Rachel Reeves incoherent response on the £100k childcare cliff edge issue

[MidnightPatrol]

Mumsnet have interviewed Rachel Reeves about various topics, and one of those questions put to her was about the £100k childcare cut off (asked by me).

Her response is completely incoherent - shared below for the many others stuck in this ridiculous situation (or interested in it).

Transcript:
Justine Roberts: Okay, so we've had quite a lot of questions around the tax system which is obviously your specialist subject. Here's a typical one. MidnightPatrol said: I have a one and four year old in nursery. As I earn over £100,000, I lose £25,000 in childcare support for them. I need to earn an extra £55,000 over that £100,000 cutoff to cover that loss. Where I live in London every other parent I know is either working part-time or salary sacrificing tens of thousands into their pensions to try and avoid this. Is there any suggestion that this absurd cliff edge might be changed?

Rachel Reeves: So again, this is not a cliff edge that I introduced, but is one that I inherited and I do understand what is being said there about if you've particularly got young children that you miss out on some of these key supports. Now obviously, the childcare offer is quite a new offer and it's the first time that it's been properly funded. We've put the funding into it. It is much more popular than anyone anticipated. It's actually costing taxpayers more than we originally thought. But that's a good thing because it is helping more people into work. I think it is right that it isn't available to the highest earners. If you are earning more than £100,000, you are within the top 5% of earners in the country. And I don't think you could have a system where everybody has all of their childcare costs paid because that would require even higher taxes on people to be able to afford that.

Justine Roberts: But do you acknowledge the cliff edge?

Rachel Reeves: I absolutely recognise the cliff edge and we are looking at how we can always ensure that the tax system incentivises people to work. But I think most people recognise, especially if you are in your thirties and forties and at sort of maximum earning power, that although you may lose some benefits in the short run by taking that promotion or taking those extra hours, actually you are going to progress whereby you are no longer losing out because you are earning so much more. And you know, we should celebrate people doing well and being in those very top income brackets. But I think it is right that if you are earning so much more than the national average, you should pay a bit more tax.

So you think that earning £1 over should lose you £25k overnight

thats simply not clever

At the end of the day I don’t think the response is very useful but others have said there’s a wrap up section that covers it

its a ridiculous policy. Especially with fiscal drag. Taxation isn’t just about fairness it’s about motivating behaviours. Not tapering change is really poor practice. It might not be put in by labour but they should look to address it, even if it’s starting at a lower level. When you add it to the marginal tax rate it’s farcical

again it’s all about motivational behaviour. Just because it’s at a different salary point it’s irrelevant. You still want people to work when they can it supports the economy and therefore all of us

its no different than the cutoff of benefits if you work too many hours or the fact that some benefits seem to attract lots of freebies. This is not being goady, the feeling that others have when they just miss out on being entitled to these things is the same motivational issue.

cliff edges are poor practice

That'll be every NHS doctor who uses childcare.

Why wouldn’t they have the opportunity to put more into a pension? Anyone can open a separate SIPP?

You really aren’t being hard done by like you think you are.

Frankly it’s amazing you earn so much but can’t compute this situation.

All you have to do is pay into your pension.

You are saying the saving is 1.5k per child. So that’s taking your bill down to 2k.

Assume 4yo starts school in Sept? Then that’s great. Now your bill is down to 1k.

Drama over 👍

She doesn’t need legislative time. It can be amended in a Budget. And she could probably spare a bod from the Treasury to check out the figures, there’s plenty of independent research on the impact of cliff edges to get them going. They seem to have time for all sorts of other tax jiggery pokery.

The point is she doesn’t think it’s necessary because she splits people into high earners and low earners and is opposed to being seen to give any ‘tax breaks’ to high earners. Even if there might be some overall benefit to the economy. It’s classic Labour ideology.

What percentage of NHS doctors with very young children earn over 100k? That's a consultant salary...

All the consultants I know had their children later in life (into their 40s).

A) The issue just isn’t about me personally - many other parents are facing this issue. And it catches more
parents every year as the threshold is frozen.

B) Having to put money into your pension to claim effectively caps the income for parents with small kids at ~£5k net a month (if paying a student loan). This is a problem in HCOL areas, impacts your ability to get a mortgage. It’s not unusual in the south east to have a £2-3k a month mortgage - so there is a significant lifestyle impact (which more broadly makes the UK a less attractive place to live and work for higher earners). Two nursery places including the free hours in London might still end up being £3k+ a month.

C) The ‘put money in your pension’ solution works to claim the money… until you hit £160k then you are back to square one. Even at £200k of income, my effective tax rate inc loss of childcare would be around 80% on every penny over £100k.

It’s an ill thought out piece of policy with far reaching impacts on the behaviour of higher earners, which reduces overall tax take.

Women too? That's a high risk choice if having biological children is important to you. The number of single male consultants with primary responsibility for children under five years old must be fairly small.

In two parent families it's academic anyway as the second income would take the total well over any threshold if the fairer tapered total parental income model were adopted (or on the absence of a second income childcare would be a luxury rather than needed for both parents to work work).

It all flew over your head didn't it

Not my experience or indeed any of my colleagues.

I agree with you. People are just commenting as a knee jerk because of the salary, not the wider economic understanding

That was perfectly coherent. Just because she didn't say what you wanted to hear it doesn't make it incoherent.

