Mary Dejevsky: Tax families fairly, and child benefit solves itself

Why is the child benefit anomaly being treated as a one-off, rather than as a symptom of a wider ill?


With the family unit at the centre of pre-Budget politicking, here are a few seemingly unrelated facts for the Chancellor to consider. One: he has got himself into an almighty pickle over cuts to child benefit. Two: over the past 15 years, the number of househusbands has trebled, and the rate is accelerating. Three: in many places the cost of childcare has risen even faster than inflation. And four: taking more people out of tax by raising the basic-rate threshold to £10,000 will cost £11bn.

Let's start with child benefit. It is not hard to fathom George Osborne's rationale for removing it from higher earners. But it is hard to believe he understood the anomaly – and the attendant ill-feeling – it would create. On the one hand, families with two earners, each bringing in £40,000, will keep their benefit; on the other, much less well-off families, with one earner bringing in only a little more than £43,000, will lose it. Even if the threshold is raised, say, to £50,000, the anomaly remains.

Now it may be that fewer families will be caught in that trap than campaigners claim, though a perverse incentive will be created for those whose pay hovers around the threshold not to cross it. But it is the patent unfairness that allows a family with an income of £80,000 to keep its benefit, while another family with barely half that income stands to lose it, that has made the whole question so politically tricky.

Almost never mentioned in this increasingly frenzied debate, however, is that the anomaly could be dispatched at a stroke. Britain is one of very few countries in the developed world which taxes people according to their individual, rather than their household, income. You cannot choose. If the household were the basis of taxation, Osborne could withdraw the benefit when the family's income reached £50,000 or thereabouts, and the perception of unfairness would vanish. All families with similar levels of income would be treated the same.

So why does he not just do it? After all, this new child benefit trap simply illustrates for middle-earners what lower-earners have long known about the benefits trap per se. When income tax is levied on individuals and benefits are calculated according to the household, there are distortions that encourage some people not to work many hours, or not to work at all.

Those most penalised by the present system are single-earner households in which the one income is enough to disqualify the family from means-tested benefits. Such families are taxed far more highly than they would be almost anywhere else in the world. You might not feel particularly sympathetic, as they are not really poor. But they invariably include children, often sick children, or a partner who cannot work because of ill-health (my own situation). If a couple could opt to be taxed together, or the non-earner's tax-free income allowance were transferable, these families would be tangibly better off.

Which is where factors two and three come in. Rising childcare costs – which are paid, let it not be forgotten, from taxed income – and the loss of child tax credits are persuading more mothers to stay at home, along with nursery hours that rarely dovetail with working hours. For the growing band of househusbands, similar considerations apply, along with the reality that the woman's earning capacity is higher. Changes in employment – the decline of manufacturing, which saw mainly men made redundant, and the current shrinking of the public sector, where 70 per cent of employees are women – may well increase the number of single-earner families.

Pressure for the option, at least, of household taxation should grow. But why is it already not greater than it is, and why is the child benefit anomaly being treated as a one-off, rather than as a symptom of a wider ill? One reason may be low awareness of the relative tax burden such families face, especially compared with their equivalents abroad. It is not just income disparity, but the tax system that makes this section of our "middle" uniquely "squeezed".

Part of the blame, though, rests with the women's lobby, which regards individual taxation as a landmark achievement, liberating the finances of wives and partners from patriarchal control. Any move to restore the option of joint taxation – which existed 20 years ago – is seen as a retrograde move that will force women back into the kitchen. In fact, if anything is forcing them back, it is the combination of stagnant pay, escalating childcare costs and fewer public sector jobs – which actually makes joint taxation, for them, the better deal.

And so to the Liberal Democrats' Budget contribution – the likely rise in the basic-rate threshold. The desire to take more people out of tax altogether is laudable. But it is expensive, and so long as personal allowances are not transferable, single-earner households remain penalised. Reintroducing the option of joint taxation would cost much less. That alone should convince Osborne to take another look at it – and he could solve his child benefit conundrum at the same time.

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