Tax breaks for children seen giving more to rich than poor

Photo: Vedrana Bosnjak / freeimages

Tax changes giving bigger tax breaks to Czech families with children look like costing more than the government budgeted for and the benefits look like overwhelming benefitting the reasonable off and rich rather than the poor.

Photo: Vedrana Bosnjak / freeimages
Tinkering with the tax system is an inveterate habit of governments. New administrations usually cross the threshold of power on promises of change and on the votes of the discontented. And one of the simplest actions to take is to adjust the tax system in favour of one section of the community, usually, at the expense of another.

The parties of the new centre-left Czech government had a pretty mixed bag of ideas on taxes before they came to power. The Social Democrats favoured higher taxes on the rich and big business and sharp reductions in Value Added Tax. ANO wanted no major changes in business taxes. And the Christian Democrats were vociferous advocates of more tax breaks for families with children.

With the bigger government parties getting a slice of their wish list transformed into proposed tax changes, the Christian Democrats have been adamant that they fulfill some of their pledges as well. The result is the proposal to phase in more generous tax breaks for families with children, a fundamental election promise.

In welcoming the government agreement for the move last week, party deputy chairman Jan Bartošek said that most of the income would be quickly recirculated into the economy as extra spending and consumption by working families.

It is in this context, that the cost of the phased in tax changes for second, third and following children have been estimated at only 2.7 billion crowns. Taxes raised on the expected extra spending would cancel out some of the costs. So the study released last week by two researchers from the Economics Institute of the Academy of Sciences will not make particularly pleasant reading for the government and Christian Democrats.

The study first of all puts a higher, 4.95 billion cost tag on the tax breaks for children on the grounds that it’s far from certain that families will automatically spend all their gains. Generally, economists point out that the spending of tax windfall varies a lot, partly depending on whether taxpayers were warned in advance they would take place and planned for them and on whether they believe they will stick in place for the long-term.

Worse, perhaps, is the study’s message that the benefits of the new tax breaks will overwhelmingly benefit the better off rather than the poor. Since tax allowances are only advantageous to those paying tax in the first place, those who are too poor to be taxed will not get any benefit. But lower earners will also be disadvantaged. The study reckons a family with two or more children on low pay will benefit by an average 2,900 crowns a year. The same family on middle to higher wages will be 7,314 crowns a year better off, it adds.

That finding also dents the recycling revenue version of events because the reasonably and better off have a clear penchant for saving a much higher slice of their income compared to those living a more hand to mouth existence.

What’s more the latest move, for better or worse, will widen the difference in tax treatment of a single earner on average wages with no children, taxed at the average Czech rate of 23%, and a married man with non-working wife and two children. Taking into account the social benefits due to the family, he will actually get slightly more money back from the state than he pays in as tax, the study points out.

The changes also reinforce the fact that, from a tax perspective, it hardly pays for a wife to rejoin the labour force after having children. Against all statistical trends, the Christian Democrats may succeed in pushing Czechs into more marriages, fewer divorces, and more children. But their flagship proposal looks like making fewer friends than they hoped for and raising more tax questions for the government.