Single family allowance is good news. If coupled with the family quotient, that would be even better

«The legislative process for the single, universal family allowance is now complete.  A single economic support instrument for all families with children will be available soon. Precise amounts and modalities have yet to be established. The measure will undoubtedly be applied to all children from the seventh month of pregnancy until they hit 21.

The single allowance will therefore replace, as of July 1, 2021, the current family allowances, the family tax deduction measure for each child, the baby bonus, as well as all other economic support», explains Giovambattista Palumbo, Director of the Eurispes Observatory on Fiscal Policies. «Furthermore, a protection clause has been included in the execution phase to avoid any eventualities. Since exemptions are currently granted to children up to 24, the measure contains a transitional rule for children over the age of 21.

According to the initial plan, the allowance is 161 euros per month for all children of families with an annual income of fewer than 30 thousand euros; if the annual income is higher, the allowance is reduced to a minimum of 67 euros. Furthermore, the government would require an extra 800 million euros to handle the negative balance compared with existing treatment for approximately 1.3 million families. Self-employed workers and VAT holders will benefit from the measure in comparison to the previous situation. For example, they do not currently receive family allowances, but only tax deductions for their children, which start at 80 euros per month per child – 101 for children under the age of three – and gradually decrease until they reach zero with 95 thousand euros of income. Furthermore, those who are currently exempt from paying taxes due to their low incomes will benefit from it compared to the current situation since they are currently unable to take advantage of the deductions.

It will also get better for most employees as allowances and deductions are currently decreasing rapidly above a family income of 20,000 euros.

Employees and retirees with low family incomes of around 15,000 euros per year, on the other hand, are at risk. They currently receive the maximum deductions and family allowances in this population range, amounting to approximately 250 euros per child per month. The safeguard clause will specifically target them.

However, the project of a single universal allowance is part of a more significant structural reform. Italian families’ economic stability is also dependent on the distinction between double single income families, with the latter being more vulnerable to real-economy uncertainties. However, the single universal allowance makes no distinction between these two types of households. Thus, to include this criterion, it would be necessary to link it to a broader tax reform that prioritizes family income.

The first example is the French family quotient, which calculates tax rates based on family income divided by the number of family members and adjusted based on an equivalence scale. It would then bring us closer to more horizontal equity, and the income declaration could also balance the regressiveness of indirect consumption taxes for lower-income households.

The ISEE could also serve as a starting point for such a reform, as it already weights the total income of the household, plus 20% of the movable and immovable assets, divided by an equivalence scale: the first member ‘weighs’ 1, the second 0.57, the third – corresponding to the first child – 0.47, and the fourth – corresponding to the second child – 0.42. There are also supplements for the third child and problems with disabilities.

Among the flaws in the current ISEE system is the inequity of equivalence scales, in which the 4th child in Italy is assigned a value of 0.35 and in France is assigned a value of 1 through the family quotient. Italy is the only country in the world that uses the ISEE, which should be a welfare policy tool rather than a family policy because the family must be supported regardless of income – with adjustments based on income. As a result, the universal allowance can serve as an important first step toward implementing a concrete fiscal equity policy. However, even the universal allowance has some limitations, such as a two-year limit, because when a child becomes dependent and attends university, the costs for its maintenance skyrocket.

Finally, I applaud the single allowance. However, this innovative introduction should be linked to broader family taxation reform, possibly including, in support of the same allowance, the family quotient, shifting from individual taxation to taxation by parts.

Individual taxation is the only one that still governs the application of the IRPEF in Italy. In this context, two correctives work – or used to work – to support the family income. Fiscally, tax deductions for spouses and dependent children and deductible or deductible charges for dependent members’ expenses. Family allowances at the parafiscal levelOn the other hand, the tax system partially responds to the principle that – with equal income and family composition – each family member should be guaranteed the same amount of resources before and after tax.

This model can be implemented in two ways:

– Income splitting, in which the spouses’ total income is divided by two and the rate corresponding to half of the income is applied to the total income.

– The family quotient, in which total household income is taxed pro-rata by dividing the same income by a quotient determined by the number and characteristics of household members.

As previously stated, the family quotient is the rule in France. Spousal separation is mandatory in Portugal but optional in Germany and Ireland. To summarise, the single allowance, a type of ‘parafiscal’ intervention, has undeniable merits, if only to simplify the system.

However, a broader fiscal reflection, intervening on the taxable base subject to taxation, may act as a multiplier of its beneficial effects.

Together, the two measures could act as a “bazooka” against declining birth rates.

Of course, it’s also – and perhaps most importantly – a financial issue. However, the Recovery Fund could consider such a broad-reaching reform».

 

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