Split Income To Reduce Welfare Churn

We’re all familiar with the dictum, “In this world nothing is certain but death and taxes.” But as Will Rogers so rightly observed, “Yes, and the only difference between death and taxes is that death doesn’t get worse every time parliament sits!”

The first thing that should be said about taxation is that we need less of it, not more.

Australia’s welfare system – pensions, childcare, income support, jobseeker, health, education, etcetera – costs Australian’s taxpayers more than $500 billion per year. About half of the welfare is ‘fiscal churning’ – taxing people’s income and then giving some of it back in the form of welfare benefits.

Ideally, the solution is to only provide welfare for those who need it, and to end the tax-welfare churn for everybody else.

A good place to start is in the areas of childcare, parental leave, and family tax benefit payments.

‘Income splitting’ is a policy which treats, as the basis of taxation, the family rather than the individual.

Double-income families currently have access to two tax-free thresholds, whereas single-income households, by definition, have access to only one.

Income splitting would allow a couple to combine their incomes – regardless of each individual’s earnings – and then ‘split’ them in half for tax purposes. Each would then be assessed on an individual basis, beginning with the tax-free threshold, thereby reducing the amount of tax paid by the highest earning partner.

Consider the following scenarios:

Scenario 1:

A family with one wage-earner on $100,000 pa currently would pay $22,520 tax based on current tax scales viz:

First $18,200 of income: tax-free.
Next $26,800 of income ($18,201 – $45,000): taxed at 15% ($4,020).
Remaining $55,000 ($45,001 – $100,000): taxed at 30% ($16,500).
Medicare Levy (flat rate of 2%): $2,000

A total of $22,520 in tax paid to the Federal government.

Scenario 2:

A family with two wage earners each on $50,000 pa would each pay $6,520 viz:

First $18,200: tax-free.
Next $26,800 ($18,201 – $45,000): taxed at 15% ($4,020 tax).
Remaining $5,000 (from $45,001 – $50,000): taxed at 30% ($1,500).
Medicare Levy (flat rate of 2%): $1,000

A total of $13,040.

That is $9,480 pa less tax than the one wage-earner family, despite both families having the same income.

It is difficult to calculate the cost to the Budget of introducing income splitting as behavioural incentives are unpredictable. Income splitting would clearly make it easier for one parent to stay at home to perform a child-caring role.

Some estimates are in the order of $12bn per annum but these do not take into account the substantial savings from reduced childcare subsidies, reduced parental leave, and potentially reduced family tax benefit payments.

Paid parental leave currently costs Australian taxpayers about $5bn a year. Childcare subsidies cost around $15bn per annum. And the big one – Family Assistance (Family Tax Benefit Part A and Part B) – costs around $20bn.

Simplifying the tax transfer system would greatly reduce the amount of fiscal churn.

When it comes to the tax system, Australia has one of the most hostile systems in the world for single-income families.

Eighteen OECD countries – including France, Germany, Ireland, Luxembourg, Norway, Poland, Portugal, Spain and Switzerland, now have some form of income splitting, as does the United States.

Australia’s tax system effectively punishes couples who choose to do their own childcare by treating the individual income earner, and not the family, as the unit of taxation.

Many families prefer part-time work, informal care by relatives, or flexible arrangements that do not place their children in institutions for long hours.

The Labor government has made it abundantly clear that universal childcare – paid for by taxpayers – is non-negotiable. Maximising female participation in the workforce and childcare centres run only by approved childcare service providers are articles of faith on the Left. Labor’s recently announced ‘Three-Day Guarantee’ for childcare assistance is a central plank of its ‘cradle-to-grave’ welfare state mentality.

The stark contradictions between the taxation system, which taxes income earners as individuals, and the welfare system, which takes into account spouses and children when it comes to benefits because they are part of a family, are well-overdue for reform.