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Tax disincentives for working mums should be removed

Trisha Jha | The Australian | 06 August 2014

Our system of family benefits disadvantages women — but instead of coming up with expensive new schemes to mitigate these disadvantages, let’s fix our existing policies.

The Productivity Commission is correct — childcare is a wicked problem for mothers who want to work. But as the PC’s recent draft report on childcare recognised, there are perverse incentives embedded in our tax-and-transfer system that could be improved. If the government is serious about both increasing female labour force participation and repairing the budget deficit, this is a good place to begin.

Spending on family payments was $32 billion in 2013-14. The bulk of this is concentrated in two areas: family tax benefits ($20bn) and childcare fee assistance ($5bn).

The government’s 2014 budget tinkered with family payments to deliver expenditure reductions. While reducing spending is a good thing, it does not necessarily fix the problems of perverse incentives and competing principles that underlie the system.

Secondary earners (mostly women) with children at particular income levels have disincentives to work as a result of the withdrawal of parts A and B of the Family Tax Benefit, a reduction in Child Care Benefit, and higher rates of income tax when they either return to work or take on more hours. The cumulative impact of the withdrawal of benefits and increases in income tax is known as ‘‘effective marginal tax rates’’ or EMTRs.

When the out-of-pocket costs of using more childcare, the price of which is increasing well above CPI, are added to EMTRs, the ­result is a system where it sometimes pays for people not to work as much as they could or would like to.

When this phenomenon is discussed in the context of unemployment benefits, the term ‘‘poverty trap’’ is often used. In the context of the family payments system, it is perhaps more accurately conceived as a ‘‘reliance trap’’ for secondary earners, as they are forced to rely on their partners both throughout their working age years and during retirement — to say nothing of their fortunes in the event of divorce.

This matters because those who bear the economic and financial cost of bad family tax and ­welfare policies are dis­proportion­ately women. And it matters to government, given that the Coalition is intending to pour an extra $2bn-3bn into its expansion of paid parental leave in the name of gender equity and workforce participation to ameliorate the effects of these costs. Family tax benefits ought to be reformed with the punitive effects of EMTRs in mind, with a particular focus on simplifying the income tests for FTB Part A. This tackles one part of the problem, which could also be supplemented by personal tax cuts.

Furthermore, the work/study/training test for childcare fee assistance should be more strictly aligned to the amount of care for which a family is eligible. The government should also consider re­framing childcare as primarily a workforce participation measure and reducing regulations accordingly. This should assist with the availability of childcare places — another barrier to workforce participation.

The more women are able to maintain a history of employment and the more they are able to work, the more superannuation they will accumulate. The government clearly recognises the gender equity problems with the lifetime super gap between men and women, which is why one of the key features of their expanded PPL is the inclusion of super paid out at pre-birth wages.

This is worthwhile, but a more effective way to deal with the super gap is to enable and encourage women to work more — by minimising the disincentives to work that are wrapped up in the $25bn of government spending.

It is not the period of parental leave that creates low labour force attachment and lower earnings for women — it is the downgrading of work commitments, either to part time or to a new job that is more flexible but pays less, that occurs when people decide to have children.

Some families are perfectly content with this, but for others the current system represents a barrier. It is a problem that can be addressed by fixing the existing disincentives rather than introducing more programs, which only add to complexity and poorly targeted expenditure.

Trisha Jha is a policy analyst at The Centre for Independent Studies, and author of Complex Family Payments: What it Costs the Village to Raise a Child, available at cis.org.au