Tax reform is generally evaluated based on efficiency, equity and simplicity. There is also sustainability, consistency, transparency and stability, but what is often left out of the equation is gender.
In KPMG’s submission on Tax Reform we argued that it was important to evaluate potential changes to the tax system through a prism of gender equity.
Underlying this thinking is the observation that one of the greatest single sources of productivity gain in our society is higher female participation in the workforce. We provided a number of specific recommendations and a broader evaluation of our tax system based on gender.
The use of joint and family income in the tax system and the transfer system
In the early 2000s our system of family and childcare assistance was changed significantly. Political discussion focused on different gender-based models of family contribution: the traditional breadwinner-homemaker, the primary-secondary earner and the dual-income model. The government of the day felt that the breadwinner-homemaker and primary-secondary models were being financially disadvantaged given the way in which family and child-assistance payments were provided. It was thought that this could be addressed by basing at least some payments on joint or family income.
Unfortunately this gave rise to certain traps when one takes into account the interaction of the transfer system and the tax system. They continue to this day. Thus some women, moving from three to four days a week, in particular circumstances have very high effective marginal tax rates when you take into account the additional tax on higher income and the loss of assistance payments. This effective tax rate could be as high as 70%.
There are clearly economic benefits in eliminating this trap, but there are strong social and ethical concerns. Although the political rhetoric of the time was that the system provided women with “choice”, the impact for many women was to deny choice as they remained out of the workforce for long periods due to the high effective marginal tax rates.
There is a deeper discussion here and it is a philosophical one. It concerns the role of an individual and the family as a unit of well-being. There will be different views. Some will be strongly held. But ultimately the most important unit of well-being must be an individual. It is the individual’s capability to achieve what he or she values which is important. That is not to deny that the family may be an intrinsic part of what the individual values and their own sense of well-being and capability could be linked to the family. But the important concept of the family, should not prevent us from looking at how individuals are impacted within the family. The economics of our system should not be geared to sacrificing specific individual well-being for an abstract notion of family well-being.
Our solution to the problem of high effective marginal tax rates is to base family and child care assistance on the child and not joint or family income. This is not inexpensive in the short term, but will provide considerable benefits in the long term with increased female workforce participation.
Child care costs
This is related. We believe that childcare top-up payments, that is payments by employers for childcare costs beyond Government assistance, should not be subject to Fringe Benefits Tax. This would be the case for all forms of childcare provided the payment is treated as assessable income by the care provider. This will have immediate benefits as employers have an incentive to offer childcare assistance as part of an employment package. Again, there are long term benefits from greater female participation.
Looking at broader initiatives and the system as a whole
Overall women are often in a different position to men when considering general tax initiatives. Women tend to have less superannuation savings and, although there is very little data, it seems they are more likely to derive interest income than dividends or capital gains. Women tend to have a greater portion of wealth in home ownership rather than other assets. Potentially, consumption taxation may impact them disproportionately.
These factors need to be part of the prism of evaluation. That does not mean they will be decisive ones, but they need to be considered.
Gender-based Intergenerational accounts – a measure of our progress
An additional recommendation in the KPMG Submission concerns the presentation of intergenerational accounts. One of these looks at lifetime income, taxes and transfers, both historical and estimates of the future benefits cut by 10 year age groups and gender. This will focus our attention on the progress we are making as a society.
Hopefully we will see an Australia that is becoming both fairer and smarter- as women take a more equal share in economic life. That is the vision splendid.
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