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Eight-Child Families Get 101% Marginal Tax Rate in Budget

Britain’s budget means parents face marginal tax rates that vary depending on how many children they have -- and those with eight or more will pay more in tax than they earn on part of their income.

Chancellor of the Exchequer George Osborne’s March 21 statement announced revised details of his pledge to remove child-benefit payments, which currently go to all parents, from the wealthiest as part of his plans to tackle the budget deficit. The withdrawal will be tapered between incomes of 50,000 pounds ($79,000) and 60,000 pounds a year, so that a parent earning 60,000 pounds will lose the benefit altogether.

A new income-tax charge will be used to claw back the payments. This will add 11 percentage points to the marginal tax rate of families with one child and 18 points to those with two, according to the Institute for Fiscal Studies. A household with eight children will have to pay back as much as 5,933 pounds, pushing up its marginal tax rate to 101 percent from the current 42 percent.

“It’s an unusual way of implementing the taper,” said Robert Joyce, research economist at the London-based institute. “But it is at least an improvement on the very high marginal rate lower down the income scale that they would have had under the previous plan.”

Under Osborne’s original proposal, any parent earning enough to pay tax at the 40 percent rate -- currently just over 42,000 pounds a year -- would have lost all of the benefit, which is worth 1,056 pounds a year for the first child and 697 pounds for each subsequent one. The change is due to take effect in January 2013.

‘Simple Way’

Still, the new arrangements do not get rid of the anomaly whereby a family with two parents each earning less than 50,000 pounds will keep the benefit, while a neighboring household with a single income of 50,000 pounds or more will lose it.

Osborne told lawmakers in London today his plan “is a much more administratively simple way” of withdrawing child benefit from the better off than means-testing every household in Britain.

“The alternative, which is assessing total household income, is not something the government does,” Osborne said in testimony to Parliament’s Treasury Committee. “We would have to create an entirely new system to assess the total household income of 6, 7, 8 million people. I don’t think we need to do that.”

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