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

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.