Child benefit tax unlikely
Proposals to tax or means-test child benefit payments in the next budget appear increasingly unlikely due to major legal and administrative problems.
The Government last year cut the monthly child benefit by €16, but left the door open to taxing or reducing the benefit for higher income families at a later date.
Internal Department of Finance records show the extent of the obstacles facing policymakers trying to grapple with the issue.
Officials say there are significant problems in, for example, seeking to tax cohabiting couples with children. While the Revenue Commissioners have a database of married couples to use for assessing tax, it has no such data on cohabiting couples.
“There is no way of accurately getting this information so as to ensure all cohabiting couples pay tax on their child benefit,” records state.
Similarly, in the case of divorce or separation, officials state it would be difficult to determine who would be liable to pay tax on child benefit.
If tax on child benefit was not applied equally, officials warn that there could be constitutional difficulties if married people were treated worse than cohabiting couples.
Even if an equitable way to tax child benefit was identified, department officials say it would be problematic to ensure people would be treated fairly. If the benefit was taxed, it would likely be based on a person’s income for the previous year. Such a system would not take account of current-year income.
“If a person was unemployed in the year after assessment it may not be fair to reduce their child benefit,” according to department records.
The Government would face a similar set of administrative and policy difficulties if it opted to means-test child benefit instead of taxing it, according to officials.
The dilemma of whether to measure net or gross income is one obstacle raised. While gross income is simpler and more transparent, officials say net income would provide “a more accurate indicator how well-off a household is in practice”.
Any system of means-testing would need to be responsive to changes in circumstances, such as reductions in income, unemployment, or changes in the household arising from separation or divorce.
In addition, an audit and control system would need to be put in place. This would have to limit the possibility of under-declaration of income and prevent fraud.
Another obstacle with means-testing is the cost of administrative and information technology. Such a system would involve significant costs and require “significant changes to IT systems . . . to deal with the processing of changes in income and possible under or overpayment of child benefit”.
Documents also note the dilemma of who to means-test and the lack of data for the overall household income for cohabiting couples. “The concept of the taxable unit is different to the concept of the household used in the social welfare system,” documents state.