APPENDIX 5
Memorandum submitted by the Citizen's
Income Trust (CB 5)
SUMMARY
S.1 The Citizen's Income Trust regards Child
Benefit as a successful example of how a universal Citizen's Income
would work, as it is effectively a Citizen's Income for children.
It is universal and not dependent upon earned income, therefore
there is no stigma attach to claiming it. As it is a flat rate
benefit it is worth more to those on low incomes.
S.2 Child Benefit is cheap to administer, with
only 2 per cent of the budget being spent on distribution costs.
An estimated 98 per cent of those entitled to it actually claim
it
S.3 The most important aspect of Child Benefit
is that those parents who have low incomes receive an automatic
top up to their incomes on which they can rely irrespective of
circumstances. In 1990-91 only 900,000 working families with children
received more in Child Benefit than they paid in Income Tax.[7]
S.4 At present Child Benefit is presented as
a cash expenditure in the Treasury accounts which prevents there
being a proper understanding of its existing efficiency in targeting
assistance to low income families. It has been found that Child
Benefit is one of the most effectively "targeted" benefits
of all. The money is predominantly spent on the children for whom
it is intended (either for clothing, family outings, or to cover
the costs of particular activities).
S.5 Any equitable scheme for taxing Child Benefit
would be so complex as to largely offset any fairly small increase
in tax yield.
S.6 A Citizen's Income would not be dependent
on work status or family status, but there could be different
rates for adults and children. It follows that there is no argument
against having different rates for children of different ages.
1. INTRODUCTION
1.1 The Citizen's Income Trust welcomes the
opportunity to submit written evidence to the Social Security
Committee's Inquiry into Child Benefit. The Trust is in favour
of the retention of a universal Child Benefit, which is effectively
a Citizen's Income for children. A Citizen's Income is a small
guaranteed income paid by the state to every man, woman and child
as a right of citizenship.
1.2 The charitable trust, Citizen's Income,
takes its name from the concept of a universal or basic income
guaranteed to all citizens unconditionally. The Citizen's Income
Trust's objectives are to advance the public education about the
national economic and social effects and influences of Citizen's
Income Systems.
1.3 The Citizen's Income Trust is independent
of all political parties and is not a pressure group. Subscriptions
and donations from individuals and charitable trusts fund it.
2. THE CASE
FOR A
UNIVERSAL CHILD
BENEFIT
2.1 Child Benefit has been in place in the UK
for almost twenty years, replacing family allowances and child
tax allowances in 1979. It has remained in place as a cornerstone
of social security policy despite threats to abolish it. The Citizen's
Income Trust regards the benefit as a successful example of how
a universal Citizen's Income would work, as Child Benefit is effectively
a Citizen's Income for children.
2.2 The annual cost to the Exchequer of Child
Benefit is £6.7 billion per annum. This is less than 7 per
cent of total government expenditure on benefits. Child Benefit
is cheap to administer, with only 2 per cent of the budget being
spent on distribution costs. An estimated 98 per cent of those
entitled to it actually claim it. Approximately 7 million families
receive the benefit for 12.7 million children. Payment is mainly
transferred through a post office giro account, or direct to the
carer's bank account (predominantly mothers). It has been found
that Child Benefit is one of the most effectively "targeted"
benefits of all.
2.3 Many of the advantages of Child Benefit
are not particularly tangible or easily quantified but this makes
them no less valuable. The benefit can be relied upon and it therefore
allows for more efficient budgeting within the household. It is
universal and not dependent upon earned income, therefore there
is no stigma attached to claiming it. As it is a flat rate benefit
it is worth more to those on low incomes.
3. PROPOSALS TO
TAX CHILD
BENEFIT
3.1 There is a widespread view that high earners
ought not to receive Child Benefit. However, prior to 1979 every
couple with dependent children liable to tax received child tax
allowances and these were worth more to those on high tax rates
than to those on the standard rate. Reverting to this or taxing
Child Benefit for anyone liable to tax at any rate would not penalise
high earners. It would require a residual Child Benefit for those
below the tax threshold which would be yet another means-tested
benefit to be withdrawn at a high marginal rate as recipients
became liable to income tax and employees' NI contributions.
3.2 Thus the only proposal seriously canvassed
is to tax Child Benefit for those families whose income exceeds
the threshold for the 40 per cent higher tax rate. This was put
forward by the Commission on Social Justice in 1994 and has some
supporters in all political parties. It has to be examined in
the context of individual taxation of married men and women, which
has been in effect for several years. The present Government has
affirmed its commitment to this principle, although it has yet
to be seen how it will preserve this in administering the Working
Families Tax Credit.
3.3 It would be feasible to require any caring
parent or guardian receiving Child Benefit who was herself or
himself liable to tax at 40 per cent to pay the difference between
the standard and higher tax rates on the value of Child Benefit
received. However, more often the partner of the caring parent
will be a higher rate taxpayer if anyone in the household is.
The Citizen's Income Trust believes it would be unrealistic for
anyone to seriously suggest that women who are higher rate earners
should be taxed on their Child Benefit, whilst their partner was
not.
