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International Socialism, February/March 1971

Jim Kincaid

Taxing the Poor

From International Socialism, No.46, February/March 1971, pp.13-16.
Transcribed & marked up by Einde O’Callaghan for ETOL.

Until now the Supplementary Benefits Commission has been forbidden by statute to pay out money to families in which there is a breadwinner in full time employment. This ruling was also applied universally by the various predecessors of Supplementary Benefit – by the National Assistance Board, and earlier by the Public Assistance Committees, and earlier still by the local Poor Law Guardians. In fact since the Poor Law Amendment Act of 1834, it has been a settled principle of British social security that means tested money payments should not be given to wage earners. The grounds for this rule were that otherwise employers would be encouraged to offer wages that were below any poverty line operated by government or local authority, since the means tested cash allowance paid out of rates or taxation would make up all wages to the same minimum level. At all wage levels below the poverty line operated by the public authorities, there would be no compulsion on the individual employer to offer better wages than other competing employers to attract labour.

The principle that wages should not be subsidised by means tested cash allowances is now to be set aside by the Conservative Government. They have produced a scheme of fiendish intricacy, and intend to have it on the Statute Book before Christmas. The new Family Income Supplement will be paid out, after a means test, by the Supplementary Benefits Commission, and only to families with a parent in full time work.

The low wages paid for a broad range of jobs leave a substantial number of families deep in poverty. According to the present Government, there are about 160,000 families in Britain with a breadwinner in full-time employment, but whose weekly income is less than the meagre poverty scale allowed to its clients by the Supplementary Benefits Commission. (This total includes about 24,000 families who are wage stopped, and whose poverty income at work is projected on into periods of sickness or unemployment by the rule that supplementary benefit should be cut back to leave income below the level of normal earnings, however low these may be). The total number of children involved is said to be about 500,000. In 54,000 of the 160,000 families there is only one parent, in most cases just the mother, deserted, separated, unmarried or widowed.

These figures represent no more than the vaguest of estimates; they are based on a Government survey carried out as long ago as 1966. The Labour Government, while professing the most anxious concern about the matter, nevertheless took good care not to repeat this research at a later point in their term of office. The Child Poverty Action Group (in their pamphlet, Poverty and the Labour Government) reckons that the number of children in the families of the wage earning poor rose from half to three quarters of a million between 1966 and 1970. An important factor was the 50% increase under Labour in the size of the national insurance contribution paid by everyone who is employed no matter how low their wages. There is evidence too that low wages have been increasing more slowly than average wages. Many of the lowest paid are among the 3½ million in industries where pay and conditions are regulated by the Wages Councils. The system has scarcely altered since first set up in 1909, and workers in the large and labour intensive sectors of agriculture, catering and retail distribution are among those covered. On average, settlements made by Wages Councils were running at 9% improvement in pay during the first half of 1970, i.e. below the average for better paid groups of workers. But the main disadvantage suffered by Wages Council workers is that they get wage increases at much less frequent intervals than most groups of better paid workers. The elaborate and leisurely conciliation procedures used by the Councils allow the employers endless opportunities for stonewalling. Some Wages Councils haven’t given a pay award since 1965. In recent years the whole group of workers in Wage Council industries have had to wait an average of 20 months between pay increases. During the 12 months ending June 1970, one out of three Wages Council workers had had no improvement in pay.
 

Labour and Poverty

The Labour Government’s attempted solution of the problem of low wage poverty proved completely ineffective. In 1968, family allowances were increased by 10s to the present rate of 18s a week for the second child in the family and £1 for younger children. However this increase was effectively restricted to lower income families by the device known as claw-back. Anyone with an income large enough to be taxed at standard rate, lost the whole increase by means of a reduction in the size of their tax-free personal allowance. The effect was that whereas the Government handed out an extra £180 million a year in increased family allowances, £133 million of this arrived straight back into the Exchequer in the form of increased income tax. For income tax payers, the only result was that the extra cash collected by the wife at the post office was exactly balanced by the extra tax lopped off the husband’s pay packet. For families whose income was not high enough to reach the income tax threshhold there was a clear gain. But not a large one. The usefulness of the 10s increase in family allowances was limited by two factors. Many full-time wage earners were in poverty even though they had only one child, and thus received no family allowance. (Sir Keith Joseph pointed out recently that of the group of 160,000 families whom the Government estimate as currently in poverty, one third have only one child apiece). Yet Labour continued to exclude all one child families from any entitlement to a family allowance. Secondly, for a substantial number of workers, the gap between their earnings and the poverty line was too great to be plugged by an extra 10s per child. The result was that even when first introduced in 1968 the improvement in family allowances still left half of the group of wage earning poor below the Supplementary Benefit poverty line.

