Family-friendly policies make for higher fertility rates

On a recent ABC Insiders Programme, Treasurer Peter Costello said that the argument for maternity leave was not about boosting fertility rates, but for assisting women back into work after they've had a child.

In one sense he is right - maternity leave is a social justice issue. But policies that assist mothers to continue working are also likely to boost fertility. This is the conclusion from research in Europe which observed that developed countries with tax, welfare, labour market and equal opportunity policies favourable to high rates of married female employment have experienced the smallest declines in fertility rates, and now have rates about 0.5 children per female higher.

It is a recent phenomenon, reversing the position before 1970. Various reasons have been suggested for it. It seems women are no longer prepared to trust their own and their children's future wellbeing wholly to their partner.

If falling fertility is indeed a concern in Australia, it is worthwhile examining how friendly our tax, welfare and labour market policies are to women continuing to work after having children. It is an issue which rarely gets an airing in political debate, because both main parties believe it has dangerously divisive elements which are more likely to lose rather than gain votes.

The issue has become polarised between traditional family or "homemaker" lobby groups on one side and feminists on the other. For more than twenty years, the former have been persistent lobbyists for "homemakers'" allowances, income splitting tax systems and reducing government assistance to childcare.

With recent interest in declining fertility, these lobby groups have sought to imply that it is working married women who are responsible, while women who stay home have much larger families. In fact, family size for working women averages 2.06, versus an almost identical 2.11 for women at home.

The traditional family lobbyists found a willing ear with the Howard government. As a consequence it has significantly raised the bar for working married women with children. Their work has become more part time, more casual, even during the late stage of the business cycle; child care has got less affordable; while male breadwinner working hours have got longer.

The restructured employment service, the Jobs Network, excludes assistance to married jobseekers whose spouse is working, unlike the former CES. Most of all, the Howard government has restructured the tax system to spread significant disincentive effects over a much larger range of family incomes.

Australia has always had an income tax system based on individual assessment of husband and wife, unlike many counties which taxed on a family unit basis, either by adding incomes to be taxed as one (Britain, Sweden) or by adding and then allowing notional splitting to tax as two individual incomes (USA, Germany). Whichever system is used, the net effect is that the secondary earner in a couple (usually the woman) is effectively taxed at the primary earner's marginal rate. With progressive tax systems, such disincentive effects can be significant to secondary earners, but much less so to primary earners, as most economists now agree.

In recognition of these disincentive effects, many countries abandoned their family unit tax systems in the 1970s in favour of individual assessment, at least for incomes earned from personal exertion. The USA introduced separate, lower scales for individuals (and sole parents) while maintaining income splitting, resulting in a contentious "marriage" penalty where two-earner married couples would pay less tax if they were not married.

Under current income tax scales in Australia, a taxpayer on $60,000 per year with a non-earning spouse would pay $15,580 or 26 per cent tax (ignoring spouse tax offset, any family tax benefit, Medicare levy and GST). A two-earner couple earning $35,000 and $25,000 would pay $10,760 or 18 per cent tax on their combined incomes.

It is this difference that has been the focus of the traditional family lobby, arguing that as the couples' joint incomes are equal, fairness demands that each couple should pay the same tax, either by allowing income splitting, or by government provision of special homemaker's allowance to a spouse (read woman) who "chooses" to stay at home. As a "bumper sticker" piece of lobbying, it has been highly successful. But it is deeply flawed.

Husband and wife enter implicit contracts as to how earning income, housework and child rearing are divided between them, to derive a desired level of consumption and savings. Housework produces an output which is traded within the household. Much of this output can be substituted by purchases from the market sector: childcare, takeaway meals, home decorating services, cleaners.

The traditional family lobby often argues theoretical cases where the well paid professional couple each earn equal incomes alternating working two and a half days a week. Perusal of ABS's Income Distribution and Time Use data show that the number of such arrangements is negligible.

Very few married women earn as much from an hour's ordinary time work as their husband earn from an hour's overtime, or the promotion which comes from working extra hours in managerial and professional occupations, even after tax. (Only in the lowest quintile of family income distributions where women are the main or sole breadwinners do wives' incomes exceed their husbands in any meaningful numbers.) Thus, there is already a bias in favour of men working longer or taking second jobs - where travel between jobs is tax deductible, unlike travel to work for the second earner - and women working less.

Income tax (and the goods and services tax) distorts these decisions on a highly selective basis. Production in the household is not taxed. When a wife goes out to work her wages are taxed, and if she then uses the net income to purchase substitute services, say takeaway food, the price she pays incorporates GST and tax paid on the wages of the employees who produce it. A perhaps unintended consequence is to discourage specialisation of labour and reduce GDP growth.

