Family Tax Benefit B – explained

Spog, who commented liberally on a post of mine a few days ago sent in this explanation of his comments on the effect of Family Tax Benefit B. It appears below the fold together with illustrative diagrams. They are posted with Spog’s permission and my thanks over the fold.

As per our earlier mails, I’ve attached a spreadsheet with a few charts in it. The best ones are probably charts 3, 4 and 5.

Chart 3
[photopress:Chart_3.gif,full,alignleft]

Chart 4 [photopress:Chart_4.gif,full,pp_empty]

Chart 5 [photopress:Chart_5.gif,full,alignleft]
They show the disposable income before and after FTB B is included for a couple with one child.

In each case, the couple has a fixed income (eg, $50,000) which is then split between them in various proportions. On the left hand side the income goes 100% to one partner, in the middle it’s split 50/50, and on the right hand side the income is all with the other partner.

In the “classic” tax arrangement (ie, without FTB B), the shape is an inverted “U”, giving the highest household income at a 50/50 split. You can see that FTB B over-corrects for this in both the $40,000 and $50,000 examples, giving more income to households that don’t split 50/50. Ideally, the function of this type of horizontal equity mechanism is to equalise the results, not reverse them.

The income splitting you mentioned does do this correctly, as did the old tax-deduction for a dependent spouse. For income splitting to be palatable to most people, you’d have to cap the extent to which this could occur. A cap is already in place with a fixed tax deduction.

I’ve cheated a little in the $30K example by not including the dole/parenting payment, which would still be payable at that income. It’s not a huge amount at this income level, so I left it out to make all the comparisons have the same components of disposable income (mind you, the $100,000 household does not get FTB part A as their income is too high)

I hope this makes sense, and that you can read the file at your end.

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