Howard’s family tax policies and the First Child Tax refund

Patricia Apps, University of Sydney

Women with young families work much longer hours in total, at home and in the workforce, than any one else. Those who stay home average around 80 hours per week, and those who enter the workforce, average around 90 hours per week.

These excessive hours are due to inadequate assistance for families with children aged 4 and under. Families in this age group receive only a very small fraction of the cash and in-kind assistance given to older families.

The Howard Government’s promised ‘First Child Tax Refund’ will not make a difference to this situation. And it will provide little or no assistance for many low-wage two-income families.

Howard’s family tax policies have been consistently biased against low and median wage two-income families and do little to help low-wage single-income families. The First Child Tax Refund policy is biased against the same families.

It is a myth that the Howard Government has given ‘battling’ families a fair go.

Howard Family Tax Policy is particularly detrimental to the low wage family.

Under the proposed scheme, families with a mother on a low wage receive no more than $500. And if the mother earns more than $25,000 pa for full-time work before the birth of the first child and returns to full-time work, the family receives nothing.

This is a classic Howard Family Tax Policy. The single-income family receives a benefit, which is withdrawn if the mother works. This type of policy is particularly detrimental to the low wage family. For example, a single-income family on around $30,000 receives Family Tax Benefits, which just exceed the family’s taxes, and yet these benefits can be almost entirely withdrawn if the mother works.

Take the following example. Suppose the father’s income is $29,857 pa (the lower family income threshold for Family Tax Benefit (FTB) Part A) and the mother is able to earn $26,000 pa for full-time work. Suppose that the family already has one young child and a new baby arrives after July 1, 2001. The mother faces a choice. Should she stay at home or go back to work as before?

Table 1 shows what happens to this family using current tax scales and Family Tax Benefits. Column 1 lists the family’s taxes and benefits when the father is working and the mother stays at home. Column 2 shows the effects on the family’s taxes and benefits if the mother goes out to work full time.

If the family is single-income it pays $5,785 in income tax and the Medicare levy, and it receives $9,162 from FTB Parts A and B. Row 4 of the table shows the family’s income, net of taxes and benefits, as $33,234, a gain of $3,377. If we include a conservative estimate of the family’s GST, say 5% of net income, the family’s gain falls to only $1,715. In other words, a single-income family on this very low income receives family benefits which are almost wiped out by direct and indirect taxes and the Medicare levy. Howard’s family tax policy can hardly be considered generous to this family.

Table 1: Taxes and Family Benefits Under 2001/02 Rates
Annual incomes, taxes and family benefits Husband only working: $pa Effect of wife working: $pa
Gross income 29,857 26,000
Less tax + Medicare Levy –5,785 –4,570
FTB Parts A and B 9,162 –7,103
Net income (1+2+3) 33,234 14,327
Less GST –1,662 –716
Effective average tax rate –0.06 0.48
First Child Tax Refund 836 –836
Final net income (4+5+7) 32,408 12,775
Effective average tax rate –0.09 0.51
 

Now look at what happens if the mother goes out to work full time. She pays $4,570 in income tax and the Medicare levy. She loses $7,103 of FTB Part A and Part B. FTB Part A is withdrawn at a rate of 30 cents in the dollar up to the base rate and FTB Part B is withdrawn entirely beginning at earnings of $1,679. Over an income range of almost half her income she pays effective marginal tax rates of 60, 77 and 47 cents in the dollar (see Table 2 below). Her net income is reduced to $14,327. Again, making a conservative estimate of the GST she is paying, her total tax bill plus loss of benefits is $12,389, almost half her earned income.

Taxes on the additional income, together with the loss of almost all family benefits, leaves the mother working full time with barely enough money to pay for child care using government approved care, which is the only way she can access the Government’s Child Care Rebate. So she will probably find child care in the informal sector and get no benefits, like almost two thirds of working mothers. If she does claim Part Rate of Child Care Benefit, this will cover less than the tax she pays on the additional income earned to pay for the child care. If she stays at home, she can provide full care herself for both children, untaxed.

The First Child Tax Refund has the Howard hallmark—a benefit that is taken away as the wife increases her hours of work.

This is the situation before the introduction of the First Child Tax Refund. How does this new policy help this family? If the mother does not return to work, the family’s refund is $836. If she does return to work, the family loses this refund—the family gets nothing.

The great irony is that the Howard Government sells its family tax policies, the First Child Tax Refund included, as giving choice to women. In fact it is robbing women in lower income families of choice—the choice to improve their family’s prospects and standard of living now and in the future by going out to work.

A central feature of the First Child Tax Refund scheme is that it increases the true or ‘effective’ marginal tax rate (EMTR) for a prospective mother earning over $25,000. Up to the cap $2,500, the increase in the rate is equal to 1/5 of the tax paid in the base year, divided by her base year salary or wages.

For the low wage family we have considered, the scheme raises the mother’s EMTR by 3.2 percentage points. This rate, together with the EMTRs she already faces, produces an extraordinary profile of final EMTRs, as shown in Table 2, column 4.

Table 2: Effective Marginal Tax Rates on Second Income, 2001/02
Wife’s Taxable income Income tax MTR MTR + FTB EMTR Final EMTR
$0–$1679 0 0.30 0.35
$1679–$6000 0 0.60 0.65
$6001–$10853 0.17 0.77 0.82
$10854–$14503 0.17 0.47 0.52
$14504–$20000 0.17 0.17 0.22
$20000–$26000 0.30 0.30 0.35
 

Column 1 of the table gives the wife’s taxable income and column 2, the marginal tax rates (MTRs) applying to each band of income. Column 3 shows the EMTR the wife faces due to her MTR on income and the rate of withdrawal of FTB Part A and Part B. Column 4 adds on the Medicare levy (1.5 cents in the dollar) and rate of withdrawal of the First Child Tax Refund, 3.2 cents in the dollar.

Like FTB Part B, the First Child Tax Refund has the Howard hallmark—it provides a benefit for the family that is taken away as the wife increases her hours of work. The scheme therefore increases her EMTR, in this case, by 3.2 cents in the dollar, and raises her effective average tax rate to 51 cents in the dollar.

Economics research shows that this kind of family policy shifts the tax burden disproportionately to working married mothers in low and median wage families. The effect of this, in the short term, is to reduce employment and family saving. In the longer term, it undermines economic growth, reduces fertility and creates a more unequal society.

Patricia Apps is Professor in Public Economics in Law in the Faculty of Law at The University of Sydney

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