Craig Emerson (Rankin, Australian Labor Party) Share this | Hansard source

The core of the Families, Community Services and Indigenous Affairs and Other Legislation (2006 Budget and Other Measures) Bill 2006 increases the income test-free area for family tax benefit part A quite substantially. The government, in the previous year’s budget, had already decided to increase the free area from $33,361 to $37,500 and that was to take effect from 1 July 2006, but the budget brought down just a few weeks ago in May further increases that threshold to $40,000. Therefore, the effect is to push the operation of what are called effective marginal tax rates out further along the income scale. I would suggest that that has some merit because it means that over a fairly substantial range of income—in this case, $40,000—there is no withdrawal of the family tax benefit and, therefore, no contribution to effective marginal tax rates from that withdrawal over the income range of up to $40,000. When we are so concerned with encouraging workforce participation by women, this is a step in the right direction. It certainly, however, gives me an opportunity to make some observations about the family payment system.

Labor introduced a needs based family payment system to recognise the higher costs of having and bringing up children. Labor not only introduced that system through what was then called the family allowance supplement but today strongly supports the family payment system for lower and middle income earners. I strongly support the family payment system for lower and middle income earners, but there are some design features that have adverse consequences for workforce participation by women who have left the workforce to have a baby and are considering coming back into the workforce.

These sorts of problems have been articulated quite eloquently by John Head from Monash University and also by Patricia Apps. Effectively, they have demonstrated that the impediments to returning to work for second income earners, who are most typically women, can be very high in Australia and that the operation of the tax system in tandem with the family payments system means that there are very high effective marginal tax rates over relevant income ranges. What we mean by effective marginal tax rates is the amount of money that is lost per extra dollar of income earned as a result of the tax paid and the loss of benefits—in this case, the family tax benefits. It is probably worth me quoting from John Head’s article, which I think is a very good one. He says:

By strongly favouring single-earner families and disfavouring two-earner families, it should be reasonably obvious that we will end up with fewer second earners and many of these will work fewer hours.

What he is really saying is that the expansion of the family tax system has shifted the tax unit progressively away from the individual and onto the family. We can see some arguments for that, but there are real adverse consequences as well, as everyone in this parliament should appreciate. It means that, when a mother who has had a baby is considering coming back into the workforce, because of the family taxation unit rather than the individual taxation unit, she is adversely affected by the fact that her partner, her husband, is already earning income. If the husband is earning sufficient income to take the family above the income-free threshold, the benefits are withdrawn—in this case, at a rate of 20c in the dollar. To obtain the effective marginal tax rate, you add that 20c in the dollar to the relevant marginal income tax rate to get the total figure. That can be quite high. It gets even higher a little bit further along the income scale because, with the continuing of the phasing-out of the family tax benefit, you then hit a base rate of family tax benefit which applies, again, over quite an income range, but after a while that too is phased out. It is phased out not at 20c in the dollar but at 30c in the dollar. For many families, the taxable income will be such that the marginal tax rate will be 40c in the dollar.

If you are over an income range where you are losing 40c in the dollar through tax for every extra dollar earned plus 30c in the dollar through the operation of the final phasing-out of the family tax benefit, then the effective marginal tax rate will be those two figures combined, which is 70c in the dollar. Indeed, Mr Head goes on to say:

… Apps shows that EMTRs—

effective marginal tax rates—

rise to almost 70% at average income levels—

for women who seek to return to the workforce. He continues:

As a consequence … second-earners in low- and average-wage families pay up to 50% of their total incomes in tax, the highest average tax rates in the economy.

So Professor Apps and Mr Head are pointing out that mothers really get whacked when they seek to return to work as a result of the withdrawal of family tax benefit and the relevant marginal income tax rate. Mr Head makes some very interesting observations. He says:

While the workforce participation rate of women has risen over time to the current 75% of the corresponding male rate, hours worked by women have remained stuck at a mere 50% of male hours for the under-65s—one of the lowest rates in the developed countries of the OECD group.

He goes on to say:

If we are to meet the challenge of demographic change, it is obvious that we must somehow draw heavily on this reserve army of well educated, able-bodied but underemployed women.

I want to spend a little bit of time exploring the problem of relatively low participation of women in terms of hours worked per woman in the workforce. We have, as articulated in the Intergenerational report and in the Productivity Commission report on the economic implications of an ageing population, a real issue on our hands of population ageing, and that issue has been created by decisions that couples have made over the last 40 years. Fertility has been falling over that period after peaking in around 1961, at the height of the baby boom, when the fertility rate was around 3½ babies per woman. It is now down to about 1.8, so there has been a very substantial decline.

That slide in fertility is combined with the consequences of marvellous new medical technologies allowing people to live longer—and that is a great thing in a civilised society. Certainly one of the most important measures of prosperity in a developed country is the longevity of its people. That is all very good, but it does mean that we are going to experience having more than four million extra Australians over the age of 65 by around 2042 and a much smaller number of extra working age Australians. That means that we will have fewer working age Australians earning the incomes and paying the taxes to support those who are too old or too young to work.

Given that, as the Treasurer said, demography is destiny, there is not an awful lot that we can do about those realities. The die is cast. As a consequence of decisions made over the last 40 years, we need to get the greatest participation and the greatest productivity that we reasonably can out of those who are of working age. So that is why we are so interested in lifting the workforce participation, in particular of women who have had a baby and are contemplating whether or not to come back into the workforce. No-one on this side of the parliament—and, I suspect, no-one on the government side of the parliament—believes in trying to force women back into the workforce, but certainly we on the Labor side do not believe in putting obstacles in their way. It is the interaction of the family payment system in particular with the income tax system that has led to these obstacles being put in the way of women coming back into the workforce.

