The papers have eased off for a couple of days now.  But, let's face it, the problem is still there:  the coalition's proposals for stripping child benefit from families with a higher rate taxpayer do not work.  They cannot be made to work.  If it weren't for the one-way direction of the political process, they would already have been ditched.

Here's why:  to the extent that benefits are means-tested, they're done on household income.  By contrast, the coalition is proposing to means-test on the tax-paying status of one of the earners.  While HMRC can ask households to provide their income on a combined basis as part of means-testing, one of the advantages to child benefit has always been its universality and its design.  Because it's paid in most cases to the mother, while in most cases the main breadwinner is the father, it generally reaches children.

However, there are no current benefits that are based on the taxpaying status of either earner.  That's because, while salaried income can be forecast with reasonable accuracy, your taxpaying status for the year cannot.  This explains why the child benefit proposals now suggest that the means-testing will be on the prior year.

Yet that could produce some extreme unfairness.  Imagine a family where a higher rate taxpayer loses their job right at the end of the tax year.  Because of the year's lag, they could be prohibited from receiving child benefit for a full year, even while they have a much lower income.  And how will the system deal with couples that split up?  Will they be bound by the marital status from the year before?

Unfortunately for the coalition, married couples are under no obligation to reveal their tax status to each other.  It's a product of the decision from the early 1990s to abandon joint tax filings.  Because the proposal is to withdraw child benefit via the higher earning spouse's tax code, he/she may demand that the child benefit-receiving spouse hand the child benefit over as compensation.  The very idea that a taxpayer could be fined for not knowing about their spouse's tax status is ludicrous.

One way out of this mess would be to revisit the system of joint tax filings for married couples.  The Tories have said that they want to reward marriage through the tax system.  The best way to do this would be to let married couples file a joint tax return, letting them offset their joint pension contributions agianst their joint income, while taking advantage of both personal allowances and both basic rate bands.  Under this system, child benefit could easily be denied by means-testing the couple's income.  A couple that refuses to file together could still get child benefit if one of them has an income below the higher rate limit.  Note how I believe that it should be based on income, not taxpaying status.  I think it's a big mistake to encourage tax avoidance by such legal means as paying in pension contributions.

Another, as has already been suggested, would be to tweak the tax system to take it back off higher rate taxpayers.  A downside of this approach would be that it would tax those without children more.

But both of these would be practical.  The coalition's current proposals aren't practical and have some dangerous consequences.  We desperately need a rethink.

People who read this post also read:

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Filed under: Politics, Taxation with tags child benefit, conservatives, hmrc, married filing jointly