I had an interaction a couple of weeks ago with Kate Ashmor, President of Australian Women Lawyers in relation to the tax deductibility of child care. The interaction wasn’t terribly productive as Ms Ashmor’s responses were confined to pat responses arguing unempirical and mostly irrelevant points, but it did point to the entitlement mentality that Joe Hockey talked about recently (although in Joe’s world, the entitlement mentality exists within the ranks of the poor and disadvantaged, not the middle class or well off).
As Twitter doesn’t provide the best avenues for prolonged, intelligent debate, there are many things that irk me about the tax deductibility of child care (well actually tax deductions for a range of things, but child care was the topic du jour). So Ms Ashmor and her ideological confreres have a better understanding of making child care tax deductible, I’ll extrapolate on the exchange we had on Twitter and explain why tax deductible child care is champagne socialism.
For the purposes of this blog, I’ll assume that there’s no means-testing involved as I tried to draw her out on this issue but she failed to respond, accordingly I’ll assume she doesn’t support means testing (and most of the lobbying I’ve seen on this topic has been by well paid professional women).
1. It’s fundamentally inequitable
The problem with any tax deduction is that is favours high income earners, especially in a progressive tax system like ours (i.e. one that levies higher rates of taxation on higher levels of income), both directly and indirectly.
For the purposes of illustration, I won’t go into spousal income and base the example solely on the mother’s income. Let’s take a lawyer similar to Ms Ashmor. Let’s say that she’s a senior lawyer earning an average annual salary of $220,000 per annum. Now we’ll assume that the law provides for a maximum of $10,000 in child care fees to be deducted.
As $250,000 is above the threshold for the top marginal rate of income tax of $180,000, the deduction will be offset against income that would be levied at 45 cents in the dollar. Accordingly, a $10,000 tax deduction would reduce her taxable income to $210,000, saving her $4,500.
Now let’s take Ms Ashmor’s example of a nurse. According to www.payscale.com, a registered nurse with between 10 to 19 years experience (and in the demographic most likely to have children in child care) earns between $29,995 to $77,261. For illustration purposes I’ll use the higher figure. The income tax applicable for income between $37,001 and $80,000 is 32.5 cents in the dollar. So assuming our nurse has spent $10,000 on child care, her taxable income is reduced to $67,261, saving tax of $3,250.
So the high earning lawyer gets $4,500 back from her fellow tax payers, and the nurse gets $3,250, a difference of $1,250 more to the lawyer. I’d love for someone like Ms Ashmor to tell me how it’s equitable for a wealthy lawyer to get more tax payer support than a nurse on a lower income.
But remember how I said that there is both direct and indirect inequity? That’s because it’s not just about a bigger rebate from one’s fellow tax payers, but also related to the capacity to obtain the maximum rebate in the first place. Can our nurse actually afford to pay $10,000 in child care fees, or does she juggle it so she only spends $7,500. That means an even smaller rebate, whereas the higher earning lawyer is able to ensure that she gets every cent from the tax payer that is available. It’s even more stark for women on lower incomes where the capacity to pay is further reduced.
There’s also another form of indirect equity. The sole criterion for obtaining this tax payer largesse is having a child who uses child care. That means that people with no children can’t avail themselves of this benefit, and people with large numbers of children are entitled to a much larger share of it than those with few or no children. The effect that this has is that people with few or no children are subsidising those with larger numbers of children.
Going back to our lawyer friend, let’s say she has 3 young children in child care and avails herself of the full rebate per child, being $30,000. Her taxable income is now reduced to $190,000, giving her a tax rebate of $13,500. This is funded by other tax payers, over 90% of whom earn less than her (Matt Cowgill has an excellent blog post on income distribution here), most by a significant amount. This is a reverse Robin Hood where you rob the poor to give to the rich.
2. Child care increases productivity and the tax base
This next argument proffered by Ms Ashmor has a certain economic rationalist appeal to it, so gets initial sympathy from me. But is it backed up by empirical evidence? It would have a chance of surviving in reality if it could be proven that tax deductible child care actually created employment, as otherwise a mother returning to work is simply taking back work done by someone else in her absence, displacing them from employment and the ranks of tax payers. I suspect, but am happy to be shown otherwise, that the availability of tax deductible child care doesn’t materially increase the ranks of gainfully employed but merely shuffles deck chairs.
3. Child care as an employment expense
The next argument Ms Ashmor trotted out was that child care was an employment-related expense like uniforms or transport. I have to argue that this is a pretty feeble link. Firstly, having a child isn’t a prerequisite for having a job, like your uniform is. Secondly, those deductions are available to all employees in that class. Thirdly, if wearing a uniform is part of your job, it’s not optional – having a child is.
4. But there is empirical evidence!
When challenged on empiricism, Ms Ashmor linked this article from the Australian Financial Review referring to the Grattan Institute Report on changes to the tax system available here. The report is pretty well attack in this article in the Sydney Morning Herald for some of the reasons I’ve already raised, plus others. I’d also have to point out to Ms Ashmor that a report from a think tank (with obvious political and ideological biases) does not constitute empirical evidence.
5. But our population rate is falling, we need more babies, they’re tax payers of the future
I had to laugh when Ms Ashmor trotted out the Peter Costello line used in support of his baby bonus (another non-means tested cash splurge). As I pointed out to her, turning fiscal policy into natalist policy is not only hilarious, but an extraordinarily ineffective tool. If Australian women were making decisions not to have children purely on the basis of the tax deductibility of child care, then it might have some hope of working. But they don’t. Women have children for a variety of reasons, sometimes for absolutely no reason and the decisions that drive women not to have children are similarly diverse and unrelated to tax policy, take for example the Swedish longitudinal study showing wealth leads to less children in the New Scientist. Babies are still going to be born. The rate at which they’re born has basically nothing to do with the tax system.
The other point on this issue that I pointed out to Ms Ashmor, but which she probably wisely chose not to respond to, was that Australia has a high migration intake that more than makes up for a relatively low birth rates (but still not below replacement rates). Unless Ms Ashmor is arguing for a complete abolition of all immigration, our birth rate isn’t even on the radar as an issue.
Besides, arguing economic growth purely based on population increase is the demographic equivalent of a Ponzi scheme.
I have general issues with government child support as a whole but that’s a topic for another blog.
My view on this issue and on fiscal policy in general is in accord with the Right – ideally tax should be as low as possible, leaving more money in people’s pockets to make their own decisions on what to do with it. However, in Australia, both the Left and Right use tax policy a means of furthering their particular agenda. When the Left does it, it doesn’t bother me as much because it’s consistent with their ideology. But when the Right does it, it makes my head explode as it’s completely hypocritical.
Ms Ashmor and those of her ilk arguing for tax deductibility of child care should be honest about their motives and stop trying to cover them up with flimsy socioeconomic platitudes. They object to paying higher levels of tax and want some of it back. Child care is a fantastic lever because child rearing is a sacred cow in our society. But if they have an objection to a progressive tax system, they should come out and argue against it openly. Accusing people like me of inciting class warfare is facile and in fact disingenuous – wanting the less well off to subsidise those who are wealthier sounds pretty much like class warfare to me.