Children in the tax and benefit system

Stuart Adam

Institute for Fiscal Studies

Aims1. Understand the treatment of children in the tax and

benefit system2. Useful case study

• applications of economic theory/reasoning• issues arising in empirical research

Outline• Introduction, definitions, context• Why might we support children?• How might we support children?• UK trends in support for children• Support for children and child poverty

Child-contingent support

“difference in net (after taxes and benefits) income between a family with children and an otherwise-identical family without children”

• restrict attention to financial support • not just support for poor families• not just things with ‘child’ in the title!• TAXBEN microsimulation model using the

Family Expenditure Survey

The policy contextChild poverty

• Child poverty in the UK high by European standards• Long-term upward trend (though falling recently)• Government’s child poverty pledge

• 25% reduction by 2004-05, from 1998-99 baseline• based on Government’s chosen measure of child

poverty: “children in households below 60% median equivalised income” (HBAI)

• Longer-term aspirations• 50% reduction by 2010• abolition by 2020• but measure not defined yet

Why support children?Equity arguments

1. Vertical equity• Children as proxy for poverty• Unfair on childless poor• But mitigates disincentives

2. Horizontal equity• Compensation for direct and indirect costs of

children• Not unfair on childless poor after all• Can think of as social insurance

Why support children?Equity arguments

• Challenge: childbearing can be voluntary and confer utility• Counters both horizontal and vertical equity

arguments

• Two ways the challenge might be met:• Childbearing not always deliberate rational

decision• Children shouldn’t face consequences of parents’

actions

Why support children?Efficiency arguments

3. Externalities• to having children

• Intragenerational or intergenerational• Support as a fertility incentive

• to spending on children• Bad outcomes more likely for children in poverty• These impose costs on the whole of society

4. Capital constraints• Can’t access parents’ future income• Can’t access returns to investment in child

How might we support children?

• Does money help?• Is it spent on the child?

• Do parents protect children from low income?• Does that affect whether we want to support

them?• The case for public services

• Does spending on the child achieve anything?• Correlation isn’t causation

• How should it be delivered?• Who should receive it?

Who should get how much?

Determinants of the level of support depend on the rationale…

• Vary by income?• Possibly for efficiency reasons• NOT for equity reasons unless “care more about children”• Individual vs joint assessment – do couples pool

resources?

• Vary by number or age of children?• Not all children cost the same

• Vary by other things?

Average child support£ / week per child, 2003 prices

£0

£5

£10

£15

£20

£25

£30

£35

1975 1980 1985 1990 1995 2000

Source: Adam and Brewer (2004)

Average child support£ / week per child

£0

£5

£10

£15

£20

£25

£30

£35

1975 1980 1985 1990 1995 2000

Child support Child support, earnings-indexedSource: Adam and Brewer (2004)

Understanding the results

1. What is our baseline?• Clearly not nominal level• Price indexation? Average earnings? GDP? …

2. Results reflect changes in:• Tax and benefit policy• Characteristics of families with children

• Isolating the impact of policy changes• Calculate support for children assuming that

families’ characteristics unchanged since 1978

Average child support£ / week per child, 2003 prices

£0

£5

£10

£15

£20

£25

£30

£35

1975 1980 1985 1990 1995 2000

Child support Child support, 1978 population

Source: Adam and Brewer (2004)

Decomposing changes

1978: £14.36

Policy changes 78-99: + £2.88

Characteristics changes 78-99: + £4.31

1999: £21.55

Policy changes since 99: + £11.02

2003: £32.57

Source: Adam and Brewer (2004)

A brief history of child support

1909: child tax allowances

1946-48: welfare state programmes

1976-79: child benefit (CB), one parent benefit (OPB)

1988: Fowler reforms: income support (IS), family credit (FC), housing benefit (HB),….

