Saturday, 9 October 2010

A subsidy by any other name

Previously I said George Osborne was talking nonsense when it came to describing child benefit as an example of the poor subsidising the rich. However my response was less to do with what he was saying and more with why he was saying it; what I should have said is that I agree with him.

There are two main criticisms against removing child benefit from high earners. The first is that universal benefits are cheaper to administer than means-testing – which is correct and why the government settled on an imperfect solution of using the income tax system as a cheap and easy test. The second is that as a result, a couple who are each on an income in the standard tax bracket will be able to keep the benefit even though their combined salaries could exceed that of a couple who lose out because one of their salaries is in the higher tax bracket. This is unfair, but no more so than the idiosyncrasy that already exists with a progressive tax system where a couple earning £30,000 each will pay far less tax than a couple with a single wage of £60,000. Fix this anomaly (if you dare) and everything falls into place.

If we ensure the cost of administration remains comparatively cheap there is no justification for universal benefits. That the better off more than pay their way isn’t in dispute, however it isn’t relevant. What’s important is the simple logic reminding us that an increased tax liability from giving a benefit to the rich (or indeed anyone) is paid for through the taxation of everyone else. To quote Harold Wilson:
One man's wage rise is another man's price increase.
Avoid the word subsidy if you wish, call it an entitlement if you must, but the poor will definitely pay.


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