British tax credit simplification, the intra-household distribution of income and family consumption

Publication type

ISER Working Paper Series

Series Number

2014-13

Series

ISER Working Paper Series

Author

Publication date

March 13, 2014

Abstract:

The UK Government enacted simplification of its tax credit system in 2003. An interesting consequence of the reform is that tax credit payments were split between partners in couples, causing a rare wallet to purse transfer. This paper presents evidence on the effects of the reform on family spending, using quasi-likelihood techniques, for a sample of low income couples with children. In areas of child goods, evidence of important spending increases are found, whereas spending decreases are observed amongst goods that disproportionately benefit parents. A further key finding is an apparent trade-off between spending on public goods that are not exclusively consumed by children, but may nonetheless have a child development dimension. Results are contrasted to earlier findings from UK 1970’s child benefit reforms. The effects are consistent with a non-cooperative bargaining framework, in which partners differ in their relative preference for different household public goods.

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