[Under the Coalition’s proposed parental leave scheme] “the woman working in the local chemist in Gippsland in regional Victoria would be subsidising the paid parental leave of the woman working in the bank headquarters in Collins Street in Melbourne”. - Minister for Families, Community Services and Indigenous Affairs, Jenny Macklin, in a speech on 17 July.
In the lead up to the election, all sides of politics are aiming to sell their paid parental leave policies to voters.
The Labor government’s $1.4 billion scheme is already in place and provides 18 weeks’ pay at the minimum wage, around $622 per week pre-tax. To be eligible, the mother must have received a taxable income of $150,000 or less.
The Coalition’s $4.5 billion scheme provides mothers with 26 weeks paid leave, at full replacement wage up to an annual salary of $150,000 (or a maximum of $75,000) or the minimum wage if greater. It will also include superannuation contributions.
The Australian Greens have recently endorsed the Coalition’s scheme and promised to introduce something similar, although capped at an annual salary of $100,000 (or a maximum of $50,000).
The opposition’s scheme is ambitious and more expensive than the government’s. But is Macklin right that it is unfair to low-paid workers?
Flow-on effects
The answer partly lies in how the policy will be funded and partly in how it’s structured.
The Coalition’s scheme is funded by a 1.5% levy on companies with taxable incomes over $5 million. Essentially Macklin’s argument is that this increased company tax will flow through to consumers, but the benefits will largely go to those women earning a higher wage. This is because under the government scheme, everyone is paid the same: the minimum wage.
But with the Coalition’s scheme, the higher your income, the more benefit you receive.
Under a future Abbott government, parents earning over $45,000 would get the bulk of the increased assistance. For example, a mother earning $100,000 would receive $50,000 over 26 weeks, or about 4.5 times the payment under the current government scheme. At the upper limit of $150,000, the new payment would be 6.7 times the current entitlement.
Along with this, as political blogger Greg Jericho notes in The Guardian, more highly-paid women are much more likely than lower-paid women to already have paid maternity leave.
This means it is likely the Coalition scheme would simply replace these existing schemes. So, for a highly-paid woman on $150,000, the net gain after deducting existing employer-provided entitlements might be between 2.5 and 5 times the current government scheme.
It is worth remembering, however, that lower-income mothers pay lower income taxes than higher-income families and receive higher family tax benefits. The Coalition proposal then would reduce some of that redistribution of tax and benefits, although the effect is likely to be small.
Who would pay for the company tax increase?
The increases for higher-paid women in the Coalition’s paid parental leave would be paid for out of an increase in the company tax. But wouldn’t this just affect shareholders?
There is a central issue here of what economists call “tax incidence”, that is, the question of who ultimately bears the burden of corporate taxes. According to United States Urban Institute most economic studies of corporate tax incidence acknowledge that capital will bear the bulk of the burden in the short run, but there is little consensus about what will happen in the long-run.
In fact, the Henry Review recommendation for a cut in the company tax rate to 25% was partly based on the argument that in a small, open economy such as Australia, the fact that the legal obligation to pay corporate taxes falls on shareholders is irrelevant, and the ultimate burden of corporate tax falls mainly on labour.
From this perspective, more corporate taxes results in less investment in the economy, and a smaller capital stock, which in turn leads to lower productivity of labour and, therefore, lower wages in the long run.
This argument is not universally accepted. But the well-regarded Tax Policy Centre of the Urban Institute and the Brookings Institute now treats 20% of the US corporate income tax burden as falling on labour, 20% on the normal return to all capital, and 60% on the supernormal returns to corporate equity (shareholders).
According to an article in The Australian from May this year, the four major banks are hostile to the Coalition’s parental leave scheme, warning shareholders and customers would ultimately pay for the $400 million-plus cost to the industry: “The banks will have to treat it as an increase in their cost base, which means passing it on to shareholders or customers.”
Responding to the Greens’ similar proposal last week, Australian Industry Group chief executive Innes Willox also argued that it would be unfair to consumers, who would pay higher prices.
Verdict
There are divergent views about who is burdened by company tax increases, but it is generally accepted that there would be some impact on wages and prices. So in this sense, it is correct to say that lower-income groups would pay for part of the proposed benefits to be received by higher-income mothers.
Review
This is an accurate account of the different funding mechanisms for the competing parental leave schemes.
It is correct to say there are divergent views on tax incidences, and it is difficult at this point in time to say how a 1.5% tax would be absorbed by business, and if it would be passed on through lower wages or increased prices. It is certain, however, that it is an additional cost to the businesses who need to pay for it in some way. It is unlikely that big business will reduce their own profits to cover this additional cost.
Depending on how business passes on the costs, it is hypothetically correct to say that lower-income earners could be indirectly subsidising higher-income earners. - Marian Baird.