Wednesday, 6 October 2010

Child benefit cuts and all that

Don't worry, I'm not going to jump the bandwagon and repeat the arguments made in the many excellent posts around bloglands. As many have very elaborately explained, the suggested child benefit cut is incredibly unfair. I don't want to linger on this, it's been said much better than I ever could.

What I would like to add to the discussion is a suggestion to look at alternative ways of making the tax and benefit system fairer. You know, it wouldn't hurt to get some inspiration from other countries that operate a fairer society, with less inequality and more well-being, and maybe reform the tax and benefit system properly, rather than try and scrape a billion here and there.

So here are some suggestions:
First of all, the main issue in this country is the significant income gap. There are many on very low incomes and some on very high incomes, a few on middle incomes. This makes work unattractive if all that's within your reach is a low paid job where you're not significantly better off than on benefits.
Secondly, tax credits are paid back at the moment, and there are many of them, making it rather confusing.
So how about a system that abolishes tax credits in favour of tax allowances, while introducing more progressive taxation?

By this I mean a much more graded taxation system where incomes say over 50k are taxed at a higher rate, and incomes over say 75k at yet a higher rate and so on. Raise minimum wage to a living wage while you're at it so that work always pays.
Then, to make things fair and value parents who stay at home to raise children, create a family unit tax free allowance - each adult in the family has a tax allowance, as has each child. This is added to the tax code, so that a single income family is supported through a higher tax free allowance, and a family with more children has more of a tax free allowance than one with just one child.

Above all, this would make the tax system based on the family unit. It should apply to anyone in a family unit, married or not, and would as a nice side effect help reduce the incident of people claiming benefits as single parents when they are not actually single parents (single parents are often better than as a family unit BECAUSE the tax free allowance of the parent who isn't working can't be transferred to the working parent, thus inviting benefit "cheats" - they're not cheats in my view though, playing the system in my view is fair enough if the system is rubbish and lets you play with it).

So say we have a family of two parents and 3 children, one parent works. The working parent's tax free allowance could be £5000 for the working parent, plus £4000 for the non working parent, plus £3000 for each child - a total tax free allowance for this family of 18000. The income above this tax free allowance could be taxed much more progressively, especially as it goes above a certain amount. I don't get why the tax system has to be so streamlined with just 3 tax rates, why not have 5 or 7?

In a system like this, child benefit would be built into the tax free allowance, and so would tax credits. So we could get rid of them.
Add some London/south-east/Edinburgh weighting and Bob's your uncle.

Maybe add some child care support for cases where both parents work, to encourage parents into work if that's your policy. In some places in Germany you get a certain amount of child care costs reimbursed per hour you work, which makes childcare affordable. No need to mess with tax credits, you just go to the Youth Services, show your work contract and get childcare vouchers which cover around 80% of the actual cost. You could link this to family income (i.e. if you're on a high income, you get less of your childcare paid) to make it fairer.

The big elephant in the room remains unfair salaries, but that'll take a generation at least to tackle and I'll leave my musings on this for another post.



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