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Monday, 4 October 2010

Osborne's faux-pas

A big mistake from Multi-millionaire trustafarian George Osborne in promising to abolish child benefits for anyone paying tax at the higher rate.

First of all let me declare a non-interest. My children have grown up and have either left home or reached an age for which they are no longer eligible for child benefit. Now let me say why it is wrong.

First of all the restriction will apply to any household where one of the members is paying tax at the higher rate (roughly  £44,000).  But because of the crude way it is applied it will not apply to a household where there are 2 earners earning £43,000 each, fopr a combined family income of £86,000.  Others who would still qualify would include the private equity manager who can defer millions in gains and show little income on his tax return and the resident non-dom who has little UK taxable income and pays for his lavish lifestyle with a foreign credit card issued by his friendly offshore bank.

More seriously, the idea is poorly thought through for a number of reasons.  A family with 3 eligible children would receive £20+ 2*£13 or £46 per week, which is just slightly under £2,400 a year. That may not sound much to Mr Osborne, but to a family on a taxable income of £44,000 a year taxed at a marginal rate of 40% plus 2% NI, that represents the net income from an extra £4,135 of extra income.  Or to put it another way, earning anywhere between £44,000 and £48,135 makes them worse off that they would have been earning £44,000.

Of course (and at this point I warn you that I am not a regulated financial adviser), that any parent caught in this trap would be well advised to make additional voluntary contributions, or possibly to make donations under gift aid, to reduce their taxable income in order to retain their eligibility for child benefit. Alternatively, if you are an MP, you will still be allowed to employ your spouse as a secretary during this parliament.

But that misses the real iniquity. Originally child benefits were implemented as a tax allowance.  The logic was that a single or childless married coupleshould be granted individual personal allowances each, at some times transferable, at othe times strictly personal, because the first so many pounds of income is deemed to be required for basic personal needs such as minimal housing.  The logical extension of this is that further allowances are needed for additional family members because the income of the familt, effectively a single legal and economic unit, is stretched further.  Hence the availability of income tax allowances for children.

When it was realised that tax allowances benefitted high rate tax payers disproportionately - a factor that was less aparent before income tax rates increased after the second world war, the child tax allowance was changed to child benefit, with broadly the same impact for basic rate tax payers.

Removing the benefit for higher rate tax payers no means that a married couple with 3 children where the only working spouse will be paying tax at the higher marginal rate despite an average income per capita of £8,800 per person in the family, whereas a childless couple each earning £43,000 will be paying tax at a marginal rate equal to the basic rate, despite having an average income per capita that is 5 times higher.

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