AN EXAMINATION OF THE IMPACT OF THE FAMILY TAX INITIATIVE. Gillian Beer

Transcription

1 AN EXAMINATION OF THE IMPACT OF THE FAMILY TAX INITIATIVE Gillian Beer Policy Papers No. 3 September 1996

2 National Centre for Social and Economic Modelling Faculty of Management University of Canberra The National Centre for Social and Economic Modelling was established on 1 January 1993, following a contract between the University of Canberra and the then federal Department of Health, Housing, Local Government and Community Services (now Health and Family Services). NATSEM aims to enhance social and economic policy debate and analysis by developing high quality models, applying them in relevant research and supplying consultancy services. NATSEM s key area of expertise lies in developing and using microdata and microsimulation models for a range of purposes, including analysing the distributional impact of social and economic policy. The NATSEM models are usually based on individual records of real (but unidentifiable) Australians. This base produces great flexibility, as results can be derived for small subgroups of the population or for all of Australia. NATSEM ensures that the results of its work are made widely available by publishing details of its products and research findings. Its technical and discussion papers are produced by NATSEM s research staff or visitors to the centre, are the product of collaborative efforts with other organisations and individuals, or arise from commissioned research (such as conferences). The Policy Papers Series aims to provide input into current policy debates. It must be emphasised that NATSEM does not have views on policy and that all opinions are the authors own. Director: Ann Harding NATSEM, University of Canberra 1996 National Centre for Social and Economic Modelling, GPO Box 563 Canberra ACT 2601 Australia Phone: Fax: Client services hotline@natsem.canberra.edu.au General hotline@natsem.canberra.edu.au

3 1 Abstract It is estimated that the implementation of the family tax initiative by the Coalition government will provide assistance to almost two million low and middle income families at a cost of over $900 million per year. This paper examines the impact of the proposed policy on Australian families using the STINMOD model. It looks at how sole parents will fare compared to couple families, the outcomes for single versus dual income families and the outcomes for families with differing incomes and numbers of children. It also examines the proportion of the cost of the policy that will be spent on families in each state. Contents 1. Introduction Details of the Family Tax Initiative Methodology Results Conclusions Appendix References... 17

4 2 Author note Gillian Beer is a Senior Research Officer at NATSEM. Acknowledgments The author would like to thank Ann Harding, Simon Lambert and Josh Polette for their comments on an earlier draft. General caveat NATSEM research findings are generally based on estimated characteristics of the population. Such estimates are usually derived from the application of microsimulation modelling techniques to microdata based on sample surveys. These estimates may be different to the actual characteristics of the population because of sampling and non-sampling error in the microdata and because of the assumptions underlying the modelling techniques. The microdata do not contain any information that enables identification of the individuals or families to which they refer.

5 3 1. Introduction In early 1996 the Family Tax Initiative was announced as a key election promise by the Coalition and, in the 1996/97 Budget, details of its implementation were announced. The government estimates that the family tax initiative will provide significant assistance to almost two million low and middle income families and will cost over $900 million per year (Commonwealth of Australia 1996a). This paper uses STINMOD, NATSEM's publicly available microsimulation model, to assess the impact of the family tax initiative on Australian families. It looks at who gains and by how much according to the number of children, the family structure and the level of family income. It also estimates the cost of the policy by state. 2. Details of the Family Tax Initiative In its proposed form, the family tax initiative is designed to provide assistance for families with children aged under 16 years of age and children aged 16 and 17 who are in full-time secondary education. For each eligible child, a family may receive a $1 000 increase in their taxfree threshold. In addition, single income families with at least one child aged under 5 years may receive a further $2 500 increase in their taxfree threshold. Both the $1 000 and $2 500 increases are subject to sudden death income tests on the income of the parent(s). For the $1 000 increase in the taxfree threshold, the combined taxable income of the taxpayer and his or her spouse (if there is one) must be less than $ per annum with a $3 000 increase in this limit for each dependent child other than the first. The cutout for the $2 500 increase is $ per annum, with this limit also increasing by $3 000 for each dependant other than the first. All sole parents with at least one child aged between 0 and 4 years are eligible for the extra $2 500 increase, provided their income is less than the calculated threshold (starting at $65 000). For couples with a child aged between 0 and 4 years, their combined taxable income must be less their calculated threshold starting at $ per annum and the income of the spouse with the lower income must be less than the

