Household benefits/credits should not be treated as
income
Under development
What?
The rule should be: don't attempt to treat tax credits as net income.
(This would apply to all current & future tax credits). But if the
household receives any tax credits, operate the "basic rate"
(15% / 20% / 25%) at all income levels.
Then if & when tax credits become available for all low earners,
even those without a family (perhaps 2003) - remove the concepts of "flat
rate" and "reduced rate" for low earners from the child
support formula entirely! In other words, try to make the whole scheme
vastly simpler than it is. The positive way of presenting this would be:
"the child support formula is 15% / 20% / 25% - but if the household
doesn't receive a tax credit, there is a protection mechanism for low
earners based on a "flat rate" or a "reduced rate"".
Why?
The current scheme, and the reformed scheme, both provide incentives
for non resident parents to behave in ways that are not in anyone's interests.
This includes:
- splitting up with their new partners;
- giving up work and letting their new partners earn the household's
money
How?
The rule could be:
- Don't attempt to treat tax credits as net income. (This would apply
to all current & future tax credits).
- But if the household receives any tax credits, operate the "basic
rate" (15% / 20% / 25%) at all income levels. (So ignore the concepts
of "flat rate" and "reduced rate" in these cases).
Then if & when tax credits become available for all low earners,
even those without a family (perhaps 2003) - remove the concepts of "flat
rate" and "reduced rate" for low earners from the child
support formula entirely!
In other words, try to make the whole scheme vastly simpler than it is.
The positive way of presenting this ("spin"!) would be: "the
child support formula is 15% / 20% / 25% - but if the household doesn't
receive a tax credit, there is a protection mechanism for low earners
based on a "flat rate" or a "reduced rate"".
References
| Relationship to other
Agenda items |
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| Other pages in this web
site |
| Problems
when the NRP's household claims Working Families Tax Credit |
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| Should
Working Families Tax Credit be included as NRP's net income? |
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| Suggested
alternative to treating tax credits as NRP's income |
This is the real proposal. |
| Case
Study 1 - Removing the incentive for the NRP to work |
WFTC is being paid for a child that
the NRP isn't financially responsible for, and affecting his payments
to a child he is financially responsible for. There is suspicion and
resentment that in stage 2 above money intended by the government
for the new partner's child is being diverted to a different child.
The formula may be justified, but it appears to the people concerned
to be arbitrary and unfair. |
| Case
Study 2 - Bizarre child support changes as the new partner's income
changes |
In this case, the NRP earns the
same amount throughout. But the NRP's new partner manages to go from
earning less to earning more than the NRP. The NRP's child support
liability plummets as a result!
As far as the PWC is concerned, the NRP's household, and hence
the NRP, has become better off (even though this is not the result
of the NRP's efforts). The PWC may expect the "children to
share in the wealth of their parents". Instead, the child support
received falls to less than half!
By earning more than the NRP, the new partner has removed all of
the WFTC as a source of income for the NRP, so that it is not used
in the child support calculation. This will surely become an avoidance
tactic in the reformed scheme.
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| Case
Study 3 - No incentive for the NRP to earn more |
The real conclusion is that having
big steps in the formula such as the 0% / 50% / 100% contributions
of WFTC to net income screws people up to an incredible degree. It
is incompetent legislation to make such a small change in circumstances
have such a big final outcome. It can only cause resentment, and cause
people to behave badly. Who, in Arnold's situation, would even bother?
Why shouldn't Arnold say "stuff it, why bother to try to earn
more?" |
| Potential lobby groups |
| NACSA |
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| Other relevant external
links |
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