Taxing time for families

One way of doing it is to allow family members to pool some proportion of their tax-free thresholds. We should not allow total pooling because household living costs are reduced by economies of scale (two people can live cheaper than one). If one person needs, say, $12,500 for subsistence (the current welfare minimum), two people living together do not need (2 x 12,500 equals $25,000) to achieve the equivalent standard of living. Most “equivalence scales” suggest they need about 1.5 times what a single person needs (say $18,750), although the welfare system defines subsistence for a couple as slightly more than this ($20,169). Ideally, therefore, the principle that we should not pay tax until we have earned a subsistence income would translate into a tax-free threshold of around $12,500 for a single person and something around $19,000 plus for a couple.

Under Dwyer’s proposals, it would be for each family to choose how it wants to be assessed. Many working couples would presumably prefer to continue filing separate tax returns so that each can retain their own tax-free threshold. They would be free to do so. But many couples where there is only one earner might prefer to transfer part of the threshold of the non-working partner to the working partner. And if children were also given their own thresholds - as Dwyer recommends - part or all of these could be transferred as well.

The welfare system defines the subsistence income for a family of two adults and two children as $27,335. Currently, assuming only one earner, we tax such a family on every dollar earned over $6,000 and then pay them some, all or even more of this money back through Parenting Payment and Family Tax Benefit. Under an income sharing tax regime, however, we might allow the principal earner to earn $12,500 (the new single person threshold), plus say two-thirds of the partner’s threshold (another $8,000 or so), plus two child thresholds (or tax credits) of, say, $4,000 each - a total of $28,500 before paying any tax. The quid pro quo, of course, is that they would receive no additional welfare top-ups.

There is a pressing need for some fresh and radical thinking about tax, welfare and incentives as they affect families, and Dwyer’s paper makes a compelling case for recognising family income sharing for tax purposes. His arguments and proposals should be central to any future discussion of how to achieve a fairer and more sensible income tax system in this country.