This is where listening and reasoning skills come in useful.

With your finely honed ‘listening and reasoning skills’ can you explain the reasoning behind losing £25,000 of childcare support - as justified because you are in the top 5% of earners?

And can you elaborate on the fiscal benefits of this policy, desire the clear evidence people are reducing their incomes to both claim it and simultaneously pay less tax - which Reeves didn’t bother addressing at all.

That, I don't know, but this is what the doctors on here have said. I remember being particularly struck a few months ago by one whose local area were offering enhanced payments for catch up clinics, that she would otherwise have done, but the impact of going over 100k meant it was a no brainer to refuse.

lol I don’t think so. Correct where I am wrong

But RR is perfectly capable of knowing this is an own goal and they simply don't mind. The aim is levelling down, even if it means less tax revenue.

See also VAT on private schools resulting in more state school places needing funding, job losses etc. But it doesn't matter because they want levelling down and like to punish the hand that feeds them- the higher tax payers

But anyone could say the same thing.

I could pay myself (as a Ltd company owner) a paltry amount, put the rest in pension and receive full whack UC.

But I can’t because then I wouldn’t be able to make ends meet as we live. So I don’t.

This is life. And if you earn 160 or 200 then really you don’t need childcare support from the tax payer. It’s literally a few years of tightening your belt. Such is true for all parents with young kids in childcare.

It’s nothing like paying yourself £12k a year to enable yourself to claim universal credit.

The consequence of this childcare policy is that people are working less, or paying less tax via pension contributions so they can claim. No one is going to work more for less money - why would you?

So we have a top-heavy taxation system which is then heavily incentivising parents to… reduce hours or maximise pension contributions, lowering the tax taken by the treasury. The behaviour of this group is very significant as they pay 50-60% of all income tax.

You simply demonstrate that you do not have a grasp of the issue.

At £160k you say ‘you don’t need help for childcare’ - but here’s the thing, less the £25k of childcare support, tax paid at rates of 44-62% on this income, on the income between £100-160k I’d take home a whopping additional £2,600 vs earning £100k and claiming the childcare. Thats a really significant issue in incentivising certain behaviours.

I’m not sure it’s even just a labour issue.

The ‘60% tax trap’ at £100k will have been in place for 19 years by the end of this parliament.

Again totally illogical, catching huge numbers of people and incentivising counter-productive behaviours from workers.

But no one, including the tories, is willing to address it as it would be seen as ‘helping the rich’, no matter what impact it has.

They are all hopeless.

You're right of course
I guess I'm am further disgusted by the blatant hatred of higher earners by labour's VAT on school fees.
But yes the marginal tax bracket is the product of the previous government.
Eventually we'll all wonder why we bother.

I think Reeves' response is pretty coherent and she is being clear about what she believes. I agree and disagree with her.

I agree with her that ultimately we can't expect the state to subsidise these kinds of costs for everyone. After all, the state is just made up of taxpayers and we know that if you're earning this kind of money then you are often on the hook to fund any additional spending one way or another. So put simply, you might want the extra help with childcare now but you will also be the one that ends up paying for that and more if we allow the welfare state to grown to pay for everything for everyone. High earners should be very careful what they wish for.

I disagree with her failure to acknowledge that cliff edges like this are bad for the individual and bad for the economy. It decreases productivity and leads to inequality and unfairness. Interestingly I think Labour believe these concepts only apply to the bottom socio-economic groups but for a society to function they need to be maintained for everyone.

I think the best solution is to phase help and support more incrementally so nobody suddenly loses huge amounts with relatively modest pay rises. Unfortunately though I also believe that with public finances being the way we are, we need to look at all spending as an investment and look of the returns we get for it. This may ultimately lead to the state paying for less and focussing spending on areas that grow the economy and lead to the most societal benefit.

@Itchthescratch in response to “Unfortunately though I also believe that with public finances being the way we are, we need to look at all spending as an investment and look of the returns we get for it.”

I think this is one of the key questions here (and where no data has been forthcoming) - are the government actually saving any money through this policy, or would they generate more revenue making childcare universal)?

Since September the value of 30 hours plus take free childcare in my area is £15,000. That’s the tax on income £100-125k.

Everyone earning less than £125k in that scenario will salary sacrifice to pension and claim (or be worse off). The cost to the treasury is the £15k of childcare + whatever tax is now not paid (another £15k, for example, if they earn £125k).

Those earning more than £125k are still heavily incentivised to do it - so the government is still paying the £15k childcare plus losing even more tax as they salary sacrifice to ensure eligibility.

A year ago this wasn’t such an issue - the value of the hours was smaller, claimed for a shorter period, and likely only to include one child.

There was less incentive to avoid it at a lower level - I think my first child I was only not eligible for £2k of tax free childcare, unless earning >£110k you could probably justify the loss. For my baby now, that loss at the same age is £15,000 a year - that’s a far greater incentive to take action to avoid it.

And - more broadly - this group pay 50-60% of income tax, so if we are worried about finding other services… heavily incentivising our highest earners to earn less and pay less tax is irrational.

It absolutely is not just a Labour issue. This was created under the Tories. However, Labour are in charge now and could choose to correct bad Tory policy instead of letting it affect ever greater numbers of people.