6 4 cutoff for the Basic Parenting Allowance 1. Based on January 1996 rates, this level is currently $4 487 per annum. Benefits from the family tax initiative can be received in one of two ways - via the tax system in the form of an income tax rebate (referred to as family tax assistance) or through the social security system in the form of a fortnightly cash payment (called the family tax payment). A family is automatically eligible for the fortnightly cash payment if they receive the higher rate of family payment (previously known as the additional family payment). Other low income families are also eligible for the cash payment if their taxable income (which does not include maintenance income) from last financial year is less than the cutout point for the higher rate of family payment (which is calculated including any rent assistance). Families falling into this category include sole parents whose current maintenance income excludes them from receiving the higher rate of family payment and/or parents of 16 and 17 year old children who are too old to be eligible for any family payment and are instead receiving AUSTUDY. Parents receiving a Department of Veterans' Affairs (DVA) payment and who therefore receive the DVA family pension instead of the family payment, also fall into this category and are eligible for the fortnightly cash payment. 1 In determining whether the family is single income or not, if the family is eligible for the cash payment form of the family tax initiative then the single income status of the family is assessed on the spouse's current private income (not including any government benefits such as pensions or job search allowance, parenting allowance etc received by the spouse). If, however, the family is eligible for the rebate form of the family tax initiative, the spouse's assessable income for the single income test is based on his or her current taxable income (and therefore, includes any taxable government benefits received by that person).

7 5 3. Methodology The impact of the family tax initiative on Australian families has been simulated using STINMOD/95, NATSEM's static microsimulation model. The model uses a database of over families adjusted to reflect the Australian population (ie, the demographic, labour force and family characteristics) as at November It then applies the rules of major government programs including social security, income tax, AUSTUDY and Medicare to each of the families in the database to simulate the distribution of family incomes in Australia (Lambert et al, 1994). The payment rates and tax rates used are those as at January The income tax program rules have been altered to incorporate the new family tax initiative. New outcomes are then produced and compared to the base outcomes (without the family tax initiative). This paper compares the disposable incomes 2 of a family before and after the implementation of the family tax initiative. The difference relative to their old disposable income is the percentage change resulting from the new policy (ie the percentage change in disposable income 3 ). It should be noted that being a static microsimulation model, the results produced from STINMOD are only the 'first-round' effects of a new policy and do not include any behavioural change that may result from the introduction of the policy change (Lambert et al, 1994, p. 3). In modelling the family tax initiative in STINMOD, if a family with eligible children does not receive the higher rate of family payment or their last year's taxable income is too high to be eligible for the cash payment (ie their combined incomes are greater than the cutout point for the higher rate of family payment) then they are assessed for eligibility for the rebate. The income test for the rebate is based on their current taxable income and the rebate is assigned to the parent with the highest taxable income to ensure the family gets the maximum possible gain. The value of the family tax initiative for a family is calculated by determining the increase in their taxfree threshold - determined by the number, age and study status of their children - and calculating the income tax that the family would have paid on 2 A family's disposable income is defined as the sum of their private incomes plus any transfer income they receive less their total income tax paid (net of any rebates). 3 The percentage change in disposable income is equivalent to the following: (new family disposable income - original family disposable income) *100 original family disposable income

8 6 that amount. For example, if a sole parent with $ taxable income had three children aged 3, 5 and 7 years, the increase in their taxfree threshold would be $5 500 (calculated as 3 * $ $2 500 for a child aged 0 to 4). The marginal tax rate of 20 per cent applicable to this amount is then applied to obtain the value of the family tax initiative for this family - $1 100 per annum or a $21.15 per week increase in their disposable income. Note that the family tax initiative also includes income tests to be applied to the income of the dependent children (based on the child income tests used for the family payment). However, STINMOD is unable to model these income tests due to the lack of data on children's income. The simulation assumes that all children are dependent for income test purposes. The total cost of the family tax initiative (including both the rebate and the cash payment) is estimated by the Government to be $923.7 million per annum. Initial estimates using STINMOD suggested a cost of over $ 1 billion. Adjustments for takeup of both the rebate and the cash payment in STINMOD have been made so as to match the Government s estimate and the resulting estimated total cost of the policy by STINMOD is $923.6 million per annum. For the analysis in this paper, all eligible families - sole parents and couples with dependent children 4 - are ranked according to their total taxable income and split into ten equal groups known as deciles. Singles and couples without children are not included in the sub-population. Those in decile one are families with the lowest 10 per cent of taxable incomes. Conversely, decile ten contains families with the top 10 per cent of taxable incomes. Table A.1 in Appendix A lists the income ranges covered by each decile. 4 Note that for this analysis a child is counted as being dependent if they are aged between 0 and 15 years inclusive or if they are aged 16 or 17 years and in full-time secondary education. This definition of dependent is different to the 'usual' STINMOD definition which includes children aged 16 to 24 years who are studying full-time.

