Child benefit’s fiscal nimbys?
Treasury minister David Gauke has made waves with his attack on those decrying child benefit cuts for higher rate tax payers for practicing fiscal nimbyism. George Osborne has even commissioned a poll that shows that a big majority back the policy (82%) – including both higher rate taxpayers and those below the limit.
This is clever politics for the coalition (not something much said in recent weeks). What I would argue is a progressive policy has been trumpeted by a populist, seemingly progressive, argument that rich people should pay more. It has also diverted attention from the freezing of child benefit which will hit lower paid parents the most. (See today’s TUC press release).
It is helpful to understand the history of child benefit to explain this confused politics.
For many years it was a combination of an allowance paid as cash to the mother and a tax relief which would have mostly benefited fathers. Indeed it even started partly as an incentive for parents to have more than one child.
Labour, somewhat reluctantly as it feared a male voter backlash, abolished the tax relief and put the proceeds into a universal child benefit which, ironically, started to be paid as Mrs Thatcher came to power. It was popular, simple and gave mothers a regular source of income paid directly to them. The Conservatives therefore pledged to keep it as a universal benefit.
But think how Mr Gauke might think about child benefit if it had been kept as a tax relief. Higher rate tax payers earning less than £100,000 get the same tax allowance as those on lower incomes even though it is more valuable to them than standard rate tax payers. Reducing the income on which you pay 40% tax by £8,105 a year is clearly twice as nice as reducing the income on which you pay 20% tax.
But there is no suggestion that the personal tax allowance for higher rate tax payers should be scrapped or reduced.
Other tax reliefs – such as that on pension contributions – equally benefit higher rate tax-payers more than standard rate tax-payers.
I am certainly not against raising the tax contribution paid by higher rate tax payers (such as myself). But about the worst way of doing it is to only levy it on parents in an extraordinarily complex way and to do it in a way that further undermines universal benefits.
Attacks on universal benefits for pensioners (such as winter fuel allowances and bus passes – even though these are better seen as a subsidy to transport companies) come from the same place.
But if you want higher rate tax payers and rich pensioners to contribute more, then the easy and honest way to do it is make them pay more tax.