And, two years later, in 1970, virtually no one’s income was any greater by virtue of the 10s increase in family allowances. Nearly all of the extra £47 million a year awarded from 1968 onwards was being drawn back to the Exchequer via the income tax claw-back. The volume of wage earning poverty was more than back to the pre-1968 level, both in terms of the numbers of people affected, and the amounts by which on average the low wage groups fell short of the official poverty line.

A number of trends have combined together to produce this outcome. Prices and average wage levels rose rapidly over the two year period. The money level of the official poverty line was edged up by increases in supplementary benefit rates in the autumn of 1968, 1969 and 1970. As illustrated above, the financial position of low wage earners deteriorated. But after 1968 there was no further increase in family allowances to compensate for these developments.

But more important than any of these developments in multiplying the numbers of wage earners in poverty has been the operation of the tax system. What has happened over the past two years is that income tax has become a major cause of poverty. The reasons for this are rather complicated but should be more widely appreciated. For the consequence has been a sharp reduction in the standard of living of millions of workers with less than average earnings.

The social impact of income tax in Britain is determined not just by the proportion of each £1 taken by the standard rate or by surtax. For people with incomes below the national average, what has a bigger impact on their standard of living is the size of the tax allowances – i.e. how much of income is freed from tax if a person is married or has children; and the size of the personal tax allowance which the taxpayer is allowed for himself. If the size of tax allowances is held constant during a period of rapid inflation, then there are three consequences. A higher and higher proportion of the population find themselves paying income tax. For the whole taxpaying population, an increasing proportion of their income is subject to income tax. And the rate of increase in the proportion of income taken in tax is highest for people at the lower end of the income scale. It is also the case that these various trends can change the distribution of post-tax income with phenomenal speed in only a short period, and always to the disadvantage of lower income groups.

A person gets a tax allowance for each of his children – £115 a year clear of tax if the child is aged under 11, £140 for a child aged 11 or up to 16, and £165 for a dependent child aged 16 or over. The size of these allowances has remained unchanged since 1963. Given inflation, the effect is that people with lower and lower incomes are having to pay the standard rate of income tax if they have children. As an example, three children aged between 11 and 15 would attract tax free children’s allowances amounting to £420 a year both in 1963 and 1970. This was half of the average wage for manual work in 1963, but less than one third of the corresponding wage in 1970. In effect the purchasing power of the tax relief given in respect of children has been allowed to diminish sharply over the period.

Much the same is true of the tax relief given in respect of a wife. In 1963 she was worth £120 a year of income exempt from tax. Not until the budget of April 1970 was this increased, and then only by a trifling £20 a year, leaving the wife allowance at its current level of £140 a year. Approximately, it would take a wife and a half to achieve the same purchasing power in tax rebate as a single wife generated in 1963. As with children, the effect is that being married brings a man into the income tax paying bracket at a lower relative income than was the case in 1963.

The position was considerably worsened by two changes made in the income tax system in the last two Budgets of the Labour administration. From 1965 onwards the standard rate of income tax was 8s 3d in the £1. But in the years between 1965 and 1969, a person paid a lower rate of tax than the standard rate on the first £300 a year of income subject to income tax. Only thereafter did standard rate come into operation. In the Budget of 1969, Roy Jenkins abolished the 4s rate of tax, and in the following year the 6s rate was also scrapped. As a result the full standard rate now begins to operate at a level of taxable income £300 lower than was the case in 1968 and earlier. If income rose above the threshold at which income tax comes into operation, a person immediately starts paying at the standard rate, currently 8s 3d in the £1, but to be reduced to 7s 9d in April 1971.

