Most of the reforms proposed by the Henry Tax Review appear to have died a quiet death. In his recent article on inequality in The Monthly, Treasurer Wayne Swan does not mention the Henry Review at all, even though he trumpets the “quiet revolution underway in recent years in our tax and transfer system to ensure relief to those who need it most”, with more progressive reforms in the offing.
One of the key conclusions of the Henry Review is that the tax and transfer system is too complex. The Review proposes reducing the number of income tax rates and thresholds, and the number of means tested payments for families, pensioners, carers and others. However, as the economist Patricia Apps has pointed out, the Review does not propose to alter the basic architecture of the tax and transfer system – especially as it impacts on families with children – but rather to consolidate it.
Is our tax and transfer system really so effective in terms of promoting equity and fairness, while at the same time maintaining incentives for people to work? Apps argues that families with children are faced with a highly inequitable tax-transfer structure in two respects. First, it is not families with the highest incomes who face the highest effective marginal tax rates – the proportion of an extra dollar earned that is lost through taxes on incomes and withdrawal of means-tested Family Tax Benefit (FTB) – but families on average incomes or lower.
Effective marginal tax rates under the Australian system take on an inverted U-shape: low at very low levels of income, rising to their highest point towards the middle of the income distribution, and then falling towards the top. This is arguably inequitable, and acts as a disincentive for families with children to earn more.
The system is also structured so that second earners, typically women, may be faced with high tax barriers in seeking to enter paid employment. In particular, reforms implemented by the Coalition government under John Howard have been seen as encouraging partnered mothers give up paid employment and remain in the home. “Quiet revolutions” notwithstanding, Labor governments since 2007 have not tinkered much with this status quo.
What’s more, while child poverty in Australia is lower than it was in the early 1980s (at least in part because family payments were made more generous), about a tenth of Australian children still live in poverty, and this rate has not has not changed greatly since the turn of the millennium. Do Australians really have the tax and transfer system they deserve, and is there no scope for improving it?
Would a system of universal (as opposed to means-tested) family payments, paid as a right to every parent with respect to the children they care for be fairer and more equitable? Radical changes to tax and transfer systems are difficult to imagine in the current political environment, where every proposal for marginal changes is hotly debated.
However, a few points are worth raising.
Giving all families a universal family payment may appear expensive, but that depends on what it replaces (for example, FTB, which is also expensive). A universal family payment would, by definition, go to better-off as well as poorer families, but this could be partially clawed back by making it taxable at the marginal rate of the highest earner in a couple (FTB is currently not taxed), which could produce positive effects in terms of more progressive effective tax rates, as well as gender equity.
A universal family payment would likely be popular among families with children, because it would confer unconditional recognition of the importance to society of raising children. Furthermore, depending on its size, a universal family payment could reduce the proportion of children living in poverty. A system with universal payments would also be cheaper to administer than the current means-tested system.
The detail of a universal system of family payments needs to be debated. How much should each child get? Should children in lone parent families get more? Should it replace or complement a means-tested system? Would other tax reform be necessary to pay for it? Whatever system were proposed, there would be losers as well as winners from the reform, possibly including poorer families whose incomes would have to be protected. Complexities – such as the interaction between family payments and youth allowance or child support – would need to be considered.
Nonetheless, our early estimates suggest that a reasonably generous universal family payments system may indeed be affordable. A universal payment of $6,000 per year per child, plus $5,000 for each lone parent, would cost about $31 billion (at 2009-10 prices). This compares with a cost of $16 billion for FTB. However, if the payment were made taxable and income tax rates for people with high earnings were adjusted upwards, it could be implemented at little or no net cost to Treasury. In other words, fiscal issues in implementing a universal family payment are not insurmountable. The real challenges are political.
Perhaps it is no bad thing that the Henry Review, which did not propose a radical overhaul to the current system, died a quiet death. Its demise has left a space for debate on deeper reform of income taxes and family payments in Australia than either Ken Henry or Wayne Swan have so far contemplated. That debate needs to begin.