This year is likely to be one of the hardest for the coalition, as spending cuts begin to hit harder than ever before. Tory MPs are warning that the measure that is most worrying their constituents is the removal of child benefit from higher earners, and analysis today from the Institute of Fiscal Studies gives us some inclination as to why.
The IFS has examined how much this will cost parents earning over £50,000 – the point at which the payments begin to be taken away. It has found that the measure will mean that for someone with one child who earns over £50,000, they will have a marginal tax rate of 52.6 per cent. In other words, for every extra pound earned over that level, 52.6p will be taken away. As they continue to go up the income scale, they will lose more and more cash until they hit £60,000 and all the child benefit payments are gone. This results in a marginal tax graph that looks like this:
As the chart shows, the marginal tax rate for parents earning between £50,000 and £60,000 jumps significantly, especially if you have more than one child. The rate for those with four children is over 70 per cent.
This matters because it creates less of an incentive to work harder and therefore earn more. If you are only likely to keep 30p of every extra pound you earn over £50,000, it does not create much of a motivation to try and earn more than £50,000.
A second, more fixable with the problem is that, as the legislation stands, the limit of £60,000 is not due to rise with inflation, or even wages. So as we all earn more in cash terms over time, more and more people will find their child benefit taken away, until even the lowest paid receive none (at such a time when £60,000 becomes a relatively small amount of money). We can only assume the Treasury will change this in the implementation, or else there will be far wider consequences than the government is currently expecting.
A final problem is how this fits with the child-related elements of the new universal credit, which Iain Duncan Smith is rolling out later this year. Both payments will go to parents, but will be means tested in different ways (one on the whole family, the other on a single earner), and withdrawn at different income levels. Robert Joyce, who wrote the report, comments:
Perhaps the biggest concern is the incoherence it creates in the welfare system… It is unclear whether the net effect of all this will be to improve the welfare system.