4 October 2010

Child benefit

Benedict Brogan points out in the Telegraph that Chancellor Osborne's announced intention to remove child benefit from higher rate taxpayers means that households in which at least one person earns £44,000 or more will be facing a hefty tax increase - £1,000 for the first child, £700 for each subsequent child.
Pity the middle class family with four children, Dad earns £50,000 and Mum doesn’t work. Then imagine their next-door neighbours, a couple with four children but both work, and both earn £42,000: they earn more, they both get their personal allowance AND they keep their child benefit. How can this be described as family friendly or supportive of mothers who choose to stay at home and look after their children?
It can't. This is the reverse of the perverse incentives Duncan-Smith has laboured to remove from the lower end of the income tax scale, where it simply does not make sense for someone to work more because the resulting loss of benefits amounts to a 90 percent marginal rate of taxation. 

There is only one system that is without loopholes for the rich, easy to administer and which does not create perverse incentives. It's called the Flat Tax with deductions. That is, all income above personal and dependents' allowances, from whatever source, is taxed at a single rate.  

If it replaced ALL current forms of income tax, and combined with Friedman's Negative Income Tax, it would cut through the Gordonian Knot created by the Treasury over the years and brought to previously unimagined levels of complexity under the late Labour regime.

Transparent, fair, easy to calculate and to administer, it would also make it a simpler task to identify the optimum rate to enhance revenue as defined by the Laffer Curve.

What's not to like about it?


  1. How typical of our country that Brogan felt the need to say the family in question is middle class.

    Of course it's wrong that better-off people get state subsidy for having kids, but I have to agree that a collective rather than individual threshold would have been better. Not sure how many four child families there are in which both parents earn over 40k though.

  2. Didn't the child benefit replace the dependants' tax allowance? To makes sure the money got to the (presumed single) mothers? As the man said, if you want less of something, tax it; if you want more of something, subsidise it. Result: the highest rate of single teenaged mothers in Europe. Every benefit or tax credit creates perverse incentives.