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

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.

However, they fail to meet the bare minimum costs of raising a child and contributes to child poverty in those families that have no income apart from social security. If family allowances are well below the minimum costs of children in these families, then either the children must go without or their parents must make sacrifices, such as missing meals.

ACOSS recently released updates of estimates of the minimum costs of children from research conducted by the Social Policy Research Centre for the former Department of Social Security. The researchers drafted minimum budgets for low-income families with children, taking account of the costs of necessities such as food, clothing, and so on.

The results, together with those of separate research into the costs of children conducted by NATSEM are presented in the table below, and compared with family allowance (Family Tax Benefit Part A) and Youth Allowance payments for children of different ages living at home.

Sources: DSS 1998, Indicative Budget Standards. AMP-NATSEM 2002, Income and wealth report. Centrelink data.
Notes: Family and youth payments include Family Tax Benefit Part A, Youth Allowance (for children over 16 years living at home), and the child's share of the family's Rent Assistance. The following payments are not included:
- Family Tax Benefit Part B and the Baby Bonus, because they offer additional help for parents who forego wages to care for a child at home, so are not generally available to low and middle income families with children.
- Parenting Payments, because these are only designed to meet the minimum living costs of the parent (hence they are paid at the same rate as unemployment allowances or pensions).
- Child Care Benefit, because there is no allowance in the low cost budgets for child care costs.
The SPRC Budget Standards only extend to age 14. A trend line has been added to extend them hypothetically to older children. Note that the resulting estimate for older teenagers is likely to be conservative. It is much lower than the equivalent figure from the NATSEM study. Assumptions, data and sources available from ACOSS.

Two features of this table stand out. First, family and youth allowances are significantly less than the minimum costs of children. Second, as we would expect, the direct costs of children (such as food) rise as they grow older but the payments do not increase as much as the costs of older children. In fact, many families receive less for a 17-year-old than they get for a 13-year-old. So there is a large gap between Youth Allowances for older teenagers and the costs of raising them. Public policy has concentrated on the needs of young families and neglected those with older children. Yet, as every parent knows, teenagers are expensive!

This would not be such a problem if all families enjoyed large increases in their incomes and falls in their housing costs as their children grew older. Unfortunately, for many lower-skilled or jobless parents who rent privately, this is not the case. They struggle to raise their older children and keep them in education.

Low-income families (earning less than about $40,000 to $50,000 per year) with teenagers older than 15 years generally receive Youth Allowance. But the level of this Allowance has fallen behind increases in family allowances for younger children over the past decade and a half. Low-income parents are expected to support a 17-year-old at home for just $85 per week (including their share of the rent)!

As a result of this and other anomalies in the social security system, many sole-parent families actually lose between $30 and $70 a week when their youngest child reaches 16 years.

The most severe child poverty would be alleviated, and the future prospects of teenagers from low-income families would be improved, if these anomalies were removed and Youth Allowances were set at a much higher level than family allowances for younger children.

Meeting the indirect costs of children

On the other hand, public concern about the financial pressures facing young families is soundly based. Young wage-earning families usually forego income so that one parent can care for a child full or part-time at home. This is exactly the time that many middle-income families face the added financial pressure of high mortgage payments.

The cost of this foregone income while parents care for their children is referred to as the indirect cost of children. These costs are quite different from direct costs like food and clothing. Indirect costs are the costs of sustaining parents while they care for children at home.

These days, patterns of child rearing for young children are diverse. While most mothers have returned to employment by the time the youngest child reaches primary-school age, many care at home full time for at least the first three years or so, and many opt to combine part time employment and part time care.

Employment status of mothers in 2000

The present social-security system offers only limited help with the costs of care for preschool-age children, whether at home or in formal child care. The main payments are Family Tax Benefit (Part B) for single income families, the Baby Bonus, Child Care Benefit, and Parenting Payment for those parents on the lowest incomes.

Family Tax Benefit (Part B) and the Baby Bonus are token payments. The maximum rate of FTB (Part B) for a family with a preschool-age child is just $78 a week, and the maximum Baby Bonus is about $50 a week, though most receive much less. These amounts are based on what the government felt it could afford at the time, rather than any objective assessment of the costs facing parents. They are also inflexible, providing little or no help to parents who combine part-time care and employment. They are poorly targetted. The partners of millionaires may receive both payments, at the maximum rate.

Parenting Payment is more than a token payment. It is paid to the main carer of a child in a low-income family, at the same rate as for unemployment allowances for an adult (around $175 a week for a married parent). So this payment is at least based on a clear benchmark: what the social-security system regards as the minimum cost of sustaining a parent while they care for a child at home. But it is restricted to families with incomes below about $30,000 per year.

No such payment is available to middle-income families, even in the period immediately following the birth of a child, when these families come under the greatest financial pressure. For at least the first three months or so after the birth, mothers are usually advised not to return to employment for the sake of their health and that of the baby, even if they wish to do so as soon as possible. Yet Australia, almost alone among the OECD countries, still lacks a national system of maternity leave or maternity benefits (apart from a small lump sum payment given to most parents after the birth of a child).

For those parents who wish to place their preschool-age children in formal day care, public support is provided through Child Care Benefit. This payment has an important dual role. It offsets child-care costs for parents and it gives the government financial leverage to ensure that child care services are accessible and of high quality.

Unfortunately, many parents cannot secure affordable, quality child care. The average "gap fee" for full-day care services is more than $50 a week. This is more than a low-income family, and many middle-income families, can afford. Moreover, there are long queues for child care in many parts of Australia. Parents in the know place their child on waiting lists before they are born!

There is a strong case for reform of the mish mash of payments that help with the indirect costs of children, especially to extend more help to middle-income families with preschool-age children. The complicated and inequitable Baby Bonus should be abolished. The other payments for parents caring for children at home should be redesigned to offer better and more flexible support for parenting, especially just after the birth (through some form of maternity benefit) and over the next three years.

However, replacing all of these payments and family allowances with a single flat payment, as advocated by some, would not meet the diverse needs of families in a cost-effective way. To offer exactly the same amount of help to families with different needs is false equity.

The families with the highest costs would be short-changed, especially:

• Parents with young children who need help with both child care fees and the cost of staying at home part time;
• Parents with teenage children.

The cost of children varies between families with different numbers of children of different ages, and between parents who care at home and those who use formal child care. Payments for families should reflect these costs. They should be based on the actual minimum costs of raising children, and the ability of different families to meet those costs.

Conclusion

An across-the-board tax cut is like scattering seeds into the wind. A well designed, well targeted boost to family assistance would be much less costly and more likely to bear fruit. It would reduce child poverty and relieve financial pressures on middle income families.

The highest priority should be given to:

• Improving youth allowances for teenage children in low-income families;
• Simplifying and improving payments that help with the costs of at home and formal child care for preschool age children in low and middle income families.