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 (%)
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.