Childcare tax trap 'absolutely insane', says IFS

Jeremy Hunt scrapped tax-free grants for working parents after they started earning £100,000.

Working parents face 'absolute madness' Financial penalty once their income exceeds £100,000 in an 'abomination' of a tax system that fails to pay for work, experts warn.

Stuart Adam , senior economist at the Institute for Fiscal Studies (IFS), said parents faced some of the «craziest» tax cuts in the UK when their income exceeded this threshold.

Mr Adam criticized Jeremy Hunt's decision to remove all free childcare entitlements and tax-free subsidies for working parents after they started earning £100,000.

This creates a so-called «cliff edge» «, from which the chancellor left. families are thousands of pounds worse off, even after significant pay rises. The IFS calculates that this means a parent earning £134,000 with two children could be worse off than one earning £99,000.

Asked what aspect of personal taxation he would fix if he had the money to address high marginal tax rates, Mr Adam said at an event organized by the Center for Policy Research think tank: “The thing that really seems crazy to me is I would probably actually say that the childcare cliff is £100,000 because it is so large and the fact that you are earning £130,000 plus than you would be earning £99,000. It just seems absolutely crazy.”

Individuals also start losing their personal tax-free allowance of £12,570 once their income exceeds £100,000, resulting in their marginal tax rate (or the tax paid on every additional £1 of income) increases to 60 percent.

Dan Needle, founder of Tax Policy Associates, also criticized the policy. “Cliff's edge seems like an understatement of the description. This is an abomination and has no place in the tax system. And to say that eliminating it is a regression or giving money to the rich is the wrong answer.

“If we have a beard tax and we abolish it, then the fact that rich people benefit from it , doesn't matter. The tax is stupid. It's an equally stupid policy.»

Mr Needle added that he knew people who had fallen into the trap of the child care tax.

“Their decision is obvious. They refuse to work. They refuse promotions, make additional pension contributions that they really don’t want to make. How much revenue does the government actually receive from these refunds? Unclear. But this seems like a really terrible feature.»

Mr Adam estimated that removing personal allowance would cost between £4 billion and £7 billion a year, although this did not take into account behavioral responses that might encourage people to work more.

He also blamed The Tories are in favor of introducing most of these high marginal tax rates.

“Almost all of these problems have arisen in the last 15 years,” Mr. Adam said. “Cutting personal benefits. Reducing child benefits. Marriage benefit, reduction in annual pensions. Free childcare on the edge of the cliff. The divergence between Scotland and the rest of the UK is all that has happened in the last 15 years.

“It wasn't quite like that before. I'm not suggesting for a second that there was once a golden age when everything was wonderful. But we shouldn't fall into the trap of saying, «Well, it's inevitable, we can't do anything about it.»

Richard Hughes, chairman of the Office for Budget Responsibility (OBR), said Mr Hunt faced a choice between «a small change for a lot of people or a big change for a small number of people» when deciding how to cut taxes.

He said: “[The 4p cut] in National Insurance made little difference to a large number of people. But the introduction of high-income child benefits made a big difference for a relatively small number of people.

“There are 30 million workers in the country. The NI cut resulted in an increase in the workforce by 200,000 people. The higher income child benefit only affected 170,000 people, but it added 10,000 more people [to the labor force]. So that's a relatively big profit.

“So I think it really depends on whether you want to have a wide reach but make a small difference, or whether you want to make a big difference for a handful of people, it's going to be very , very high marginal tax.»

Recommended

How much does it cost to have a family — from pregnancy to private school Read more