Harry McGee on Taxing Child Benefit

The Irish Times – Wednesday, January 2, 2013:

HARRY McGEE, Political Correspondent

Middle-income families would lose €640 a year for each child if the
Government decided to tax child benefit at current income tax rates,
figures provided by the Department of Finance have disclosed.

The cut for families paying income tax at the higher rate of 41 per
cent would be five times higher than the cut of €120 in yearly benefit
per child announced in last month’s budget, if that measure were
proceeded with by the Government.

It works out at a €55 cut in the monthly benefit for each child and
would mean a family with three children would lose almost €2,000 in
annual income to the household, or €166 a month.

Households paying tax at the standard 20 per cent rate would also face
substantial cuts – €312 per child annually, almost three times as much
as the budgetary cuts announced on December 5th. A family with three
children would lose almost €1,000 each year.

Radical step

The information was supplied by Minister for Finance Michael Noonan to
Labour Party TD Joanna Tuffy in reply to a parliamentary question.
While the answer does point to a series of legal and other
complications and obstacles, Mr Noonan makes it clear the department
is not contemplating any other intermediate or higher rates of tax
other than the 20 per cent or 41 per cent bands.

Introducing tax on child benefit would save the State €395 million
each year and would achieve some 80 per cent of savings required in
the Department of Social Protection budget for 2014. However, Minister
for Social Protection Joan Burton is against such a radical step.

Ms Burton will this month publish the report of a group, chaired by
Ita Mangan, which looked at this issue in detail. It recommended two
options for changing the payment from a universal benefit: its
preferred choice of means-testing; and also taxation. It warned that
both solutions involved complex change.

A majority of Labour TDs and Senators favour taxation, but a minority
is opposed. This group includes Ms Tuffy, who said no third income tax
band meant middle-income couples on €60,000-€70,000 a year “will be
taking the same hit as a couple earning €300,000 per annum” if it was
implemented on the basis of the current tax regime, which she said was
unfair.

Legal questions

“Even for those paying the lower 20 per cent rate, they will end up
considerably worse off, losing three times as much as the €120 cut in
the budget . . . I do not think that people talking about taxing child
benefit have really thought it through in relation to impact,” she
said.

In his parliamentary reply, Mr Noonan noted that taxing child benefit
is dependent on resolving several complex policy and legal questions.

“These policy issues include clearly determining who is the owner of
the child benefit payment, whether by taxing the payment there follows
an entitlement to the PAYE tax credit, how the payment is treated for
tax purposes in the hands of jointly assessed couples and legal issues
surrounding the tax treatment of married couples and co-habiting
couples.”

The Department of Finance believes there will be difficulties
collecting tax from cohabiting but unmarried couples with children.

A Revenue database of married couples exists, but none on cohabiting
couples, who are assessed separately. A child benefit tax based solely
on the mother’s income in a cohabiting family would be vulnerable to a
constitutional challenge on the grounds of unfairness to married
couples who are jointly assessed.

Census figures reveal some 143,000 cohabiting couples, a little less
than half of whom have children.