9 7 4. Results It is estimated that almost 71 per cent of all eligible families will benefit from the implementation of the family tax initiative. Almost 65 per cent of these gains will be directed towards families in the bottom half of the eligible family population. That is, over half of the total cost of the proposal will be spent on families with taxable incomes less than $ per year. Sole parents will have an overall average increase of $8.30 per week in their disposable incomes (a two per cent increase) while couple families will have a slightly lower average increase of $7.30 per week, or almost one per cent of disposable income (table 1). Table 1: Estimated average dollar increase and percentage change in weekly disposable income by family type Decile Couple with children Sole parent Average increase Percentage change Average increase Percentage change $ pw % $ pw % ALL

10 8 The family tax initiative will provide the greatest average percentage increases in disposable incomes to families with lower incomes. It is also these families who receive most of the benefits from the proposed policy. Forty per cent of the total gains will be received by families in the bottom 30 per cent of the eligible family population. These are families with taxable incomes less than $ As figure 1 shows, sole parents in the bottom ten per cent of the eligible family income distribution receive an average percentage increase of just over three per cent - the largest percentage change for both sole parents and couple families across all deciles. The average percentage changes then decrease with increasing incomes until the top decile, where the average percentage change is negligible for both family types. The greater number of dual income families in the higher deciles and the smaller proportion of families with young children (aged 0 to 4 years) partially explain this pattern of declining average increases 5. Figure 1: Estimated percentage change in disposable income by family type and decile % change D e cile of e ligible family taxable income Couple Families Sole Parents 5 Note that even if family composition was constant across all deciles, the average percentage change in disposable income will still fall as average income increases. This is due to the fact that, for a given increase in disposable income, the increase represents a larger part of the total disposable income and therefore a greater percentage change for those with a smaller income base (and therefore, in the lower deciles) than for those on higher incomes (who are in the higher deciles).

11 9 In general, couple families receive both higher average increases and greater average percentage changes in their disposable incomes than sole parents in the same decile. For example, couple families in decile four receive an average increase of $9.50 per week, a percentage change of 1.8 per cent, while sole parents in that decile receive on average $5.90 per week more, a 1.1 per cent change (table 1). Only in deciles one and nine do the outcomes for sole parents exceed those for couple families. In decile 1 sole parents receive a 3.3 per cent increase or $10.00 per week more versus 2.8 per cent or $9.30 per week more for couple families. In decile nine, the difference in outcomes is not as great with sole parents receiving $4.70 more disposable income per week and couple families receiving $4.20 per week more (table 1). The lower averages for sole parents may at first seem surprising given the result that the overall average increase for sole parents is greater than for couple families (table 1). However, the distribution of sole parents across the deciles shows that there are a greater proportion of sole parents in the population on low incomes, whereas couple families are more evenly spread across the deciles (see Table A.2 in Appendix A). This results in the overall average for sole parents being more heavily weighted towards the averages in the lower deciles (which are higher than the averages in higher deciles) thereby giving sole parents a higher overall average than couple families. The differences in the percentage changes between couple families and sole parents is minimal in the top four income deciles. However, the difference in the average outcomes for couple and sole parent families in each decile for the bottom six deciles is more significant. This is because the majority of single income couple families are in the bottom half of the income distribution and, combined with a greater proportion of eligible families in these deciles having a child aged 0 to 4 years than sole parent families, more couple families are eligible for the additional $2 500 increase in their taxfree thresholds than are sole parents in the same decile. These are the two elements that combine to give couple families the higher average increases and greater percentage changes in all deciles other than the first. In the first and ninth deciles the situation is a little different. Almost half (around families) of all sole parents in the first decile have at least one child aged between 0 and 4 years whereas only a third ( families) of couple families have at least one child aged 0 to 4 years. In the ninth decile, again almost half of the sole parents in the decile have one or more young children aged 0 to 4 years whereas the corresponding number for couple families is less than a third (see table A.2 in Appendix A). All sole parents are eligible for the additional $2 500 increase provided they have a child aged between 0 and 4 years and their income is less than their

12 10 calculated threshold (starting at $65 000). The higher proportion of these sole parent families relative to couple families with young children brings about the higher average outcomes for sole parents in these two deciles. In the ninth decile, the difference between the average outcomes is less marked because the income test starts to take effect in this decile and not all sole parents with young children aged 0 to 4 years are able to benefit from the additional $2 500 increase. Overall, single income families (sole parents or couples with only one earner) receive a greater percentage increase in their disposable incomes than dual income families. Sole parents receive the highest overall relative change of almost 2 per cent. The figure for single income couple families is 1.6 per cent, while dual income families have an overall percentage change in their disposable income of just 0.6 per cent (table 2). This outcome reflects the higher concentration of single income families in the lower deciles where there is also a higher concentration of families with at least one child aged between 0 and 4 years who are able to benefit from the additional $2 500 increase in the taxfree threshold (Table A.3 in the Appendix). Table 2: Estimated average increases and percentage change in disposable income for single and dual income couple families and sole parents Decile Couple with children Sole parent Single Income Couple Family Average increase Percentage change Dual Income Family Average increase Percentage change Average increase Percentage change $ pw % $ pw % $ pw % ALL

