GOVERNMENT plans to cut child benefit for higher rate taxpayers are unfair and will disincentivise workers from improving their earnings, MPs have warned. Chancellor George Osborne last month unveiled reforms to child benefits under which families with at least one person earning £44,000 or more will lose their payments.
• George Osborne's plans for changing child benefit eligibility have been attacked from all sides. Picture: Getty
But the cuts, coming into effect in 2013, will unfairly penalise couples where one works and the other stays at home to look after children, according to a Treasury select committee (TSC) report published yesterday.
It raised the issue of fairness, noting "the difference between two couples that collectively earn the same amount but only one of which was a higher rate taxpayer and will therefore lose their child benefit". The proposals mean that while one-earner families with an income of 44,000 will lose their benefits, a family with two earners just below the higher rate threshold could make 87,000 and still qualify for the payment.
One expert who gave evidence to the committee, Mike Brewer of the Institute for Fiscal Studies, described the scenario as unfair. Brewer also told the TSC that removing the benefit for families just below the higher rate threshold when they get a pay rise taking them above it was "economically distorting and perverse".
He added: "The Treasury published a figure in the Budget that suggested that it expected to lose 270 million a year in tax revenues from people tax planning around this. That sounds like an inefficient way to devise a means test."
The report also suggested there were practical obstacles to the reforms succeeding, such as the fact that couples would be forced to discuss their financial arrangements with each other.
Individual taxpayers are not obliged to disclose details of their tax status to their partner, and critics of the child benefit change claim some couples would attempt to circumvent the new rules by not telling each other about their income tax status.
The TSC has also questioned Osborne's claim that the government's spending cuts were progressive. Andrew Tyrie, its chairman, revealed that the committee was split over the timing and pace of the cuts. He also said the balance of spending cuts over tax rises means it would have been "very hard" for the review to have been progressive.
The child benefit reforms also came under fire this week from Lord Eatwell, a Labour treasury spokesman, who claimed the policy had not been thought through and wouldn't work.
He pointed to the potential for complex cases such as the impact of a grandparent who is a higher rate taxpayer moving in with a son or daughter who qualifies for child benefit.The new rules would exclude households with at least one higher rate taxpayer from receiving child benefit, suggesting that families could lose their benefits if a higher rate taxpaying grandparent moves in.
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