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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