Partly to compensate for this abolition of the reduced rates, Jenkins made increases in the personal allowance, given in respect of the taxpayer himself. It was raised to £220 a year by the 1969 Budget, and in 1970 to £325 a year clear of tax. Jenkins did not improve the allowances given for children, and as pointed out above, improved the wife allowance by only a minor £20 a year. The result was that, relatively, it was the single taxpayer who reaped by far the largest benefit from the increase in personal allowance given to compensate for introducing standard rate of £300 less of income. Married women got some benefit, but only if they earned an income by work. The change involved sharp discrimination against families in which the wife does not go out to work and in which there are children. It is in the category of those who lost out in chese budgetary changes that the wage earning poor are concentrated.

The results can be illustrated from the 1970 spring Budget. Jenkins claimed to have scored a victory for social justice because by increasing the personal allowance, he had freed 2 million taxpayers from any requirement to pay income tax. But 700,000 of them were single men, and a further 800,000 were working wives. Only 400,000 of the 2 million were married men, and many fewer of these would be men with families. The latter suffered the full effects of the lowering of the standard rate threshold; they got the same increase in personal allowance as the single men, but the value of this compensatory increase had to be spread out over all the members of the family.

This tax change of itself increased the numbers of wage earners whose post-tax incomes fell below the official poverty line. It meant that for family men the full standard rate began to bite at a much lower point of income than had been the case in earlier years. And this was in addition to the fact that inflation was in any case making standard rate reach further and further down the curve of income distribution.

As if all this were not enough, there has been yet a further erosion affecting specifically the family allowances paid to lower income groups. Remember that the extra 10s per child given in 1968 was made subject to a 100% tax claw-back as soon as total family income was above the standard rate threshold. So – not only was there a phenomenal increase in the numbers of low wage earners who found themselves paying the standard rate of income tax for the first time during the final two years of Labour rule, but once over the threshold, the first bit of income to get taxed was the family allowance. And this was taxed not at standard rate (41.25%) but at the special claw-back rate of 100% for up to 10s per week per child. (To be strictly accurate it is not the family allowance which is taxed; rather a reduction is made in personal allowance which exactly increases tax due by the amount to be clawed back. The effect on post tax family income is just the same as if family allowances were directly taxed.)

An example may help to make the position clear. In 1967 a married man with three children started to pay the standard rate of income tax if his earning rose above £23 a week. Thus if he got a pay increase taking him to £24 a week, then he would pay 8s 3d each week in income tax.

In 1970, the man with the same size family, starts to pay income tax if his earning rose above £16 1s (Not a misprint). He gets family allowances for two of his three children, and 10s of each of these two family allowances is subject to 100% rate of tax. Thus if his earnings rise by £1 to £17 1s per week – the whole of the extra £1 is immediately taxed away. Only above £17 1s does his income become subject to the normal standard rate of 8s 3d in the £1. If he has four children, the band of income subject to 100% is 30s wide, with five children, the band is £2 etc. The following table gives the thresholds at which the 100% tax begins to operate and indicates where standard rate takes over.

Note the fantastic reduction over the past three years in the income levels at which income tax begins to bite. In 1967 for the three child family standard rate begins at £23 a week. At that time there were in addition the two reduced rates. Thus in the three child family, income between £17 and £19 would be taxed – but only at 4s in the £1. Income between £19 and £22 would also be taxed but at the 6s in the £1 rate. Only over £22 would the full standard rate come into operation. Now, by contrast, the 8s 3d rate starts at earnings over £16 1s. In 1967 the average earnings for manual work were £21 a week – i.e. the standard rate threshold (for three child family) was almost 10% above the level of average manual earnings. In 1970, the comparable standard rate threshold is 63% below the average manual wage. Given the fact that men in full-time employment have to pay national insurance contributions – from which people on supplementary benefits are exempt – the result of the developments outlined above is that men with two or more children now start to pay income tax at income levels below the official poverty line. And as a result of Labour’s fiscal changes, the first band of their income to get taxed is not at the mild rate of 4s in the £1, but at the somewhat penal rate of 20s in the £1. As a consequence the effect of the 1968 increase in family allowances has been virtually nullified, and in estimating the numbers of families with a breadwinner in full-time work, and yet in poverty, the Government now quotes the same figures as were produced in the 1966 Circumstances of Families survey. It is very likely that if this survey were repeated, these estimates would have to be revised, radically and upwards.

