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The child benefit cut risks alienating striving families

6 March 2012

4:00 PM

6 March 2012

4:00 PM

Why should someone on the minimum wage subsidise the childcare
arrangements of someone on £100,000? So runs the argument for abolishing child benefit for higher-rate taxpayers. You can see why George Osborne went for this: in theory, we are talking about
the best-paid 14 per cent. If he was going to cap benefits, he had to be seen to hurt the rich too. The 50 per cent tax was not enough; axing child benefit would be just the tool he needed to say
‘we’re all in this together’.

The problem is that the 40p tax band is set far too low in Britain, and now takes in policemen and teachers. People who can not really be described as rich, especially if one earner is supporting a
family and paying off a mortgage. In taking aim at those on £100,000 the coalition is hitting the ‘strivers’ whom a Conservative Party ought to champion. People who have already
seen the value of their salary fall by 8 per cent because of the inflation, abetted by Quantitative Easing.


But the anomaly, as Tony Blair once pointed out, is that Britain’s 40p tax takes in all manner of people: anyone over £42,475 a year. It’s funny how Blair had the cheek to express
surprise, as this was a stealth policy from his government. The below chart shows the number of people caught in the 40p tax rate:

And this is the coalition’s problem. If the child benefit policy had been run past the DWP before it was announced at Tory conference, or had it been given proper scrutiny, this problem would
have been sorted out. Raise the threshold to £50,000, as Demos propose, and you set up a new bureaucracy which will further reduce the amount of money raised. This is not an easy win, and the
political costs are huge. That’s why not even the tax-hungry Gordon Brown tried this trick.

No two people have the same definition of ‘rich’. But the cohort of single earners on about £45,000 living in the suburbs will include a lot of swing voters, the type who swung to
Blair and were repelled by Brown. What might they do next time? After enduring soaring inflation, and seeing their income take another knock thanks to a policy designed to make a speech go down
better, they may well conclude that the Conservative Party isn’t for them after all. It’s one of those months where the Conservatives ought to raise a glass to Ed Miliband: to toast him
for not chasing these voters.

P.S. Allister Heath, editor of City AM and a contributing editor of The Spectator, makes the below point in his column this morning:

‘Imagine you are an aspiring, successful hard-working individual; after several years putting in the hours, you now earn £42,475 a year. You’re already a victim of the tax system:
you pay no tax on your first £8,105, but then face 20 per cent tax on the rest, as well as 12 per cent national insurance (using 2012-13 numbers). Above the zero-rated band, you hand over
32 per cent of your income to the state – and probably don’t even realise your employer has to pay an extra 13.8 per cent on top in extra national insurance. Many see this as a
corporate tax, but in fact it is a tax on labour, equivalent to an overall rate of 40.2 per cent.

The broader picture is just as grim: your real wages are going down thanks to 3.9 per cent retail price inflation, with mortgages on the rise again. When you spend what is left of your money,
you are hit again: 20 per cent Vat on most goods and services, massive “sin” taxes, air passenger duty, all payable out of your post-tax income. Don’t even dream of the
£250,001 flat down the road, for which you have been saving for years: stamp duty is payable at three per cent. Your total tax bill including council tax will end up at well over half of a
year’s income.

Now you get a £3,000 pay rise. But wait: you get caught by the 40p tax rate, as well as by the extra 2p national insurance. Your £3,000 is only worth £1,740. But because
you have two kids you could soon also lose your £1,752.40 in child benefits, which means you are actually worse off than before your not insubstantial 7 per cent pay increase. Such are
the unintended consequences of George Osborne’s plans to remove child benefits from 40p taxpayers. You (and many like you) are better off working less. It’s madness – and
that’s even before other benefits, tax credits and income-contingent student loans.’


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