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.