The Effects of the New Child Benefits System

2759 Words May 16th, 2013 12 Pages
Arjun Jairath 120237551
In 2013 changes in child benefits came into effect in the UK. In particular, child benefit was gradually withdrawn from individuals earning over £50,000 a year and completely withdrawn for individuals earning more than £60,000 a year. Investigate, using the standard labour supply model, how this change in benefits will affect labour supply decisions for a single mother with two children who is able to find work at £30/hour. Assume that she would opt-out of maximum working time regulation in case this becomes relevant. Finally, the measure of income used in the actual calculation is “adjusted net income”, which is equal to gross income minus pension contributions and several other things. For this essay assume that
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This looks as follows;

As you can see, the income tax function lies on top of the original budget constraint until it reaches £7,475 of consumption. This is because there is no tax for the initial £7,475 as it is a personal allowance. When an extra £35,000 of income is earned (a total income of £42,475), the tax of 20% reduces the total income to £35,475 of net adjusted income. When the income is £90,000 which is the maximum the mother can earn, the income tax reduces her income to £63,990 because of the 40% income tax after £35,000 of income. The curve then kinks away to the left at £7,475, until it reaches an income of £35,475. At this point the curve kinks with a further decrease in the gradient until it crosses the y-axis at £63,990.
The child benefits policy currently allocates £20.30 for the eldest child and £13.40 for any additional child. When this is added to the consumption function which is adjusted to the current income tax system, the function looks as follows;

When looking at this function, you can see that the income tax curve has been shifted upwards by amount of £1,752.40. Therefore, the curve crosses the y-axis at £67,902.4 and kinks where consumption is £9,772.4 and £37,252.4.
When the changes to the child benefits system are put into place, there is a kink from the previous consumption function (including the old benefit system and income tax) at £50,000 until it joins the consumption