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Paid Parental Leave v Income Splitting

By skepticlawyer

Income splitting-AB's worked exampleTwo things have come to my attention in the last 24 hours.

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?

16 Comments

  1. Posted May 6, 2013 at 8:57 pm | Permalink

    “Solution? Fewer children.” Sounds like a good solution to me. I mean, seriously, if developed countries like Australia want population growth, it isn’t hard: there are probably about a billion people in the third world who’d be happy to leave. The fact that we simultaneously spend large sums of public money on (a) subsidising women to have children they would otherwise choose not to have, and (b) patrol boats, detention centres and the like to keep out people who want to come here and become Australians, suggests to me a deeply perverted set of policy preferences.

  2. Mel
    Posted May 6, 2013 at 9:47 pm | Permalink

    Charles Richardson,

    The cost of keeping people out may be as you say, but the cost of getting rid of the detention centres, patrol boats etc would include:

    1/ countless deaths at sea (remember 200,000-400,000 people died at sea in the mass exodus from Vietnam post the fall of Saigon)

    2/ A dramatic increase in piracy – pirates love refugees in boats even more than luvvies, rape and theft and murder were rampant during the exodus from Vietnam and will be again under your proposal

    3/ A huge pool of unskilled workers competing for low cost housing and low skill jobs with the local working class and the resultant tensions and occasional violence

    4/ The rebirth of One Nation or something similar. Note the anti-immigration UKIP came from nowhere to get 25% in the local council elections

    I’m something of a lefty luvvie myself, Charles, but Luvviness is no excuse for woolly headed thinking.

  3. Posted May 6, 2013 at 9:55 pm | Permalink

    They don’t have to come on boats – we could let them buy plane tickets. And bad as Sri Lanka is, there’s no sign of a refugee problem on the scale that would make much impression on the labor market.

  4. Mel
    Posted May 6, 2013 at 10:10 pm | Permalink

    AIUI, women are better off having children from ages 20 to early 30s. Children of older mothers (and fathers according to some research) are more likely to have birth defects and even if they don’t have a defect, are more prone to cancer, diabetes etc .. in adult life.

    If paid parental leave means women are less likely to delay childbirth, I’d call it a good policy on consequentialist grounds.

    The Gillard government’s scheme is far too stingy. I’d extend it to 52 weeks for each child but keep it at the min wage rate. Ideally only women aged 20-35 would be entitled to paid parental leave, again on consequentialist grounds, but I guess that would be politically unacceptable.

    Abbott’s scheme is bizarre. That man really is a silly monkey.

  5. Mel
    Posted May 6, 2013 at 10:16 pm | Permalink

    Charles Richardson @3

    Again, you aren’t thinking this through. There must be at least 100 million people who could (a) afford a plane ticket and (b) have a genuine claim for refugee status.

    In fact, by gaming the system practically everyone in an authoritarian state like China could have a genuine claim.

    Once again, it is obvious you haven’t thought this through.

  6. Posted May 6, 2013 at 10:50 pm | Permalink

    Even the Labor scheme is comparatively costly, as well as adding layers of bureaucracy to the system. If there must be some sort of demographic ‘prime the pump’ policy, the French system is considerably cheaper (indeed, one reason why it was adopted is because France had, and still has, a deficit problem).

    I am also given to understand that the Gillard government has somehow spent the surplus. Abbott will be no better, not with policies like this.

  7. Mel
    Posted May 7, 2013 at 1:14 am | Permalink

    Whether it makes sense or not for the Govt to spend a surplus or go into debt when growth is sluggish and unemployment is rising depends on what economic theory you believe.

    We probably need another 100 years of good quality macro data to sort this matter out.

    According to the Productivity Commission, the net cost of the Gillard government scheme is $AU 1.3 billion gross but only $AU 310 million net.

    Personally I think shoving a kid into child care before 12 months of age is gross although I’m not sure what the research says re harmful effects, so given the tiny cost of the scheme I’d extend it to 52 weeks and maybe even 104 weeks at half the min wage rate.

    According to media reports I’ve seen, the Abbott scheme would cost $AU 4.3 billion altho I’m not sure if that is net or gross.

