Tax and the Family Interviews Lord Lawson on Independent Taxation
Lord Lawson was Chancellor of the Exchequer form 1983-1989. Independent taxation was his project. He has told Tax and the Family that he was only partly able to achieve his objectives. Families in poverty paying thousands of tax would not be paying any income tax today if his original proposals for independent taxation had not been blocked by Margaret Thatcher.
The tax system, he said, should be fair -it should be neutral. If you wanted to help specific groups this should be done through the social security system. It was clear that the system that existed before 1990 was discriminatory, it discriminated against married women and in particular against married women who stayed at home to look after the children. He was not trying to do anything other than to make the system fair.
It was difficult to get his ideas accepted. Unfortunately he was only able to do “half the job’ and he had hoped that his successors would complete the job. This hasn’t happened and as a result families are paying tax today who would not have been paying any tax if his original proposal for a fully transferable tax allowance had been introduced. This was. he said, an integral part of the proposal he had put to Margaret Thatcher. It was an essential part of his plan for independent taxation.
Asked if he was frustrated by the system as it is today, he said it was unfair. He still believes that the proposal he put forward in 1986 for a fully transferable allowance was desirable and a “great improvement on what we have at the present time”.
One of the results of the income tax system failing to take account of the family has been that families have had to be supported through the benefit system, which has resulted in families facing high marginal rates. The IFS has said that a third of all working households are likely to be with Universal Credit with the result that they will face very high marginal rates.
Lord Lawson said high marginal rates were inevitable given that universal benefits were unaffordable. He recognised that there was problem with high marginal rates at the both the bottom and the top. These needed to be flattened but he seemed less concerned than some of us are by marginal rates at the bottom as there was an escape route. You can escape the high marginal rate by increasing your income
We wondered whether he appreciated how difficult this was today for many families to escape the very high marginal rates that result from the claw back of tax credits and housing benefit.. Tax and the Family have looked into the case of a family on £20,000 facing a marginal rate of 96%. To reduce the marginal rate to 32% the wage earner would have to double his income. This was unrealistic. Asked whether he thought that we should be looking at Germany which like has independent taxation but gives married couple the option of being taxed jointly. He agreed that we should. He said that this sort of thing was implicit in his original proposals. The tax system should be fair. He was clear that the present system was, as Tax and the Family have been saying, not fair.