3.4 If the Government were to tax Child Benefit
at all, the Inland Revenue would have to ask each higher rate
taxpayer how many children (not necessarily their own), if any,
there were in the household they supported or in other households
for which they had an obligation to pay maintenance. Then the
Inland Revenue would have to check whether it had already taxed
the caring parent's income for each child's Child Benefit before
deducting tax from the other parent's. That is not all, for in
equity Child Benefit should also be taxed if the combined income
of the parents exceeded the 40 per cent rate threshold even if
neither income did separately. The only way to find this would
be to require every taxpayer to notify the name of their partner
so that the Inland Revenue could collate their tax records in
order to assess liability. This would involve an inordinate expense
to produce a fairly small increase in the tax yield and would
in effect be negating the principle of independent taxation.
3.5 DSS equivalence scales suggest that Child
Benefit as currently administered is much better targeted than
is often supposed. DSS estimates showed that once income tax had
been taken into account, in 1991 only 4 per cent of Child Benefit
expenditure went to families with equivalised net incomes of over
£25,000. This compares with 68 per cent that went to families
with equivalised net incomes of below £10,000 pa. With this
in mind, there can hardly be any resounding case for taxing Child
Benefit, particularly once the costs of administering such a change
have been taken into account.
3.6 Obviously the costs of households with children
are higher than the costs of households without children. There
is no valid reason why those costs should be borne by parents
alone, as it is in the interests of society that children should
be born and brought up. It follows that every taxpayer should
contribute to paying for Child Benefit for all children, regardless
of the incomes of their parents. If it is considered that those
with higher incomes should contribute proportionately more than
at present that applies whether or not they have children. There
are many ways of achieving this, which are desirable in themselves
to make income tax more progressive. For example, allowances against
taxable income could be replaced by allowances against liability
to tax. The upper earnings limit for employees' NI contributions
could be abolished. Or, a range of higher tax rates above the
standard rate could be introduced.
4. CASE FOR
DIFFERENTIAL RATES
OF CHILD
BENEFIT
4.1 At present Child Benefit is non-taxable
and paid for all children up to the age 16 or currently up to
age 19 for those continuing in full-time non-advanced education.
Currently a higher rate of benefit is paid to the first child
of £11.45 per week, falling to £9.30 for subsequent
children. The increase from 1999 of £2.50 per week for the
first eligible child was welcomed by the Citizen's Income Trust.
4.2 For existing lone parents, one parent benefit
has now been replaced by a higher rate of Child Benefit of £17.10
per week for the first child and £9.30 per week for subsequent
children. Since 2 June 1998, all new lone parents have received
the same rate for their first child as couples with children i.e.,
£11.45 per week.
4.3 The Citizen's Income Trust recognises that
one-parent families are more susceptible to poverty than families
with couples. However this in itself is not a justification for
differential rates of benefit to be paid to different family types.
A Citizen's Income would not be dependent upon marital status
and would ensure that every child received the same flat rate
of benefit. Measures would need to be put in place to avoid unnecessary
hardship during the transitional phase of its introduction.
4.4 A Citizen's Income would not be dependent
on work status or family status, but there could be different
rates for adults and children. It follows that there is no argument
against having different rates for children of different ages.
4.5 We have generally proposed a single rate
of Citizen's Income for first and subsequent children but recognise
the economic case for a higher rate for first children and this
would not be incompatible with the principle of Citizen's Income.
5. CHILD BENEFIT
AND WELFARE-TO-WORK
INCENTIVES
5.1 Increases to be implemented to the childcare
tax credit (part of the Working Families Tax Credit (WFTC)) will
apply to all children and not just the first child, as does Child
Benefit. In our view it would therefore not be feasible to raise
Child Benefit for families at all income levels to an extent that
would enable WFTC or childcare credit to be reduced enough to
ameliorate the unemployment and/or poverty traps.
6. THE RELATIONSHIP
BETWEEN CHILD
BENEFIT AND
THE INCOME
SUPPORT ALLOWANCES
FOR CHILDREN
6.1 The Citizen's Income Trust believes that
Child Benefit should be paid to Income Support (IS) and Job Seekers'
Allowance (JSA) recipients and that IS and JSA child allowances
should be reduced correspondingly. This would not affect total
monetary entitlement but it would avoid the need for people to
keep starting and stopping their claims for Child Benefit as they
moved in and out of work.
6.2 This would make Child Benefit a truly universal
benefit, as it should be.
7. CHILD BENEFIT
AND 16- TO
19-YEAR-OLDS
7.1 Child Benefit is a form of Citizen's Income.
One of the next steps would be to propose a Citizen's Income for
those aged between 16 and 19 years of age. This would replace
Child Benefit, the Education Maintenance Allowance and various
training allowances. The benefit would be paid to the young person
themselves and not to the parent or carer.
7.2 At present the rules on the payment of Child
Benefit arguably favour better off families as children who continue
into full time education automatically receive it (provided they
are studying full time and up to an including A-level and equivalent
standard). By comparison, those 16- to 17-year-olds who leave
school and are registered for work or training at a careers centre
can only receive Child Benefit for a much shorter period i.e.
of up to 12 or 16 weeks.
9 September 1998
7 For a full explanation of how this figure was arrived
at, see Parker, Hermione and sutherland, Holly, Child Tax Allowances?
A comparison of child benefit, child tax reliefs, and basic incomes
as instruments of family policy, STICERD Occasional paper
No. 16, ISBN 0-85328-124-6. Back
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