First, in Australia, both Labor and the Coalition are introducing/plan to introduce a form of paid parental leave to replace the baby bonus. Labor’s policy is set at the minimum wage and is therefore cheaper to the taxpayer and less onerous on the employer; the Coalition’s (which really is gold plated) will probably crowd out private provision and prove burdensome to small business. Both policies are bad ideas, although they are better than the baby bonus, as they (if you accept that this is a reasonable goal for public policy) will have eugenic, rather than dysgenic effects. That is, they reward breeding by people who are in work, rather than breeding by just anyone. It is not terribly kosher to say this, but broadening the tax base in order to pay for any sort of state (including a welfare state) via taxes requires the production of more taxpayers.
Second, when I pointed out that there is a policy alternative, and that the alternative actually involves a tax cut, I was surprised to find that many people – even libertarians/classical liberals – do not know what it is, or how it works. The alternative is ‘income splitting’, and if it is to work properly it needs to be combined with the provision of cheap childcare, preferably through a generous regime of tax deductions (including for help in the home). It is cheaper (considerably) than paid parental leave, but involves changing the way we think about welfare. Only one country has ‘the full package’: income splitting + cheap childcare via tax deductibility + tax breaks for couples with 3 children (but not, interestingly, for families with 6 children). That country is France (which means France is a lower tax country than it otherwise appears). France has the highest birthrate in the developed world, including among educated people (the group that applies cost-benefit analysis to the bearing/rearing of children with the most rigour, as demographic data across the developed world indicates).
Now, if you accept that population growth among the educated and employed is a proper goal for public policy (not everyone does, but it is clear that Labor and the Coalition both do, and there is cross-party agreement on these policies in France, too), here is how income splitting works (the most ‘numbers heavy’ part of the deal). The graphic provided here was produced by Mr Alan Barr, a Scottish tax lawyer of genius. I was lucky to have him as my tax tutor, with an eventual view to practising in this area. This is his Chambers profile, and this is his firm page. Mr Barr’s figures use real HMRC rates, which are available via HMRC’s website. The ‘personal allowance’ is what British people call Australia’s ‘tax free threshold’. To make the figures clearer, he has excluded the operation of National Insurance Contributions. This has the effect of making them look ‘more Australian’, as Australia does not have NICs.
As you can see, the first set of figures shows what happens now, particularly in a PAYE arrangement with few or no available deductions. The Bells finish up with a tax liability of £23,864, which in the expensive-to-live-in UK, will probably have the effect of forcing Mrs Bell into the workforce when her children are small, something now known to be deleterious, especially for the ‘squeezed middle’ (for some reason, both single parenthood and early childcare has no effect on the top quintile of the population; there is a mountain of data on this; no-one knows why). The Bells will then likely find themselves going backwards, as childcare is (a) expensive (b) overregulated, and (c) not tax-deductable.
Solution? Fewer children. People do not like being played for suckers.
In the second example, the Bells have undergone French-style ‘income splitting’, which reduces their tax liability significantly – to the tune of £10,116. As you can see, income splitting allows the apportionment of the higher earner’s income between the two parties for the purposes of tax efficiency. When combined with cheap childcare, it allows a reasonable split between childcare in the home, and paid childcare (whether in the home or outside it).
Effect? More children, and the understanding that society is not playing parents for suckers.
I have a stack of exams to sit (including one in Alan Barr’s subject, tax), so I have not discussed other implications of this policy (in France, for example, it has been observed that poorer families often prefer income splitting with a stay-at-home parent, usually but not always the mother; wealthier parents often prefer the cheap childcare option). I have written this post mainly as a public information service, so people know how the system works, as well as know that it is used in one developed country and considered seriously in others, as Mr Barr’s tax classes indicate.
May I also suggest that neither Labor nor the Coalition have been thinking very carefully when trying to develop Australian tax policy in this area?