Taking a benefits system from bad to worse - the coalition's child benefit policy

 

In a number of newspapers today, I am quoted accusing the government of ‘family bashing’ with reference to its decision to remove child benefit from higher-earning recipients. I do not usually criticise the government for reducing benefit payments and would not generally use that kind of language if I did criticise the government, so what is behind my reasoning? This phrase was, of course, just two words in a long media release.

For international readers, some explanation may be necessary. The UK government is introducing a strange change to a universal welfare benefit (child benefit) which involves removing it from people earning over £50,000 a year (a taper is used until all the benefit is gone at the point earnings reach £60,000 a year). It is that benefit change that I have criticised. I should add that we are one of the affected families. However, I am not protecting a special interest here: as will be clear, I would be happy for child benefit to be abolished altogether.

The government is stumbling about in no-man’s land in its attempts to reform the benefits system. Our current system ensures that a family of two adults and three children loses 75 pence in taxes and reduced benefits for every extra pound it earns until income reaches nearly £39,000. Furthermore, the way in which the tax and benefits systems interact strongly penalises marriage.

The change to child benefit will reinforce both these problems and extend further the worst features of our tax and benefit system. Firstly, there is direct discrimination against couple families – especially single-earner couple families. The benefit is removed not by looking at to household income but by looking at the income of the higher earner in the household.

The change also leads to a strengthening of the penalties on work and aspiration in the benefits system. The effective marginal tax rates faced by people earning between £50,000 and £60,000 a year will be enormous and will be dependent on the number of children. Specifically, the rates are as follows:

 

Number of children

Effective marginal tax rate (%)

0

42

1

52.5

2

59.5

3

66.5

4

73.5

5

80.5

6

87.5

7

94.5

8

101.5

 

Somebody with four children earning £50,000 a year who was offered a job at (say) £65,000 a year would lose 63% of their pay increase. The incentives for avoidance and evasion are huge.

This benefit change will also drag around 500,000 more people into the complex self-assessment income tax system and, by a ridiculous quirk of logic, has been implemented at the end of a tax year so that it will double the administrative workload for both taxpayers and HMRC!

Instead of tinkering, the government’s political capital should be used to radically reform the benefits system. It is reasonable to have a single means-tested benefit for working families on very low incomes – but this should not encompass over two-thirds of the working population as current means-tested benefits do.

We could then abolish child benefit altogether and use the £12.5bn to create a system of family-based transferable tax allowances – essentially a modernised and extended version of the system that existed until the late 1970s. This is how many countries on continental Europe organise their tax systems. Back in the 1960s families in the UK with a working adult on average earnings would often pay little or no direct tax. Let’s cut government spending radically and cut taxation radically and, in the process, reduce the discrimination against work, marriage and family formation in the tax and benefits system. 

I could not agree more Philip. I'm sitting watching this from afar in Singapore where we emigrated 5 years ago - thank goodness - and I can't believe what a mess the UK government is making. It seems like if there's a wrong decision to be made, they'll make it. I can only conclude that the real agenda is to destroy the family unit and force even more people to fall onto the welfare state. Thus the welfared masses will always outvote those with any sort of aspirations in life who are footing the bill. I'm surprised there hasn't been a revolution yet. Really, I am! I wrote to my MP some years ago suggesting that they take a good look at Singapore as a model of how things should be done. Here, income tax and corporate taxes are low. There's no IHT/CGT and pretty much no welfare benefits. My tax return takes 5 minutes a year to complete. Seriously! No accountants, no fuss. No complicated tax codes. When taxes are low there's no incentive to find ways around the system. NI here (or CPF) is a pot with your name on it, not just a big black hole. You can use the CPF money as a deposit on a house or to invest for retirement etc. Anyway, I had a response from my MP to say these ideas were good, but too radical for the UK. This sums up the whole problem with the UK. Nobody is radical enough. The main political parties (between which there is simply no difference, or spine, for that matter) will simply continue rearranging the deckchairs until the whole ship sinks. Glad to be out of it to be honest. Anyone with a choice should vote with their feet.
thanks, Rachael, excellent comment

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.

Invest in the IEA. We are the catalyst for changing consensus and influencing public debate.

Donate now

Thank you for
your support

Subscribe to
publications

Subscribe