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Tax cuts will make family benefits worse, here's some tips for reform

By Peter Davidson - posted Monday, 12 January 2004

One of the big policy debates in the pre-election period is how best to improve the living standards of Australian families.

A number of options are being debated, including:

  • to "give back" to personal income taxpayers, any "spare" Government funds through general tax cuts;
  • to raise tax free thresholds for families with children;
  • to replace existing family assistance payments with a single payment at the same flat rate for all children.

ACOSS believes that the best way to lift financial stress from Australian families is to improve the payments such as Family Tax Benefit that help with the costs of raising their children. Across-the-board tax cuts offer too little and cost too much. Financial support should reflect the basic minimum costs of raising children, not some arbitrary judgement from Canberra about what families need. These costs vary from one family to the next. So replacing existing family payments with a single flat payment for all families, as advocated by some, would be a backward step.

It takes just a moment’s thought to realise that across-the-board tax cuts are not the most cost-effective way to help families with children. Many of the recipients of across-the-board tax cuts have no dependent children. Tax cuts that are spread thinly across about ten million taxpayers provide little relief at high cost. For example, an across-the-board tax cut equal to $10 a week for an average wage earner would cost more than $5 billion a year. That would leave a gaping hole in the Budget when basic services like hospitals and schools are under-resourced.

Moreover, about a quarter of Australian households, including all of the poorest families, pay no tax and do not benefit at all from tax cuts. About 1 million children live in households that would not benefit from a tax cut.

Others argue that a bigger boost could be given to family incomes if tax cuts were concentrated on families, for example by introducing a special system of tax-free thresholds for families with children. The Family Tax Benefit already does this, in effect. For example, a single-income family with two primary-school age children pays no tax on the first $40,000 or so of its gross income due to the offsetting effects of this Benefit. Even if the family claims the payment as a direct family allowance payment from Centrelink, as 90 per cent choose to do, the effect is the same. The family receives more income from government than it pays out in tax until it earns more than about $40,000.

Governments have a habit of regularly restructuring family allowances and giving them a new name. Family Tax Benefit (Part A) is the old family allowance system redesigned three years ago so that recipients can obtain it through either the Tax Office or the social security system.

Whatever it is called, our 70-year history of family allowances is very strongly supported by Australian mothers. It is not regarded as a "welfare" payment.


Together with the Youth Allowance for children over 16 years, the Family Tax Benefit (Part A) is the most cost-effective way to help families with the basic costs of their children such as food, accommodation and clothing. These are sometimes called direct costs, to distinguish them from the income parents forego to care for children, which are called indirect costs.

Governments have a duty to help low and middle-income families to meet both direct and indirect costs. Improving these payments should be a higher priority for the major parties than another round of tax cuts, especially if those tax cuts are directed towards the top 20 per cent of taxpayers in the top tax bracket.

Meeting the direct costs of children.

A key feature of family and youth allowances is that their rates of payment are supposed to reflect the actual direct costs facing different families: for example large or small families, and families with young or older children.

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About the Author

Peter Davidson is Senior Policy Officer at the Australian Council of Social Service.

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