Comparisons - "current versus reformed" & various cases
Both the current scheme and the reformed scheme have protection mechanisms which ensure that as an NRP's net income reduces (for example, s/he loses a job or has to take on lower paid work) the liability, both in absolute terms and as a percentage of earnings, falls. Sounds OK.
The downside of this, of course, is that as the net income increases, the liability rises, both in absolute terms and as a percentage of earnings! You can't have one without the other. All means-tested schemes have some sort of trap of this sort. The safety net which catches you as you fall can be hard to leap out of.
The current scheme has protection mechanisms called exempt income and protected income which attempt to ensure that the NRP has enough to live on. The reformed scheme simply has a kink in the formula. The effects are vastly different from one another. Here is an illustration.
Comparisons at low to medium net incomes
What should the philosophy be?
How should the liability rise as net income rises? (Consider just the cases where the NRP hasn't been earning enough to pay the "correct" amount of child support).
Some would say "your liability for your children is there even if you are not earning, and we will either find enough jobs for you to do to pay this amount, or your arrears will accumulate until you do earn". However, these approaches, observed in some parts of the USA and Germany, are not the extremes discussed here.
Instead, the approach could be "you will retain enough to live on, but over this amount all your extra earnings will be taken in child support until the "correct" amount has been taken, and only then will you see any extra retained earnings". After all, why should the NRP have any extra money until the child's needs have been taken care of in full?
The current scheme appears to have elements of this in it, although not quite as severe as this. Until the NRP is paying what is considered to be the "correct" amount, in some cases very little extra net income is retained. (And when the effects of income tax and NI are added, even less of the extra gross income is retained).
The practical view recognises that with such a purist approach an NRP is likely to say "stuff it, why bother to try to earn more?"
Some NRPs would still earn more in this case. Research has shown that some people caught in the employment trap of Income Support still work even though they may actually end up with less - out of pride, the social benefits of working, gaining experience for further increases later that will lead to retaining more money, etc. But this takes a resolute person, and many would take the obvious attitude.
In the case of NRPs, there are two additional competing factors beyond those for people in the employment trap of Income Support:
Countries with high amounts of child support (USA, UK) tend to have lowish compliance rates. Countries with lowish amounts of child support (Denmark) tend to have high compliance rates. (Surprise, surprise!) While compliance can be improved in other ways, such as draconian penalties, the incentive to cheat the system somehow will always be there (eventually leading to emigration).
The reformed scheme appears to be trying to steer a compromise path - start paying extra at lower incomes, increase the liability slower with extra income, then peak at lower levels. Some PWCs will be indignant at this. Others will actually see money when before they should have been getting more but were actually failing to get any. Some extra NRPs will see the benefits of earning more. ("Politics is the art of the possible" - there is no doubt that much of the reformed scheme is shaped by politics rather than purely child-oriented analysis).
But once income tax and National Insurance deductions are combined with child support deductions, even the reformed scheme starts to show a significant disincentive.
Does the government understand the impact of marginal withdrawal rates?
The suspicion is that the impact of these marginal rates of withdrawal is not appreciated, or at least acknowledged, by government. For example, the CSA Reform White Paper says:
In some cases, each extra net £ earned, for example as overtime, will result in extra deductions of 45p (child support for 3 children when the NRP pays at the reduced rate). It is false to claim "At least 75 per cent will be retained by the nonresident parent". It may be only 55% of extra net income retained. And once income tax and National Insurance deductions are combined with child support deductions, it may fall to only 35% of extra gross income retained.
|Page last updated: 4 July, 2004||© Copyright Barry Pearson 2003|