Alternatives to Paying Child Benefit to the Rich: Means‐Testing or Higher Tax?

Abstract

There appears to be a general movement away from universal child benefits and towards means‐testing. In the present article we argue that instead of suppressing the labour supply of middle‐income parents by withdrawing the transfer as a function of income, one should consider the alternative of financing a generous universal child benefit by increasing taxation of income. The implications of means‐testing compared with a tax‐financed universal alternative are discussed analytically in a piecewise linear schedule and by combining information from behavioural and non‐behavioural micro‐simulation models. Our results provide support for making child benefit universal instead of means‐tested.