FAMILY INCOME AND TAXATION

 

A well functioning family is the greatest asset of any nation. It produces and nurtures our most valuable resource, our children. It cares for elderly relatives and provides an emotional sanctuary for all its members. The benefits to society of a healthy family are demonstrated most clearly by the costs incurred when a family breaks down Ė social security, legal, accommodation, medical, etc.

 

VALUE OF FAMILIES TO SOCIETY

 

Why should society support families in the raising of their children?

 

Some of the familyís economic activities include:

 

  • Producing and partly training the next generation of workers;
  • Providing the future worker with a name and basic legal standing;
  • Educating and socialising the young;
  • Providing nurture and shelter for the future worker until independent;
  • Delivering social welfare for its young, aged and sick.

 

These economic functions are mainly carried out outside the money economy and the national accounts. Over and above the measure of annual production (GDP) the family contributes and amount of wealth estimated to be around 60% of GDP.

 

HISTORY OF FAMILY ASSISTANCE IN AUSTRALIA

 

Until 1941, assistance to families in Australia was provided solely through a system of tax deductions. Then, in 1941, Child Endowment was introduced, the first cash payment direct to the primary carer. It operated with the assistance available through the tax system, which through the 1950ís and 60ís included deductions for such things as medical, dental, chemist bills, health and life insurance, home and water rates and educational expenses.

 

In 1976, Child Endowment and all tax concessions for children were replaced with a single payment direct to the primary carer, Family Allowance. Family Allowance was not means tested or indexed. This led to substantial erosion during a period of high inflation. At about the same time the Dependent Spouse Rebate replaced all previous deductions for spouses.

 

In 1983, the Family Income Supplement was introduced. This was an income-tested per child payment made to low-income families.The increasing emphasis on low-income families over these years, coupled with the fact that Family Allowance was now worth very little in real terms, led to the means testing of Family Allowance in 1987. This was the end of any form of universal assistance to families for children in Australia.

 

In 1994, the Dependent Spouse Rebate was replaced by the Home Child Care Allowance, a payment made directly to a non-earning spouse. Also during the 1990ís, indexation of all family payments was introduced.

 

In 1997, the Howard Government returned to the concept of family assistance provided through the tax system, with the introduction of Family Tax Payment (Part A) for children, and (Part B), for a non-earning spouse, and Family Tax Assistance (Parts A and B) for low-income families. These payments could be taken either as direct payments, or as tax rebates.

 

Today, following the restructuring of the tax system in 2000, family payments have been somewhat simplified into three main payments:

 

  • Family Tax Benefit (Part A): This payment combines the old Family Tax Payment (Part A) and Family Tax Assistance (Part A). It consists of a maximum rate, which is means tested and reduces at the rate of 30 cents in the dollar as at August, 2003, to a basic rate, which is again means tested.

 

  • Family Tax Benefit (Part B): This payment combines all rebates and payments previously made to single income and sole parent families. The payment is not means tested for sole parents and is means tasted only on the primary carerís income in a single income family.

 

  • Child Care Benefit. This combines the old child care assistance and child care rebate and is available on a means tested basis to those with children in registered child care.

 

The means-testing of FTB(A) creates a poverty trap for many low income families. In addition to tax of 30 cents in the dollar payable onincome earned over the threshold, they also lose 30 cents of FTB(B) out of the same dollar; an effective marginal tax rate (EMTR) of 60%.

 

 

BRACKET CREEP

 

Increasingly, middle income earners are finding themselves in higher and higher tax brackets. In fact, as incomes rise, in line with the cost of living, the value of the July 2001 tax cuts will be completely eroded. A study by Taxpayers Australia has concluded that by 2008, more than 35% of taxpayers will be in the highest tax bracket.

 

WAA believes that some form of tax indexation needs to be introduced, preferably based on a proportion of average weekly earnings, (eg: the tax free threshold applies to 15% of AWE, and so on up the scale).

 

This would provide a reasoned basis for the calculation of taxation, by recognising that, at a certain proportion of AWE citizens should not be required to pay tax, while at the other end, over a certain proportion (eg 175% ) the top tax rate should apply.

 

 

THE GST:

The redistribution of the tax burden in 2000, to encompass a greater reliance on indirect tax in the form of the GST, appears to have had a negative impact on many families, particularly those at the lower end of the income scale.