However, it is with the Howard government's Family Tax Benefit and Baby Bonus that the real disincentive effects arise, especially for low-income earners. For example, a family with a husband earning $30,000 and a wife earning $26,000, both in full time work, has a second child.

If the wife returns to work the family will lose almost $8,000 of family benefits which, together with the wife's own tax and Medicare levy of $4,600 results in an effective average tax rate of 48 per cent on her income, higher than the highest income earner. Howard's "choice" for women is rather like Hobson's: you can stay home and receive large amounts of taxpayers' money, or you can go out to work and receive very little after tax and loss of benefits for all the extra effort.

This rather absurd situation results from the tight targeting of family payments by means testing on both the wife's and total family income. Australia is almost unique in this approach to family assistance. Britain is starting to move down this path, prompting this comment, as reported in The Economist, from an OECD researcher: "For women with children there are quite high costs for every extra hour of work, and you're giving them an incentive to work less." He could have added: "and to have fewer children."

In our earlier example of the two couples on joint incomes of $60,000 per year, the reality is that they are far from "equal". Australia, unlike most countries, does not run a separate contributory social insurance system. Social security was merged into the tax system half a century ago, so income tax now substitutes for separate contributions.

Actuarially, two-earner couples are much less likely than single-earner couples or single taxpayers to be able to claim social security unemployment or sickness benefits or family tax benefits, or indeed separate single rate age pensions. This occurs because of means testing on the joint incomes of couples.

Other countries recognise this through lower contribution rates for the second earner in a couple, or, as in America, pay unemployment benefits to anyone who loses a job. In Australia, a working married woman (and her husband) pay the same rates of tax as any of the individuals in the following households: mother and adult son, father and adult daughter, two spinsters, gay or lesbian couples in committed relationships, or a group of young men or women sharing. All of them benefit from the economies of shared households yet none of them is denied eligibility or offered reduced benefits based on the income status of other household members. And you never hear the traditional family lobby arguing that they should.

This principal has been extended into other government services funded out of taxes, such as the Jobs Network. When the scheme was set up, the then minister, David Kemp, attempted to deny the service to anyone who was not in receipt of unemployment benefits, which would have excluded any unemployed person with a working spouse.

After complaints, service providers can now allow them access to job information, but they still have a substantial financial incentive to hold jobs back for benefit recipients. Other perverse incentives remain. The TV programme, A Current Affair, reported the case of a long-term unemployed man who could not access Jobs Network assistance because his wife was working. She gave up her job and became a welfare recipient herself so that his needs could be met.

It has sometimes been asserted that the old dependent spouse rebate, or its successor, Family Tax Benefit Part B is partial compensation for lack of access to unemployment or sickness benefits. The reality is that a parent in a two-earner family who loses a job could be out of work for 18 months or more and still not benefit, because there are no part-year claims, or risk having to pay the benefit back as is now occurring in frequent numbers.

The traditional family lobby often points to childcare subsidies as though these involved substantial payments to working women with children. The reality is quite different. A Fact Sheet issued by the Minister for Family and Community Services, Amanda Vanstone, acknowledges that a two-earner family on $70,000 per year joint income with one child in formal day care would be $2,000 per year worse off after tax and Child Care Benefit than a single-earner family with the same income, and that ignores all the other additional costs of a second earner such as transport, clothing, etc.

The reality is that only about one third of children in childcare are in the formal sector for which subsidies are available. A majority of working mothers use informal care - neighbours relatives or cash-in-hand operators for which no assistance is available. The average assistance for all children in care is just $850 per child.

The largest inequality, however, between single-earner and two-earner couples with the same joint incomes is in working hours. The latter almost always work much longer hours. Let's assume our single and two-earner couples on $60,000 each have 2 children, one under five. The single breadwinner works 40 hours a week whereas in the two-earner each parent works 35 hours a week. The single-earner couple pays $16,420 in tax and Medicare levy but receives Family Tax Benefit Part A of $2,059 and Part B of $2,752, or a net $11,609 or 19.3 per cent of income. The two-earner couple pays $11,660 in tax and Medicare Levy, and receives Family Tax Benefit Part A of $2,059, or a net $9,601 or 16 per cent of income. The single-earner family works 7.7 hours to pay tax (i.e. for public benefit). The two-earner couple works 11.2 hours. If a "bumper sticker" slogan were needed to highlight the unfairness in the treatment of two earner families, it should be: "How many hours a week does your family work to pay tax?"

With policies such as these which seek to penalise women with children who work, it seems likely that fertility rates will continue to decline and the growth in female employment will stall. This seems retrograde policy when the government's Intergenerational Report forecasts fiscal problems from an increase in aged dependents relative to working age taxpayers over the next 30 years. There is certainly need for reform, but while the Howard government remains captured by the traditional family lobby, it appears unlikely.