The other major obstacle, which is very topical today, is the high cost of child care. OECD research shows that Australia lags very badly behind in the provision or availability of affordable child care. Again, OECD research indicates that the best response that you can get in lowering the cost of child care is from lower and middle income earners. We do not do enough to remove that obstacle of the high cost of child care to women re-entering the workforce.

Denmark is a pacesetter amongst the OECD countries and, again, OECD research shows that, if Australia were to replicate the Danish experience of the availability of low-cost child care, our workforce participation by mothers would be much higher. So we would get very high returns from investing in child care. The member for Lindsay is right in her observations that the government’s child-care system is a shambles. It is chaotic and it is ineffective in achieving the sorts of objectives which are so important to Australia’s future.

The child-care benefit is actually a good policy. It was introduced in the year 2000, and when the coalition introduces a good policy I and others on the Labor side of politics will acknowledge that. It is a policy that continues to provide higher benefits to lower  and middle income earners, and then it phases out at higher levels of income. But during the election campaign in 2004 the government effectively reversed the benefits of that by introducing a child-care rebate which pays through the tax system 30 per cent of the out-of-pocket expenses of people accessing child care from approved providers. There is great inequity and arbitrariness as to what constitutes an approved provider, but that is a matter for another day.

This really means that higher income earners have the higher out-of-pocket expenses because they do not get the child-care benefit, and so the government is providing extra benefits to higher income earners through the child-care rebate. The consequence for workforce participation, compared with what you would get from an increase in the child-care benefit, is one of lost opportunity. You will not get the same responsiveness by increasing the benefits available to higher income women through the child-care rebate as you would through increasing the child-care benefit.

So enough on the child-care dimension of the argument. We now return to the question of high effective marginal tax rates. The truth of the matter is that, if you do have a family payment system that phases out at higher levels of income, then those phase-out rates, whatever they are, will contribute to the problem of high effective marginal tax rates. This legislation pushes the effective marginal tax rates further up the income scale by increasing the income-free area from around $33,000 up to $40,000. That does not mean the problem goes away; that just means that it is shifted. That is why we as policymakers need to think creatively about ways around this problem. It is interesting that Mr Head actually suggests:

The only real solution is ... to reverse the Howard policies in the tax unit area and return the personal income tax to an individual basis.

That is his opinion and he is certainly entitled to it. He then goes on to say:

For this purpose the means tests that currently apply to—

family tax benefit part A and part B—

would need to be removed or greatly eased. Child benefits would ideally become universal payments to all families, single-earner and two-earner alike.

Statistically or arithmetically, he is right, because if you do not phase out family payments then there is no contribution from them to effective marginal tax rates. But the problem is cost. If we are going to have a situation in the future of universality of family payments, that means that it has got to be funded from somewhere, and we know what that ‘somewhere’ is going to be: it is going to be higher rates of income tax on working Australians. So while you remove one source of high effective marginal tax rates—that is, the family payments system—you are then running around the corner and increasing personal income tax rates, which of themselves contribute to high effective marginal tax rates.

I have suggested in a book that I recently released, Vital Signs, Vibrant Society, that we could look at universality of family payments in respect of children under the age of three. Why did I pick the age of three? From discussions with Professor Peter McDonald and others, it appears from their work on demography that this is the critical time during which women are making those decisions on whether to re-enter the workforce. So my thought, and it is a contribution to the debate, is that we could consider a universal family payments system in respect of children under the age of three but thereafter have a means tested family payments system. It is an attempt at a little bit of lateral thinking. It does not go as far as Mr Head suggests, which is to have a completely universal family payments system, because his suggestion has real budgetary consequences. Those extra costs would have to be funded somehow and that ‘somehow’ would be higher rates of personal income tax.

We need to be careful, when redesigning the family payments system, that we do not simply increase marginal rates of income tax while we reduce the withdrawal rates on family payments, and that seems to have been what has been going on. I reiterate that I strongly support the family payments system for low- and middle-income earners but I do question fundamentally why mothers in millionaire families are able to obtain family tax benefit part B as long as they agree not to work. I thought the problem of population ageing and trying to increase workforce participation would suggest that we encourage women to work rather than pay them not to work. That is in fact what the Prime Minister is doing through the operation of family tax benefit part B. He is saying to very wealthy mothers, ‘If you agree with me to stay home and not re-enter the workforce, I will pay you $3,300 a year.’

I do not see why that should be a priority when we have had a debate here about appalling conditions in Aboriginal communities, when we know that so many kids miss out on a good education due to a lack of early childhood intervention and support for reading recovery programs in schools and when there are so many social problems, including the lack of affordable child care for low- and middle-income earners. I do not understand why it is a priority of the Prime Minister of Australia to pay $3,300 to the wealthiest women in this country as long as they agree to stay home. But that is this Prime Minister’s social engineering. It does remind us of the white picket fence and of his view that the place for women is at home rather than in the workforce, which works absolutely against policies designed to deal with the whole problem of population ageing.

We need to come up with policies that encourage greater workforce participation by women. My suggestion of a universal payment for women who have children under the age of three is one contribution to that debate. It would not be all that expensive, because 88 per cent of families already receive a family tax benefit as a consequence of the gradual easing of the means test on family tax benefits and, in effect, the nonapplication of the means test on family tax benefit part B because it is only applied to the income of the mother and if she stays home she gets that benefit. So 88 per cent of families get a family tax benefit and if we extend that to 100 per cent for children under the age of three it would cost roughly $1.4 billion. I think we could find those funds and therefore we would have as a consequence a great increase in workforce participation by mothers helping to combat the problem of population ageing in this country.

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