13 11 As described in section 2, the family tax initiative is designed to provide more assistance for families with more children, all else being equal. Figure 2 shows that this is indeed what will happen, with the average percentage change in disposable income increasing in each decile with the number of children. Families (couples and sole parents) with one eligible child receive, on average, an extra $4.40 per week, a 0.6 per cent increase. Those with two or three children receive, on average, an extra $7.40 (0.9 per cent) and $10.90 (1.3 per cent) per week respectively, while those with four or more children receive $17.00 or 2.1 per cent more (table 3). Figure 2: Estimated percentage change in disposable income by number of eligible children % change Decile of eligible family taxable income 1 eligible child 2 eligible children 3 eligible children 4 + eligible children Table 3 shows the average gains and percentage increases for families with a given number of eligible children. The different outcomes between deciles for a given number of dependants reflects the percentage of single income families (sole parents and couples) and dual income families in each decile. As stated earlier, single income families are largely in the bottom half of the distribution resulting in higher average increases for the lower deciles as these families are able to take advantage of the additional $2 500 increase. As table 4 shows, almost 60 per cent of the total cost of the family tax initiative is spent on eligible families in NSW and Victoria, with 33 per cent of the total cost going to families living in NSW. Queensland families with eligible children absorb almost 20 per cent of the total cost while the smaller states such as Tasmania and the ACT /Northern Territory each absorb just 3 per cent. This outcome reflects the different sized populations of the states and territories.

14 12 Table 3: Estimated average increases and percentage change in weekly disposable income by number of eligible children Decile One eligible child Two eligible children Three eligible children Four or more eligible children Average Increase Percentage Change Average Increase Percentage Change Average Increase Percentage Change Average Increase Percentage Change $ pw % $ pw % $ pw % $ pw % ALL Table 4: State Estimated distribution of cost by state ($ million per annum) Cost of the family tax initiative New South Wales Victoria Queensland South Australia 70.9 Western Australia 82.5 Tasmania 27.4 Act & Northern Territory 23.5 Total 923.6

15 13 5. Conclusions This paper has examined the benefits Australian families with children stand to gain from the implementation of the proposed family tax initiative. It found that less than 30 per cent of eligible families will gain no increase in their disposable incomes as a result of the policy while eligible families with taxable incomes less than $ per year will receive two thirds of the total gains from the package. Around 40 per cent of the total gains will be received by families in the bottom 30 per cent of the family population. The dominant reason for this is the impact of the income tests in the higher deciles although family composition and labour force status also play some role in this outcome. The overall outcome for sole parents relative to couple families is slightly more favourable. The disposable incomes of sole parents will increase by an average of $8.30 per week and that of couple families will increase by $7.30 per week. Overall, single income couple families and sole parents will receive greater average percentage changes in their disposable incomes than dual income families. The concentration of single income families in the lower deciles, where families also tend to have more young children aged 0 to 4 years (enabling more families to claim the extra $2 500 taxfree), explain these higher average outcomes for single income families.

16 14 Appendix Table A.1: Estimated annual income ranges covered by deciles Decile of family taxable income for all families with children Income range ($ per annum)

17 15 Table A.2: Estimated number of families per decile with either no children aged 0 to 4 years or at least one child aged 0 to 4 years by family type. Decile Couple families Sole parent families No children aged 0 to 4 years At least one child aged 0 to 4 years No children aged 0 to 4 years At least one child aged 0 to 4 years ALL

18 16 Table A.3: Estimated number of families per decile with either no children aged 0 to 4 years or at least one child aged 0 to 4 years by family type and dual or single income status. Decile Single income couple families Dual income couple families Sole parent families No children aged 0 to 4 years At least one child aged 0 to 4 years No children aged 0 to 4 years At least one child aged 0 to 4 years No children aged 0 to 4 years At least one child aged 0 to 4 years ALL

19 17 References Lambert, S., R. Percival, D. Schofield and S. Paul (1994), An Introduction to STINMOD: A Static Microsimulation Model, STINMOD Technical Paper No 1, National Centre for Social and Economic Modelling, University of Canberra. Commonwealth of Australia (1996a), Budget Statements 1996/97, Budget Paper No. 1, Australian Government Publishing Service, Canberra. (1996b), Meeting Our Commitments, Australian Government Publishing Service, Canberra. (1996c), Strengthening Families, Australian Government Publishing Service, Canberra.