    $AU 310 million is a small amount of money in a $AU 1.5 trillion economy. By way of comparison, Australia’s involvement in the war in Iraq cost over $AU 3 billion.

  8. Posted May 7, 2013 at 7:00 am | Permalink

    Sorry, I didn’t mean to hijack this into a debate about immigration. The point is that even if you’re quite happy with our current immigration policies, we can get us much population growth as we want by just opening the crack in that door a little wider. If we insist on paying people to have nice white Christian babies instead, I don’t like what that says about us.

  9. Posted May 7, 2013 at 9:58 am | Permalink

    SL @ 6 … What surplus?

  10. kvd
    Posted May 7, 2013 at 12:31 pm | Permalink

    The stated Liberal position is consistent with their general philosophy that the majority of benefits should flow to the higher income earners because they are seen to be ‘more worthy’. The Labor position seems consistent with their general ‘safety net minimum available to all’ approach.

    Both positions cost, and neither is any sort of magic bullet solution to a problem invented basically to gain votes or approval (or reduced disapproval) in their target constituencies.

    Income splitting has been around since Adam set up a dairy farm, or corner store, and ran it himself while his wife looked after the kids. It was called a ‘partnership’. What’s new-ish is the push to apply the principal of partnership to personal endeavour – salaries and wages. I say ‘new-ish’ because this really is on old favourite come voting time.

    Personally I don’t really care what the parties do, (although it would be great if somebody would explain how to actually increase the pie instead of cutting it up in different ways) but I’d really appreciate some honesty in the debate – which SL touched upon – and as far as I can see, it seems this policy of Mr Abbott’s is an attempt to ameliorate or extinguish his much commented upon ‘women problem’.

    And if I were a woman, I’d think twice about his statement that this policy shows that the Liberals ‘finally get women’. As if they also aren’t equally concerned with the overall direction this country takes, and can be bought for a couple of unfunded pennies.

  11. kvd
    Posted May 7, 2013 at 12:38 pm | Permalink

    .. and now I can actually read wot I scribbled, ‘principle’ not ‘principal’ in the above.

  12. Mel
    Posted May 7, 2013 at 12:51 pm | Permalink

    Charles Richardson:

    ” If we insist on paying people to have nice white Christian babies instead, I don’t like what that says about us.”

    Australia is already one of the world’s most multicultural societies. The Gillard government policy is not limited to white Christians, but thanks for lowering the tone of the debate.

  13. kvd
    Posted May 7, 2013 at 4:51 pm | Permalink

    Mr Abbott has now explained that we need to support ‘women of that calibre’ – effectively shooting himself, yet again, in the foot. Let’s just hope he doesn’t posess a ‘high capacity’ magazine.

    Really, I don’t understand why the Libs don’t just go out and buy a noddy doll.

  14. Mel
    Posted May 7, 2013 at 6:43 pm | Permalink

    Actually, Charles, I apologise for being so harsh on you.

    You’ve inspired me and the lads to name our middle aged garage Gothic punk band Nice White Christian Babies. We’d been tossing around names for weeks until you nailed it for us. Thanks bro’.

  15. conrad
    Posted May 8, 2013 at 5:35 am | Permalink

    I’m not sure the French scheme is cheaper (it would be good to have some real numbers with different assumptions) because the Abbott scheme is basically of a short duration, whereas the French scheme lasts for years. As it happens, I think the money spent over a longer term is better, since things like childcare (and well funded schools) are more important than getting a high amount in the short term.

  16. Posted May 8, 2013 at 7:59 am | Permalink

    I always thought that income splitting was linked to marriage rather than children. I suppose to really take advantage you need one person to not have any income and therefore have a lot of time on their hands. Might as well pop out a few kids if you’ve got nothing better to do. Of course feminists might take a dim view of government policy encouraging women to be financially dependant on their husbands, or one that further disadvantages single parents.

    The idea that such schemes encourage more children has never been the appealed to me. In fact it’s the main reason I’d be against such policies, I don’t think we need more people in the country, and we certainly don’t need more on the planet. However, I feel our society ought to do a better job at sharing the responsibility of raising children and not just lump it all on the ‘nuclear family’.

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