Monday, October 04, 2010

Means-Testing Social Benefits Equivalent To Tax Hike

The British government announced today that they will abolish child benefits for higher income earners in Britain.

That might at first glance seem like a sensible move. Presumably, people with high income are in no need of government hand-outs. But the problem is that by phasing out such benefits, people's net income will rise less if they work more. This means that this move will have the same economic effect as a formal marginal income tax rate increase, with the only difference being that childless high income earners won't be affected, while the effect will be greater than an equal sized tax increase for high income earners with children.