The tax issue keeping women out of work

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While sweeping changes such as stage 3 tax cuts spark debate on inequality, there are decades-old technicalities continuing to make work a costly choice for women with young children.

A higher tax rate can discourage people from working, especially when accompanied by an invoice for expensive childcare which ends up erasing much of that hard-earned money.

It’s easier to spot this disincentive when it’s spelt out in big government announcements on changes to tax rates and brackets. But there’s a specific measure called the “effective marginal tax rate” (EMTR), where disincentives can be more complex to pinpoint, but just as significant.

Treasurer Jim Chalmers says there are no changes to stage 3 tax cuts, but the budget will tackle energy costs.Credit: Alex Ellinghausen

The EMTR measures how much you pay in tax, accounting for government benefits you might be losing, too. In a paper to the Australia Institute’s recent revenue summit, University of Sydney professor of public economics Patricia Apps argues it’s a key measure when thinking about inequality.

Many benefits, including the low-income tax offset (LITO) and family tax benefits, are means-tested, meaning as your income increases, the amount you’re eligible to receive drops.

That’s all well and good but some of these benefits are means-tested according to a couple’s combined income rather than individually. And therein lies the problem for women with children.

For some women, it’s a personal choice to stay home and raise the kids. And with the move to paid parental leave instead of the gendered “maternal leave”, it’s becoming a more common choice for people of all genders.

“To reduce a benefit payment…because the lower earning partner earns too much is irrational and poses a significant obstacle for women joining the workforce.”

But women are still much more likely than men to take primary parental leave. Part of this is systemic: only 63 per cent of employers offer employer-funded paid parental leave. But men still only account for 14 per cent of the paid parental leave taken.

There are traditional ideas about gender roles which underpin some of that discrepancy. But there are also financial incentives. The gender pay gap has been decreasing, yet for every $1 a man makes, women earn 78 cents.

That means women are usually the secondary earners in a family. And it’s often that secondary earner who reduces their working hours or pulls out of work entirely when there are trade-offs with responsibilities such as childcare.

When a couple with kids decides whether to outsource childcare or do it themselves, they weigh up their personal preferences and which decision will leave them financially better off.

Family tax benefits are a key consideration for most. The maximum fortnightly benefit for each child under the Family Tax Benefit Part A ranges from $277 to $213, depending on the child’s age for households with a combined annual income of $62,634 or less.

For every dollar of combined income above $62,634 and up to $111,398, a couple’s family tax benefit reduces by 20 cents. Then, it begins tapering off by 30 cents for each dollar once the combined income exceeds $111,398 until it reaches zero.

There are also limits on the amount a couple can be earning before the family tax benefit is totally withdrawn, which vary depending on the number and age of children they have.

Because the Family Tax Benefit Part A is assessed on a couple’s combined annual income, a woman’s decision to work often increases the entire household’s tax burden through decreasing the amount the family can get in tax benefits.

Of course, the income of a woman’s partner is often a big chunk of why they might be pushed into higher income brackets. But it’s precisely because his pay is often a bigger proportion of household income that when push comes to shove, it’s the woman who will pare back her hours.

Moreover, the Family Tax Benefit Part B – another family benefit – is withdrawn or reduced when the secondary earner enters the workforce. As Melbourne Institute of Applied Economic and Social Research senior research fellow Barbara Broadway notes, more family benefits are paid when a family’s income is earned by one person, rather than two. “To reduce a benefit payment…because the lower-earning partner earns too much is irrational and poses a significant obstacle for women joining the workforce,” she says.

The secondary earner, usually the woman, faces a higher effective marginal tax rate because her income is reduced by her marginal tax rate and can reduce the family’s tax benefits. That means it’s usually more costly for most women to continue work.

If childcare is expensive, it makes even less financial sense for the secondary earner to continue or increase their professional work – only to pay for the childcare they could have provided themselves. Apps says this is reflected in data which shows a big fall in second earners’ labour supply when a couple has their first child.

This means a key component of giving women greater choice on whether to stay employed, besides the tax system, is to ensure access to childcare. Last year, the Mitchell Institute found more than a third of children between the ages of zero and four lived in a “child care desert”, with low-income families and those in regional areas disproportionately unable to access care. Whether through incentives to private providers or entirely government-run child care centres, access to childcare needs to be improved.

While it’s common to hear arguments against higher tax rates on upper levels of income based on efficiency loss and the increased disincentives it creates for people to work, it’s lower to middle income earners who are most sensitive to tax rates when it comes to hours worked.

Despite wages turning sharply higher once people reach the top 20 per cent of income earners, hours worked tends to flatten out once we move beyond the bottom 10 per cent of income earners. Apps maps out labour supply elasticities across income levels – showing the responsiveness of hours worked to wage increases – and finds increased wages for lower to middle income people are linked to a higher proportionate change in hours worked.

We need to address the high effective marginal tax rates faced by families which are disincentivising women who want to work from taking on more hours.

This reinforces the significance of effective marginal tax rates on work incentives, especially for secondary earners, and the need to reconsider how our tax system works.

Tax cuts are usually popular but come at the cost of government revenue to fund essential services and can increase inequality if done wrong. Given these risks, it’s worth considering whether tax policy changes are targeted in the most effective way possible. While the stage 3 tax cuts reduce the tax burden for people across the income scale, the reduction is disproportionately large for higher-income individuals – who are also disproportionately men.

If the argument for tax cuts is that they will incentivise people to work, they should be aimed more squarely at the income levels where we’re likely to see the biggest proportionate benefit and where it will give women greater freedom to choose whether to continue working.

At the very least, we need to address the high effective marginal tax rates faced by families which are disincentivising women who want to work from taking on more hours. This could be achieved through adjusting the rates at which family tax benefits are wound back or basing income tests for two-parent families on the primary earner’s income, which would incentivise secondary earners to work more.

As we debate the merits of the stage 3 tax cuts, we should also remember to interrogate long-standing tax disincentives standing in the way of women and a fairer society.

Ross Gittins is on leave

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