All this has provided the new Tory ministers with no end of innocent amusement, dampened only by the fact that (as the reader will have noticed) the story is so complicated that many voters may fail to appreciate just how effectively Labour were devastating the standard of living of below average wage earners during their last two years in office. When Sir Keith Joseph introduced the Family Supplements Bill in the Commons on 10th November, he made hay of the kinds of counter proposals being put up from the Opposition benches. Labour members had decided to argue that the correct solution to the problem of family poverty was a repeat performance of the 1968 family allowance increase. With the same claw-back, of course, from income tax payers. If Jenkins has been aware of the effects on poverty of his tax policies, he has taken care to keep very quiet about it. Sir Keith pointed out that if he dished out an extra £180 millions a year in family allowances as Labour did in 1968, then this time no less than £174 millions of it would be immediately recouped by the Exchequer in the form of extra income tax. An odd way of providing £6 million a year for low wage earners.

There are some other curious features of Labour’s tax legacy to the nation. If a man has an income which is just above the threshold which makes him liable for income tax, then the addition of an extra child to his family will increase the amount of tax which he pays. Say a married man has two children, and £15 5s a week in earnings. He pays no income tax, since the tax threshold for such a family is earnings of £15 6s. Along comes a third child, for whom he can now claim a tax allowance of £115 a year, which at 8s 3d in the £1 is worth £47 14s in terms of hard cash. But this third child attracts a family allowance of £1 a week, 10s of which is taxed at 100%, costing the father £26 a year. At the same time 10s of the family allowance paid to the second child also becomes subject to tax at the 100% rate. Thus the extra family allowance makes him liable for £52 of tax per year, while the child allowance is worth only £47 14s. The extra child has increased tax liability by £4 6s a year. This effect would be magnified if the Government were now to increase family allowances again. As the Social Security Under Secretary explained to the Commons on 10th November.

‘We are now in the situation where a 10s increase in family allowance with claw-back, would mean that a man with two children would start paying tax on earnings as low as £13 4s and, with four children, on £12 4s. In other words, for every additional child, he would be taxed on lower and lower earnings.’

The derailment of claw-back likewise leaves the Child Poverty Action Group in a state of some disarray. They too have been advocating an across the board increase in family allowances combined with the income tax claw-back. Their proposals are much more generous than Labour’s miserable 10s a week per child. The CPAG wants family allowances to be raised to 35s a week for every child including the first in each family. But unless the child allowances were simultaneously raised, all but a very small part of the increased family allowance would not improve the position of low income families, but simply filter straight to the Exchequer. But in fact the CPAG have combined their increased family allowance with a proposal to reduce child allowances! This would have worked to the benefit of poorer families two years ago when the income tax threshold was well above the supplementary benefit poverty line. But now, with the threshold below the poverty line, any reduction in child allowances would disasterously increase the numbers in poverty, and also the size of the average gap between their incomes and the poverty line.

If this Government (or the last) were serious about reducing wage earner poverty, then plenty of simple solutions lie ready to hand. For a start the abolition of low wages. Certainly an increase in family allowances would help – but only in conjunction with a sharp rise in the personal and child allowances operating for those with below average earnings. A simple technique would be bigger family allowances coupled with a rule that no one earning under £20 need pay any income tax. Then allow for gradually increasing rates of income tax to be levied on those with gross incomes between £20 and national average earnings. This means in effect introducing a principle that the rate of tax paid is partly determined by the total income of the taxpayer. Such changes could readily be combined with increases in surtax – at least to the levels obtaining up until 1961 – and by restoration of Schedule A tax. All very simple; but each proposal involving a redistribution of post-tax income from richer to less rich. This is not quite what the Labour and Tory Parties are in business to achieve.
 

