Taxing child benefit may cost families €640 a year

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.