table showed that a couple with two children needed a gross income of over £50,000 to be in the fifth decile that is with an average standard of living whereas a single adult without children would have needed just over £22,000. In the current tax year, the single-earner couple earning £50,000 could be paying almost £7,500 income tax whereas the single adult with broadly the same standard of living will be paying just over £2000.
The failure of the income tax system to take account of household size has also resulted in in-work families becoming dependent on universal credits or tax credits with the result they have an effective tax rate of 69 per cent or a higher 78 per cent if a parent is repaying a student loan. Where families are on universal credit or tax credits married women have lost all the benefits of independence and privacy that they thought independent taxation had given them.
In 2018 Lawson was asked in a filmed interview still available on the Tax and the Family website what he thought about the German system of independent taxation in which couples had the option to be taxed jointly with the result that couples with two children do not start paying tax until their income is over 50,000 euros. This he said was what he had been aiming for in 1985.
It was, in his word,“ implicit” in his original proposals for independent taxation. It would be a fitting tribute to a remarkable Chancellor if in the next Budget his original plan for independent taxation was finally introduced.