1998-02: OPB abolished. WFTC, children’s tax credit introduced

2003: child tax credit (CTC)

Total support 2003/4£ / week for a lone parent with 1 child

£0

£20

£40

£60

£80

£100

£120

£0 £200 £400 £600 £800 £1,000 £1,200

Gross weekly income

Note: assumes year-round minimum-wage work, child aged 1 year +, no childcare costs

Child benefit

Child tax credit

Working tax credit

IS

The introduction of the CTC£ billion / year, 2003 prices

£0

£5

£10

£15

£20

£25

2002 2003

CB IS/JSA WFTC/WTC CTC Other

Source: Adam and Brewer (2004)

The rise of means testing £ billion / year, 2003 prices

£0

£5

£10

£15

£20

1975 1980 1985 1990 1995 2000

FA/CB SB/IS/JSA FIS/FC/WFTC Other

Source: Adam and Brewer (2004)

Summary of empirical findings

• Since 1975, support for children has become:• More generous• Less reliant on child benefit as means-testing

expanded• Recent trend away from cash payments• Increasingly paid to the mother • More focused on younger children, one-child

households and (until recently) lone parents

• Much of the increase happens in 1999-2003

The child poverty context

0%

5%

10%

15%

20%

25%

30%

35%

40%

1975 1980 1985 1990 1995 2000

Proportion of children in households below 60% medianequivalised income after housing costs

Source: IFS analysis using Family Expenditure Survey (until 1993) and then Family Resources Survey

Rising support, rising poverty

Given the rising level of support for children, why has child poverty risen so fast and fallen so slowly?

• Latest changes not shown up yet• roughly on course to hit (demanding!) target

• Choice of poverty measure• rising inequality in gross incomes• relative poverty means chasing a moving target

References (1)Trends in support for children

Adam, S. and M. Brewer (2004), Supporting families: The financial costs and benefits of children since 1975, Bristol: The Policy Press. See www.ifs.org.uk/taxben/supportfam.shtml

The UK tax and benefit system

Adam, S. and J. Shaw (2003), A Survey of the UK Tax System, IFS Briefing Note no. 9 (www.ifs.org.uk/taxsystem/taxsurvey.pdf)

Leicester, A. and J. Shaw (2003), A Survey of the UK Benefit System, IFS Briefing Note no. 13 (www.ifs.org.uk/taxsystem/benefitsurvey.pdf)

Child poverty and the child tax credit

Brewer, M., A. Goodman and A. Shephard (2003), How Has Child Poverty Changed under the Labour Government? An update, IFS Briefing Note 32 (www.ifs.org.uk/inequality/bn32.pdf)

Gregg, P., Harkness, S. and Machin, S. (1999), ‘Poor kids: trends in child poverty in Britain, 1968–96’, Fiscal Studies, vol. 20, pp. 163–87.

Brewer, M. (2003) The New Tax Credits, IFS Briefing Note no. 35 (www.ifs.org.uk/taxben/bn35.pdf)

Brewer, M. (2003) What do the child poverty targets mean for the child tax credit? An update, IFS Briefing Note no. 41 (www.ifs.org.uk/inequality/bn41.pdf)

References (2)Equity, efficiency and mean-testing of child supportCabrillo, F. (2001), ‘Support for children and fertility rates’, paper presented at the 8 th

International Research Seminar on Issues in Social Security, Sigtuna, Sweden, June.Banks, J. and M. Brewer (2003), “Understanding the generosity of government financial support

for families with children” in J. Bradshaw (ed.), Children and Social Security, Ashgate, 2003. Available at www.ifs.org.uk/workingpapers/wp0202.pdf

Werding, M. (2001), ‘Child-related benefits throughout the family life-cycle: lessons from the case of Germany’, ifo Studien, 3/2001, pp. 327–48.

Carneiro, P. and J. Heckman (2003), “Human Capital Policy” in J. Heckman and A. Krueger (eds.), Inequality in America: What Role for Human Capital Policies?, MIT Press, 2003. Available at http://lily.src.uchicago.edu/~klmcarn/FILES/harvard/HCP.pdf

Does money help?Middleton, S., Ashworth, K. and Braithwaite, I. (1997), Small Fortunes: Spending on Children,

Childhood Poverty and Parental Sacrifice, York: Joseph Rowntree Foundation.Gordon, D. et al (2000), Poverty and Social Exclusion in Britain, York: Joseph Rowntree

Foundation.Lundberg, S., Pollak, R. and Wales, T. (1997), ‘Do husbands and wives pool their resources?

Evidence from the United Kingdom child benefit’, Journal of Human Resources, vol. 32, pp. 463–80.

Duncan, G. and J. Brooks-Gunn (eds) (1997), Consequences of growing up poor, New York: Russel Sage Foundation