The long-awaited report by the Commission on Taxation has recommended that Child Benefit should be taxed.

However, the Commission recognises that such a move will pose very real practical problems. Instead, it is now thought that Child Benefit payments will be cut in the next Budget.

The report acknowledges that taxing the payment will have a harsher impact on those with large numbers of children, because the income-tax system takes no account of the number of children in a family. In addition, it is feared it will impact most heavily on single-income married couples because of the effect of tax individualisation.

Commission chairman Frank Daly also acknowledged that there would be huge difficulties trying to identify who to tax in situations where a child’s parents were not married, or were separated

It is recommended by the commission that the “taxing of Child Benefit should be benchmarked against alternatives, including means-testing”.

If child benefit is taxed there should be a child tax credit for lower-income families to offset the impact on them.

Mr Daly did not say what level the tax credit should be. Presenting the report, he said that the credit should apply to those “in the lower half of the income scale”.

The report points to previous legal advice received by the Government that indicated major legal obstacles to taxing the benefit as legally the benefit goes to the child.

Mr Daly admitted that many of these issues would have to be dealt with by the Department of Social Welfare under new legislation.

But Minister for Social Welfare Mary Hanafin admitted to the Irish Independent on Sunday that means-testing the benefit was too expensive, while taxing it would be problematic, leading commentators to suggest that a cut in Child Benefit was the most likely Government move.

An Bord Snip recommended that the Child Benefit paid for each child be cut by €30.

Currently child benefit goes to 580,000 families for 1.1 million children. The overall cost to the State of this payment is €2.5bn a year.

A valuable payment, it amounts to €1,992 a year for a family with one child, and €6,420 for a family of three. A four-child family gets €8,856 a year.

Two-thirds of those who get the benefit have incomes of between €40,000 and €100,000 once those outside the tax system are excluded.

The commission’s report says that the fact that Child Benefit goes to all families irrespective of their income is unfair. At the moment, some 15pc of those who get the payment earn more than €100,000.

The report admits that minimising the impact of taxing the benefit on larger families will be a challenge.

It concludes: “Overall, however, on equity grounds and with the objective of improving the targeting of the support, our view is that the payment should be taxed.”

The Children’s Rights Alliance, which represents 90 groups working with children, warned that taxing the payment risked the “triggering of mass political discontent”.

“While we acknowledge that the country is in crisis and that the Government faces difficult policy and budgetary choices, Child Benefit must not be played around with.

“Any change to the child benefit payment will have an immediate impact on childhood and families, and in these uncertain economic times, a non-stigmatising, regular, reliable, easy-to-access payment to families is of critical importance.”

A group called Protest Against Child Unfriendly Budget said it was organising a protest march on September 19 next in Dublin.