The benefits of being in this together

27th October, 2012

‘George Osborne was warned by Tory MPs on Tuesday to expect a voter backlash and “widespread non-compliance” as the chancellor prepares to roll out his plan to remove child benefit from better-off taxpayers.’

Financial Times, October 24

The revolt of the yummy mummy set!

And the relevant fathers, husbands and boyfriends, yes – although such people are rarely described as “yummy”.

Why the fuss?

Where to begin? The idea is that high-income households will no longer receive child benefit, hitherto a universal right. Either the mother can rescind her claim to child benefit, or a high earner in the household can declare child benefit was received and pay an offsetting tax charge. Some worry about the principle of universal benefits being eroded; some worry it is an odd way to raise more tax; and some worry that administratively, the thing is a regurgitated dog’s breakfast.

How can a policy offend people in so many ways?

George Osborne is a man of unusual talents. I speculate that he wrote down a few useful rules of thumb for what a sensible tax system should look like, and then tried to figure out how to break every one of them.

What rules of thumb do you have in mind?

First, keep marginal tax rates simple and as low as possible to avoid discouraging work. Marginal tax rates were proliferating under the chancellor’s predecessors and now we have a new suite of high and fecundity-dependent marginal tax rates for those earning between £50,000 and £60,000 a year.

But isn’t it reasonable that high earners are denied child benefit?

Well, that ignores the second rule of thumb, which is that we should evaluate the tax system as a whole, rather than individual chunks of it. Universal child benefit is already progressive, but if we think the rich should pay more, that’s easy: raise income taxes. Mr Osborne is doing the opposite. Perhaps this is because by targeting this measure on households with children, he shields the over-55s from the worst of it.

Why would he want to do that?

That’s been Conservative party policy for ever. I’ve stopped asking why. Rule number three is the Colbert rule, named after a French finance minister: pluck the goose, but minimise the hissing. Instead, in a display of forehead-smacking incompetence, Mr Osborne plans to write to his core constituents specifically informing them that he is about to take money away they regard as a fundamental right. For an encore he will make an extra half a million people complete a self-assessment tax return, which is no trip to Disneyland. It’s hard to see how the opposition could draw as much attention to this tax increase as Mr Osborne has.

But at least it’s all going to be administratively convenient?

Very droll. The fourth principle is to make up your mind what you’re taxing: households or individuals. Our benefits system applies to households but our tax system has always applied to individuals. The way this child-benefit withdrawal is going to be introduced mixes up the two systems.

Is that a problem?

The obvious objection is that a couple earning £60,000 and £20,000 respectively will lose child benefit, while a couple earning £40,000 each will lose nothing. It also means husbands and wives have to tell each other financial details that for hundreds of years have been regarded as private. More deliciously, HM Revenue & Customs has to take a view on what constitutes “living together as husband and wife (or civil partners)”. This should be fun.

Why so?

If a mother is living with her high-earning husband, no child benefit. If she is a single parent living with her high-earning mother, child benefit is due. If she lives with a high-earning friend, she gets child benefit. If she starts sleeping with the friend, she does not get child benefit. I’ve asked HMRC how they plan to find out who’s having sex with whom.

What did they say?

They said they’d get back to me. I also failed to establish what happens if a mother has two overlapping romantic partners. Nor do we yet know whether tax returns will contain a box to allow people to specify how many weeks they’ve been sexually involved with someone claiming child benefit. It will certainly spice up the old tax return, eh?

Why is the government doing this?

Simple. Mr Osborne thinks that it will be a vote-winner. That appears to be all that matters.

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