Families deserve a simpler method

The finance minister’s recent signals that tax-payer funded parental leave may be left out of next year’s budget due to the financial crisis will be a blow to the many passionate campaigners for the policy.  However, for those who are interested in a simpler, fairer and more efficient system of family payments it may be a blessing in disguise. 

Last week Treasury Secretary Ken Henry told the National Press Club that ending the overwhelming complexity of Australia’s tax and transfer system is a national reform priority. But if you think calculating your income tax is an extraordinary feat, try successfully negotiating the myriad of competing incentives and disincentives that make up the family payment system.

Depending on their income, parents may be eligible for Family Tax Benefit A, Family Tax Benefit B (designed to encourage stay-at-home mums), two different types of childcare subsidy (designed to encourage both parents to work) and the Baby Bonus.  To confuse matters further, means-tests kick in at a different level for each benefit, so a change in family income can render you ineligible for some payments but not for others.

Henry’s ‘root and branch’ tax review will attempt to sort out this chaotic jumble of policies.  However, the Productivity Commission’s proposed paid parental leave scheme will add yet another layer of complexity for families and tax reformers to unravel.

The Commission’s proposed payment of 18 weeks at the minimum wage will be taxable. It will therefore affect families’ eligibility for other payments such as Family Tax Benefit.  This also means that the actual amount a new mother receives after tax will depend on when in the tax year she has her baby.  Women with higher incomes may be better off if they opt for the less generous but untaxed Maternity Allowance that is to be paid to stay-at-home mums in place of the Baby Bonus.

If the tax and transfer implications are confusing, it only gets worse when we look at the policy rationale. Rather than being given a set of objectives and a brief to design policy to meet them, the Commission has been asked to design a set of objectives that justify the desired policy.

The Commission has identified improving women’s participation in the workforce as a key objective.  They argue that it is not the job of the government to provide incentives for mothers to enter the workforce per se, but currently there are so many disincentives that a policy to help women overcome them is justified.

But the narrow terms of inquiry prevent an investigation of whether it would be more efficient, or more effective, to simply remove the existing disincentives.

The interaction of the tax system – which take a bigger slice of your income as it increases – and the family payments system – which progressively reduces your benefit as your salary grows– mean that parents who don’t work or work part-time face an enormous disincentives to go back to work or increase their hours.  Second earners (usually mums) often face effective tax rates of more than 50 per cent.  Single parents entering work can face effective tax rates of over 75 per cent.  Anomalies like this mean there are big hurdles to jump for stay-at-home mums who want to move into part-time work, or for families who want to share care equally by both working part-time.

This distorts the decisions of women who would otherwise choose to work, or work more.  After weighing up the extra time spent away from the kids along with only a small after-tax increase in income, is it any wonder that many mums decide it’s just not worth it?

New research from the National Centre for Social and Economic Modelling shows that changes to the way Family Tax Benefit A reduces as income increases would more than halve the number of families facing these very high effective tax rates.  Other commentators have argued that the whole system should be scrapped in favour of a universal child payment which isn’t affected by parents’ work choices at all.  Reform of the current system may be more effective than a paid parental leave scheme in overcoming the obstacles to work which many mothers face.

Surely it makes more sense to sort out this mess first, before adding yet another layer of complexity?

Beyond this practical consideration, it is important to ask whether it is appropriate for government policy to provide encouragements and incentives for parents to structure their family and work arrangements in a certain way.  Families are best placed to make these decisions free from the interference of government policy.  No particular model of work and care should be privileged over another.

Workforce participation is only one of several objectives of paid parental leave, but the example is instructive.  To best achieve its objectives within a simple and equitable framework, any parental leave policy needs to be considered within the context of the entire system of family payments and family taxation.  The upcoming Treasury review is the appropriate place for this.  

Jessica Brown is a Policy Analyst at the Centre for Independent Studies, her report ‘Million Dollar Babies: Paid Parental Leave and Family Policy Reform ’, was released by CIS today.