The Tory Scheme

Instead, Sir Keith Joseph has produced the Family Income Supplement (FIS) a scheme which, for all but the abysmally poor, does virtually nothing to counterbalance the increase in poverty arising from the present operation of income tax and claw-back. To qualify for FIS, a man or woman must be in full-time employment, and have at least one child. People will not qualify if the parental income, including family allowances, is above the following limits.

And so on, adding £2 per week per child. Income here includes family allowances, but is gross income i.e. before any stoppages out of the wage packet, such as for national insurance, income tax or superannuation. If income is below the above limits then an FIS will be paid. But the FIS will amount to only half of the difference between family income and the above levels. Thus for example 10s a week would be the FIS for a one child family whose gross income was £14 a week. The maximum FIS that can be paid will be £3 a week. This will hit particularly at large families with lower incomes. The smallest FIS payable is 4s a week. The consequence of all these restrictions is that less than half of the whole group of wage earning families in poverty will be entitled to any money by virtue of the FIS scheme.

The actual amounts to be paid out can be summarised as follows:

The Government have allocated £7,600,000 a year for the new scheme. Of this £600,000 is reserved for administrative expenses, much of it to pay the salaries of the 200 extra civil servants who will be employed to carry out the means test investigations. Even if all the families who are theoretically qualified, manage to get the FIS they are entitled to, they will get no more than an average of 3s 6d a week for each member of the family. The purchasing power of this pittance will be even smaller than at present as the cost of living continues to rise rapidly and the FIS will not start to be paid until August 1971.

It will be left to the individual family to work out whether they will qualify, to find out how to apply, and to make a claim on the correct form to the Ministry. The Supplementary Benefits Commission is under no obligation to go looking for people who are missing out on their rights, statements of income made by claimants will be checked with employers. There are formidable penalties for any claimant caught mis-stating income – a fine of up to £100 and up to three months in prison. The Act makes no provision for penalising employers who overstate the income of claimants, nor for Ministry officials who wrongly withold benefit. The Ministry is given the right to reclaim the full amount of any overpayment of FIS to a claimant. But the claimant is not allowed to claim retrospectively for any FIS he has missed receiving in the past.

The same appeals system will operate as for supplementary benefit. That is, no appeal beyond the area appeals tribunals, each of which consists of three local worthies selected by the Supplementary Benefits Commission and advised by civil servants employed by the Commission. The appeals tribunal meets in secret; and can make up its own rules as it goes along since there is no public record of precedents, and a local tribunal need give no public explanation for its decisions.

In view of all this, many of those entitled to an FIS will not receive it. In making its financial calculations, the Government has assumed that one in six of those eligible will not get their FIS. But experience of other similar means tests suggests that an uptake below 50% of those entitled is a more realistic forecast. However the scheme will open up a fruitful new area of agitation and propaganda for the Unemployed and Claimants Union movement which is beginning to spread across the country. If everyone entitled were to claim, then 2% of the working population would become subject to the bureaucratic arrogance with which the Supplementary Benefits Commission favours the 4 million people who are at present forced to depend on its allowances for all or part of their income. The day has come a little nearer when mass campaigns against the social security system can be waged collectively by the people whom it supposedly exists to help.

The FIS has not been devised to help the poor. Its usefulness lies elsewhere – to the Government and the employers in their battle against wage demands. With FIS in operation, wage claims from even the lowest paid can be rejected with blandness. Employers will argue that across the board wage increases take no account of extra family responsibilities of some workers and risk being over-generous to others – the means test is so much more sensitive to the differing needs of families on the bread line! The very existence of FIS will be used to argue that the prevention of poverty need not be a function of the wage system. Selective philanthropy, such as FIS, minimises costs (and meets these costs out of taxation not profits) and provides employers with propaganda arguments that are helpful to their cause.

 
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