In a new study, published by the Institute of Economic Affairs*, Patricia Morgan** shows how tax and benefits policy has undermined family life in Britain and encouraged fraud and dishonesty.
The study shows how the tax and benefits systems are particularly harsh on single-earner couples who have to earn over £50,000 before there is no loss from declaring their relationship to the authorities. This situation encourages couples not to marry and, if they are living together, to lie to the authorities about their family situation. In 2004/05, the government paid credits and benefits to 200,000 more lone parents than actually live in the UK fraud is widespread. The tax and benefits system encourages such fraud. In the most extreme case, a couple can gain nearly £10,000 a year by not declaring their relationship.
Family life has been discouraged over 25 years by both Conservative and Labour governments. In the Thatcher years, the Conservative government gave lone parents special financial benefits and priority entitlement to council housing. In the Labour years, the state increasingly became the child-care provider. As Patricia Morgan comments, Under Thatcher, the state became the bread-winner for lone parents; under Brown the state became the child carer. The consequences are obvious couples are strongly encouraged not to commit to each other because, by doing so, they will lose out financially. Both Conservative and Labour governments also removed any offsetting compensation in the tax system that had previously helped two-parent families.
Government policy penalising two-parent families has had a disastrous economic and social effect. Couples who describe themselves as closely involved are twelve times more likely than married couples to split up in the first three years of a childs life. There are also higher levels of worklessness and benefit dependency - lone parent families receiving an average of 66% of their income in benefits and tax credits.
Morgan shows how it is clear from international evidence, examining trends over time and by looking at the behaviour of individuals on different levels of income, that the tax and benefits system has caused the increase in lone parent families. Where there are no incentives for lone parenthood, couples tend to stay together, marry and ensure that they can support their children independently of the state. Individuals and couples respond rationally to the incentives they face currently the government is giving families perverse incentives, encouraging them not to form stable family units.
Major changes in the tax and benefit system are necessary. Benefits to lone parents could be reduced. Also, the perverse incentives in the benefits system that discourage couples from committing together should be offset by a tax system that recognises families. In particular, families should be allowed to allocate the income of the main earner to non-earners in the family for tax purposes. Reforms to the tax and benefits system should be bolstered by reforms to the no fault divorce laws that currently allow a guilty party to walk away from their marriage contract whilst imposing financial penalties on the injured party.