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Saturday, 26 November 2011

Ireland’s Child Benefit is too Generous

One benefit long overdue for reform is the one that encourages profligate parenthood

What follows may not be true of Ireland but in the UK child benefit began as an allowance against taxable income. At that time there was also a small welfare payment called “family allowance” paid via post offices. The tax allowance was discontinued and the two payments merged to produce the present child benefit payment.

Two factors were cited as reasons for the change. Firstly the allowance against tax meant that people on higher rates of tax got more than those on lower rates – and those whose earnings fell below the tax threshold even without the allowance and who were therefore most in need, got nothing. Secondly it was argued, especially by family and women’s support groups, that the reduction in income tax benefited the main breadwinner – usually the man in those days – who did not necessarily pass the gain on to the main shopper – usually the woman. It was argued that men were more likely to spend it on drink and gambling rather than their children.

The benefit was therefore paid as a uniform amount regardless of other income and into the hands of the mother. This, of course, did not prevent the mother spending it on drink and gambling instead of the children and some no doubt did and still do.

Too much is paid out for second and subsequent children
The other interesting thing about the benefit as paid in the UK is that it has traditionally been paid at a significantly higher rate for the first child than for subsequent children. I suppose the argument for this is that it is perfectly possible to re-use clothing and other items purchased for the first child so that the costs associated with later children are noticeably less than that of the first.

In Ireland, not only is the rate paid for the first child substantially higher than in the UK, it is the same for a second child, more for a third and more still for fourth and subsequent children. This means that the parent of, for example, three children in the UK will receive £188 per month. In Ireland the equivalent payment is €427.

I find it strange that, in a country that has a tradition of producing large families the state should provide an incentive for continuing to do so at a time when arguably one of the greatest threats the world faces is over-population. Who will pay to educate all these children? Who will pay their medical expenses? As the existing cohort of adults live longer and young people spend longer in education how in future will those currently leaving colleges and universities keep the large number of individuals who are either too young or too old for productive work?

Reform this benefit now
This benefit is long overdue for reform. I would advocate a return to the idea of an allowance against taxable income but at the lowest rate of tax. This could be achieved by lowering the threshold for higher rate tax by an amount equivalent to the allowance. To illustrate the principle I offer the following example which I hasten to add bears no relation to any real situation.

Suppose someone earns €50k and has allowances of €10k, not including child allowance. The first €20k above the allowance is taxed at 20% and everything above that at 40%. The tax liability would be (€20k at 20% = €4k) + (€20k at 40% = €8k), a total of €12k. If child allowance is set at €5k that will reduce the amount taxable at the higher rate to €15k, reducing the total liability by (€5k x 40% = €2k). But I am suggesting that the threshold should be lowered by an amount equal to the child allowance so that the liability reduces only by (€5k x 20% = €1k), thereby ensuring that everyone eligible for tax gets the same rebate for his or her child.

Those earning too little to be liable for any tax would receive the allowance as a “negative income tax” paid through his/her employer. This would be objected to by some as placing an unnecessary burden on business and by others, once again, as placing the money in the wrong hands. This latter objection, I would argue, is no longer valid as in most households both parents are breadwinners. Where both parents are unemployed their job-seekers or unemployment benefit would be enhanced by an appropriate amount for child allowance as now.

Finally, whatever system is adopted the amount paid in respect of second and subsequent children must be less than that paid for the first.

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