One of Labor’s proudest achievements is that it introduced compulsory super. A good thing too.
What a pity that when it did so it did it in a manner that provided much larger benefits to the rich than the poor. Super has a flat tax of 15% – or rather a range of flat taxes which mean that the degree of its concessionality is inversely proportional to your marginal rate of tax.
The Howard Government did something about this early in its life, introducing a super surtax on incomes over a certain level – though (from memory) its adherence to its promise of no new taxes meant that it adopted a means of collecting the tax which was more cumbersome than it need be. Be that as it may, as time wore on the Howard Government removed this surtax and has now greatly reduced taxes on super. All this while we hear about the need for ‘intergenerational equity’. Today super is even more concessional as a result – at least for the wealthy.
The result is twofold. Firstly, if one wanted to propose a policy to increase Australia’s savings, it is no longer clear that increasing super is such a great idea. That’s because once the money is in there, the government loses lots of revenue as a result, which lowers government saving.
Second, contrary to the rhetoric of some of its opponents, the Howard Government has not presided over huge personal tax cuts to the rich. But super has increasingly become a back door by which this has been done. A backdoor opened by Labor. What a pity.
So Labor’s proposals on childcare tax deductibility are a further disappointment – as Joshua Gans explains in Crikey! over the fold.
If it wanted the subsidy as tax breaks, it could have done so with refundable tax credits – rather than deductions.
Who pockets the child care rebate?
Joshua Gans writes:
Labor have announced that they will increase the child care rebate to 50 percent from its existing 30 percent. What this means is that working families will be able to claim 50 percent (up to a total of $7,500 per child) as a tax deduction. What is more, it will come quarterly.
This is a very significant change over existing arrangements. Actually, it is only this year that I, with an economics PhD, have been able to work those arrangements out and get a rebate. Previously, you had to have receipts and acknowledgements from many years before, that were claimed years later but only if you had filled in Form B of requisition C-182 and got your child to stand on their head for 90 minutes without complaint; or the equivalent thereof. So more transparency and immediacy is a good thing.
But will parents ultimately pocket the rebate? Well, yes and no. Yes, in the sense that it is in effect a subsidy to the industry and so parents, especially those about to have children, will likely see benefits from increased supply of child care centres.
But, there is also a no. The problem is that a rebate such as this has different impacts on families with different incomes. If you have a very high income, you will probably pocket your $7,500 per child. If you have a moderate income, youll also do relatively well. But if you have a low income, you may not pay enough in tax for this to matter as much.
Consider a family with two children in child care and both parents working. Then, even if you have no other deductions, under current tax rates, you will need a combined family income of $86,000 before being able to claim the maximum deduction. Under the proposed tax cuts by both parties, that figure will be even higher.
What this means is that high income families are getting a larger subsidy for child care than lower income ones. So if you were a child care provider, where would you set up shop? The investment equation is pretty clear.
Personally, I am all for thinking about interventions in child care as there are a number of distortions that make the work-home choice biased (especially with regard to tax implications). However, any rebate through the tax system will reflect the fact that richer folk pay more taxes and so get a larger benefit. It would be better to subsidise child care places themselves. While there are plans for such things within Labors overall policy, it is important to remember that the rebate, on its own, doesnt really do the job of targeting working families in need.