I want to talk tonight about tax, and I want to start by complimenting the government on bringing forward a broad-ranging review into the tax system in their first term of government.
It is looking at all aspects of the tax system, and I am sure it will be a very detailed and comprehensive report, but tonight I want to focus on one particular aspect of our tax system, and especially on how it impacts families where one of the parents decides to stay home and look after their children. So I am focused on stay-at-home-parent families.
I believe the basic economic unit of our society is the family. We have always tended to congregate in families through different centuries and through different cultures and often, therefore, make decisions based within a family unit. Our social security system, our family law and our child support arrangements are all based on a family system and often assess family income and family assets jointly, but our tax system does not do that. Our tax system is almost exclusively focused on the individual with no regard to the income earned by the other parent in a family relationship. The tax white paper process, the better tax review, has put out an issues paper—apparently—and that issues paper rightly identifies that there should be two aspects of a well-functioning tax system. Firstly, it should be equitable and, secondly, it should be efficient. In my view, the tax system, as it currently stands, fails on both of those objectives when it comes to stay-at-home-parent families.
I want to start by focusing on the efficiency aspects, which are not often talked about in regard to family issues, but they are just as important as the equity issues. As I said earlier, I believe families make decisions as a unit. I think I am part of a team in my household. I think my wife and I come together to make decisions as part of that team. I am not sure if my kids are always on the same team as my wife and me, but at least my wife and I always try to make decisions for the best interests of our family. Because we make decisions jointly, if we face different marginal tax rates for an extra dollar that we might earn in the workforce, that will distort decisions about what we do in terms of who stays at home, who goes to work and how much we earn, and that will distort decision making within the family and come at some efficiency loss.
Right now, the breadwinner in a single-income family which earns $70,000 faces a marginal tax rate of 34½c in the dollar, whereas, if you have a double-income family where the parents earn $35,000 each, those parents only face a marginal tax rate of 21c in the dollar. That difference, that gap in marginal tax rates, has an impact potentially on economic efficiency. Large differences between what a single-income family and a family with a secondary income earn can have big impacts on parental decisions, making it more difficult for some families to maximise their household income, especially when employment opportunities are not equal for parents, and for those who live far from employment centres.
I make the point that, for parents who live a long way from the CBD, if our tax system forces them both to go into the workforce, they potentially can face two trips on the bus, the train or in traffic. They can spend double the time, sometimes two hours or more, away from their family—both parents spending that time away from the family. It would be much more efficient, both for our road network and for our public transport network, perhaps, if sometimes one of them exclusively went to the workforce and the other stayed home to look after the children.
But it is not just on the efficiency side that our tax system falls down. From a fairness angle alone, our tax system with regard to stay-at-home-parent families is deficient. A single-income family on $80,000 pays around $6,000 more net tax every year than a double-income family on the same income. A double-income family, indeed, can earn up to $172,000 a year before they pay the same average tax as a single-income family on just $86,000 a year. That is a really important statistic. A family, a household, on $172,000 has the same average tax rate as a single-income family on $86,000—a big, big difference in the financial resources available to those families but the same average tax rate. That breaches the principle of horizontal efficiency in our tax system, because we should treat people in similar circumstances in similar ways.
Various changes to income taxes and family benefits have meant that the impact of these issues on single-income families has worsened since 2007. We have had an increase in the tax-free threshold from $6,000 to $18,200. That has had an impact. And there was also means-testing of some family tax benefits in last year’s budget. Generally speaking, single-income families on average incomes have seen their position worsen by between $2,000 and $4,000 in the last eight years.
That means that we now have the fifth most discriminatory system in the OECD in regard to single-income families. In Australia, single-income families pay around 38 per cent more tax than dual-income families for an average household. In the OECD, the average is only 21 per cent. Indeed, around half of other OECD countries offer some form of shared tax arrangements which equalise this issue, and that makes our record much worse than those other countries.
Some say that a tax system based on an individual leads to more people in the workforce, but I do not see any rationale for that measure to be the primary driver of public policy. The countries with the highest rates of workforce participation are actually the poorest, because people have no choice but to work. It is correct, in theory, that a family based tax system may reduce the number of people working. The extent of that effect is an empirical question. Australia does not have a workforce participation issue of any great nature. We have the fifth highest workforce participation rate in the OECD. And, for women, Australia’s participation rates are above the OECD average for all age cohorts. This is hardly indicative of a crisis.
It is too simplistic to conclude that more people in the workforce means more taxpayers, higher GDP and greater overall wellbeing. That ignores the benefits of unpaid work in the family home. There are many benefits associated with stay-at-home parenting, but the prime benefit is its positive impact on the health and wellbeing of young children. Study after study demonstrates that full-time parental care is the best for young children and long periods in day care for children under the age of one can adversely affect their development in some circumstances. Results of this kind have been shown across a range of countries and impact in all studies, in various metrics such as cognitive development, school readiness, aggression, motor skills and propensity to illness. It is important to stress that these effects are, of course, on average. They do not mean that any particular infant is harmed by long day care or indeed that some children do not benefit from day care, particularly where their family life may be dysfunctional. Yet the evidence is stark, and the effects are consistent across many studies.
Given this strong evidence, it is inconceivable that more is not done to help stay-at-home-parent families. That is why, in my submission to the tax white paper, I have proposed that we make some moderate changes to correct the imbalance in the figures that I raised earlier in this speech. One of the issues that I raised was that, when the tax-free threshold was increased from $6,000 to $18,200 recently, that adversely impacted the relative position of state-at-home-parent families. One potential option is to simply allow all families to have access to two tax-free thresholds so that families, whether they decide to stay at home and look after their children or both parents go into the workforce, do not pay tax before $36,400. That would seemingly be fair. It would not completely correct the imbalance. It would not completely make our tax system neutral, but it would make it a more neutral decision to stay home and look after one’s kids.
I have had this policy costed by the Parliamentary Budget Office. It would cost around $1.5 billion a year, a substantial cost. But I have not had it means-tested. Those costings apply for all families with children below 18. I think that if it were implemented we would reasonably look at means-testing that and also potentially focusing it on the families with young children, where the benefits of stay-at-home parenting are greatest. The policy would benefit around 815,000 couples, or more than 1.6 million Australians.
A more neutral tax system will help a family have more choice in their work and non-work decisions. It may in fact encourage greater workforce participation because it will lower the marginal tax rate of the primary income earner. Moreover, this income-sharing policy that I propose helps return the choice of who works and how children are looked after to the people best placed to make that decision, the mother and father of the children. It would lead to greater self-provision by families to meet their own needs, resulting in reduced churn in the tax and welfare system. There are more than 1½ million single-income parents in Australia. I think that this is an important policy and that they should not be forgotten in the national debate.