 

While recognizing that the package of assistance implemented at the time, particularly the Family Tax package, has gone some way to alleviate this burden for many families, WAA is concerned that there has been no authoritative research to assess the actual impact on families in real terms.

 

WAA further believes that one of the great burdens of the GST is its imposition on energy supplies (gas and electricity) and telephone services. The supply of energy and at least the provision of a single telephone landline service should be regarded as a necessity and be provided GST free.

 

FURTHER REFORMS

 

Means testing of Family Tax Benefit Part A - is in contradiction to the very nature of the payment, which is intended to recognise in some small way the impact of the cost of raising children, and the social benefit which families provide in performing this task. The level of income is irrelevant in this case. The appropriate comparison is with a taxpayer on the same level of income without dependants. There should be a basic unmeanstested family tax benefit that applies to all families.

 

Without this a higher income taxpayer with several dependants (eg wife and three children) is required to pay almost the same amount of tax as a single earner with no dependants on the same higher income. This is plainly unfair and offends against horizontal equity.Our current system fails to recognise the costs and responsibilities of child rearing to all parents and to accord every child some status within it.

 

The maximum rate of Family Tax Benefit Part B should not be reduced when the youngest child in the family reaches 5 years of age.The reduction of this benefit when the youngest child turns five gives the strong impression that the Government believes that when there are no pre school children in the family the household work ceases & the motherís work is over.

 

We acknowledge that when children commence school many mothers seek some paid work, usually part time, to supplement the family income or to resume their professional careers.We also acknowledge the Government's good intentions in easing the tax burden in the early years when the children are young and the mother is most likely to be at home full time.However, most parents believe primary school aged children are too young to come home to an empty house and they have very realistic concerns about those in the lower years of high school doing so also.

 

The maximum rate of Family Tax Benefit Part B (i.e. the rate currently paid where there is a child under 5 year of age) should apply to any taxpayer who has a non earning spouse

 

The income test on the primary caregiver for FTB(B) is too stringent. One of the great inequities of the current system is that many families receive no benefit from either FTB(B) or the Child Care Benefit. These families, usually on one and a half incomes, structure their paid work structure so as to ensure that one parent is always home with the child. This usually occurs when the secondary earner works night shifts or weekends. These secondary earners would rightly regard their main job as that of primary caregivers, or mothers.

 

WAA believes the current income test on FTB(B)does not take into account the reality of many womenís lives. It should be phased out much more slowly, to allow more mothers who work part time to have their primary role recognised.

 

 

PRINCIPLES WHICH SHOULD GOVERN FAMILY BENEFITS POLICY

 

WAA believes however that the tax and family payments system needs to be reviewed to simplify it and make it more equitable for all families regardless of how they structure their paid and unpaid roles.

 

Such a review should take into account the following principles:

 

        All family payments and tax benefits MUST take into account the number of dependants.

        The effect of the combination of tax and family payments should be neutral, ie: total net family income should as far as possible not be affected by the way that income is earned.

        A major priority at all times should be the reduction of poverty traps.

        Family payments and tax benefits should as far as possible be simplified and streamlined, taking into account the first three principles.

        As a matter of principle, WAA believes that a basic family payment and/or tax benefit should be available to ALL families with dependents regardless of income.

 

There are two possible methods of fulfilling these principles; the first through the transfer system, the second via the tax system.

 
Method 1: Single Neutral Payment: A single annual payment per child to replace the current basic rate of FTB(A), FTB(B) and Child Care Benefit. Such a payment would be available to all families with children on an equal basis. Whether that money is used to pay for child care, or to help recover the lost income of one parent who stays at home, is left to each family to decide.

 

Method 2: Family Unit Taxation: Under this method, similar to that which operates currently in France, each family would be taxed according to the number of units it supports. Under the system the husband, wife, handicapped child and eldest child in a sole parent family would each equal one unit. Every other child under 17 years or dependent student under 25 years would equal 0.5 units.


Total family income would be divided among the number of units, and the tax would equal that payable on each individual unit multiplied by the number of units.

The system is flexible enough to provide for different family types equitably. For example, in France, while the first and second child have a half unit value, a third or subsequent child is worth a whole unit.