Just because we treat individuals as the basic taxation unit, doesn’t mean that it’s right. Moreover there’s a strong argument that the family is really the basis of human financial interactions – we’d offer family members loans that we wouldn’t otherwise, much gifting goes on, especially inter-generationally. Naturally the breadth and extent of this varies within and among cultures. Let’s be honest, we recognise this at the moment anyway. Look at WFF, partner income testing for benefits, parental income tests for student allowances.

Just because the family is an economic unit doesn’t necessarily mean it should be the tax unit. There’s only a case for change if the recognition of individuals for tax creates outcomes that are inequitable if we accept the family as the economic unit. I suggest it does.

The idea behind proportional taxation is that we tax individuals relative to their ability to pay (rather than the services consumed). Progressive taxation implicitly recognises that there are a common set of necessities that everyone requires (food, shelter, clothes, medicines) and ever expanding sets of items which are naturally discretionary. Therefore we say that those earning more should pay proportionately more. Well and good.

However when you have two individuals coming together to raise a family, two problems occur. First, their non-discretionary spending rises with more mouths to feed. This violates our principles of fairness by having people with families ending with less discretionary income. Here I’m explicitly saying that children are different from a boat or luxury car. They’re part of normal human existence rather than a discretionary item (in the same way we don’t say that people are just choosing to eat enough to survive, or live in a house rather than on the street).

This problem is further compounded by the progressive system applying to parents individually. Incentives exist for both parents to work part time to earn half the family income each, rather than each specialising in childcare and work. I think this is important because the incentive is non-trivial and affects arrangements that go to the core of how a family operates.

Given this, would it be so bad to say to treat a family differently. The government would be acknowledging that most people want to partner up with others, and that raising a family is a normal and natural part of citizens’ lives. Maybe not for everyone, but for many.

The concrete policy options would be to allow tax credits for children, perhaps based on age. This would be similar to WFF. Another option is to allow couples to pay tax as a unit, blending their incomes together and paying tax at their combined marginal rate.

This does cause a series of problems. People may choose to enter into relationships (however they are defined by the legislation) to evade tax. Possibly true, but if it is tied into relationship property issues, the idea of commingling assets may act as a disincentive. For those without significant assets the incentive does exist. But a more natural economic incentive already exists to couple up as living together is generally cheaper and easier than living alone. I doubt the policy would distort this much.

I’m reluctant to comment on the example mentioned. Stating something that isn’t true is just fraud. So nothing stops you from saying you aren’t in a relationship when you aren’t. But then nothing stops you from claiming charitable donations you didn’t make, fictitious expenses as a small business owner, or just under reporting your income. End of the day our tax system is based on trust.

Agreed. Make benefits based on the individual as well.