Select Committee on Social Security Report


APPENDIX 18

Memorandum submitted by Peter Townsend, Child Poverty Action Group (CB 20)

TWELVE REASONS WHY CHILD BENEFIT SHOULD NOT BE TAXED

  1. It is illogical to tax something that is a child tax allowance as well as a cash benefit. Child benefit is the major means of achieving fiscal equity between those with and without children.

  2. Taxing the benefit would not raise a large sum of money by national standards, because few families in the child-rearing phase are rich (see DSS evidence). Why raise revenue from the parents of children when there are much fairer methods available for raising revenue needed for poor children?

  3. Taxing the benefit could not be done without harming mothers' access to a small but vital amount of weekly money. It would increase gender inequalities.

  4. Taxation of child benefit as joint income rather than as the individual recipient's income might increase the amount of revenue raised from a tiny to a modest amount (see evidence summarised below), but would increase the complexity of the tax system and pose awkward questions for the continuation of independent taxation.

  5. Taxing universal benefits like child benefit would re-introduce a significant disincentive to taking paid work. The strength of untaxed child benefit lies in encouraging people with children to seek paid work while acknowledging the extra costs of having dependent children. The cost—and value—of having children has to continue to be recognised in easing the transition to and from work.

  6. Taxing child benefit would depreciate national recognition of the value of children and send the wrong message that social inclusion, and universal investment in the youngest generation, do not really matter. Child benefit is currently available to all families on equal terms. It symbolises the importance of the family in national life. It needs to be strengthened and not chipped away at the edges.

  7. Administrative costs would increase. Income-tested or means-tested benefits always cost substantially more to administer than universal benefits. At present the administration of child benefit costs only 1.9 per cent of the benefit or 35p per family per week.

  8. Taxing the benefit would weaken likely support from the rich for a generous future level of benefit, and encourage media stories about middle income families receiving benefit who should also be taxed. The principle that society as a whole should share the costs of family building, including people however wealthy they are, would be undermined.

  9. Taxing child benefit is one of the significant proposed cuts in benefits giving the lie to the expressed aim of bringing security to those who cannot yet enter or take paid employment. The alternative, of increasing the adequacy of benefits while improving and modernising their management, is what matters.

  10. There are technical, practical and political difficulties in deciding who to tax which should be avoided if possible.

  11. Taxing the benefit makes even more unlikely the development of a basic citizen income to reflect citizen rights.

  12. Most important of all, taxing child benefit weakens and defeats a national strategy intended to heal social divisions, enhance educational and employment opportunities, restore a sense of community and reduce widespread poverty.

EVIDENCE

  Since the introduction of child benefit in 1976 there has been copious evidence in favour of its multiple positive functions, but also for increasing its value in real terms. The increase in real value announced by the Chancellor for April 1999 is welcome, but because of the delay in introducing an increase, and the fact that, as shown below, the increase does not apply to children other than the first or only child in the family, the Chancellor's action represents principally a catching-up exercise. For two- and three-child families the purchasing value remains lower than it was in 1979. A staged improvement is badly needed after April, and the proposed taxation of the benefit seriously handicaps any planned development strategy.

  Revenue if child benefit taxed:

    (1)  Higher rate only: £40 million if recipient, but £450 million if breadwinner taxed;

    (2)  General: £700 million, if recipient, but £1,450 if breadwinner taxed.

  Child Benefit as per cent of average earnings.
Families with one child TwoThree
19794.59.0 13.5
1994-953.15.7 8.2
Proposed April 1999(3.8) (6.4)(9.0)
Real value at April 1998 prices
197911.9823.96 35.94
1994-9511.5020.80 30.10
Proposed April 199913.95 23.2532.55
Total Expenditure (Real terms, 1997-98 prices)
1984-95£7,589 million
1994-95£6,643 million
Proposed April 1999£7,112

  Source: DSS (1998), Memorandum on Child Benefit, submitted to Social Security Select Committee, 12 December 1998.[122] The estimates for 1999-2000 have been added.

  The Institute for Fiscal Studies are among the organisations submitting evidence against the taxation of child benefit. The IFS suggest that if those paying higher-rate tax had their child benefit taxed "this would raise virtually no revenue" and even if child benefit were treated as joint income the revenue raised would amount to only £450 million—or 70p per child per week. The IFS concluded that alternative ways of raising revenue were fairer, more effective and more desirable. These would include lowering the higher-rate threshold.[123]


122   See Appendix 1. Back

123   See Ev p. 8. Back


 
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