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A good idea badly implemented

2013 January 6
by Paul Vallely

There is nothing wrong with the basic ideal that people who are comparatively well-off should not require state benefits. Those earning more than £60,000 do not need winter fuel allowances or free pensioner bus passes. Nor do the need child benefit, and under new rules from today they will no longer be eligible for a payment of £20.30 a week for their first child as before. The change should save the public purse £1.5bn a year.

But good ideas do not always work in practice.  Because tax is determined on an individual’s earnings, while benefits are fixed according to the income of a household, the new measure is throwing up a range of anomalies and administrative complexities. The most absurd of these is that a single-earner family with an income of £51,000 will lose money whereas a couple who both earn £49,000 will not.

That is not all. For some families with three children because child benefit is tax-free the change will be the equivalent of a £4,000 salary cut. Others will face marginal income tax rates as high as 65 per cent creating an incentive to work less and producing “incoherence in the welfare system”, according to the Institute for Fiscal Studies. The changes will create potential difficulties for cohabiting or estranged couples, creating a potential “marriage penalty”. The requirement for couples to disclose their earnings to one another runs counter to the general principle of taxpayer confidentiality and the policy of separate taxation of married couples.

Around 1.2 million families will be affected by the new system, yet only 200,000 have opted out of receiving the benefit. That means that up to a million people currently on PAYE will at the end of the year be forced into the complexities of the self-assessment tax system under which excess child benefit will be clawed back.

David Cameron has insisted that 85 per cent of families will be unaffected by the new system. But the sense of manifestly unfairness and costly inefficiency created by the way the changes have been devised mean that this badly thought-through policy will have to be revised.

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