4 Oct 2010

Two kids? Earn between £44k and £47k? Negotiate a pay cut.

One of the first things that George Osborne did as Chancellor was to promise a simpler tax system through the creation of the Office of Tax Simplification. What on earth would they make of a tax scheme with frankly absurd disincentives to work for people unlucky enough to earn around the higher income tax threshold.

Add-in the fact that every thread and every fibre of the fundamental benefit reforms proposed by Iain Duncan Smith are about creating incentives to work and work more, and you have a profound policy oddity.

Let’s start with the brilliant advice from the Institute of Fiscal Studies for couples with two kids earning between £44k and £47k: talk to your employer, negotiate a pay cut (for 2013, though the numbers will have changed a little by then).

And I wonder what the Office of Tax Simplification would say about effective marginal tax rates of above 100 per cent for people earning around £43k. And if you are earning £43,875, then don’t get a pay rise of £1 – you’ll need to get over £3,000 pay rise to get a larger take home pay packet.

Yes, the tax is simpler to administrate because no means-testing forms will be required, but this is a mild form of means-testing.
The IFS point out that the apparatus for targetting Child Benefit at the poor and not the rich already exists. It is called the Child Tax Credit.

If George Osborne really wanted to achieve this without the strange work disincentives, he would have scrapped Child Benefit entirely, and focussed child-related transfer payments entirely through the CTC. Yes the CTC is set to be incorporated into David Freud’s Universal Credit, but this will not happen until 2014/15.

The Pensions Secretary Iain Duncan Smith did suggest that some reform like this was in the ether. No decisions yet. so far though we have £11bn of benefit cuts (switch to CPI, housing benefit) from the Budget, and we are expecting another £4bn at the Spending Review, of which we got about £1.3bn today.

In the context of today’s difficult negotiations over the Spending Review, I see today’s announcements as a staging post on the path towards Child Benefit being wrapped into the Universal Credit .