22 December 2012

The ups and downs of Parliament 43

I was looking at the stats for this blog and was intrigued to see that the most popular post so far was one of my 4 Parliament efforts, looking at single parents.  For this blog, popular usually just means someone other than me looked at it, but that post actually does stand out.

While I like the 4 Parliament comparisons, one of the problems with them is that they become dated.  Being written at different times doesn't help either, as that can make it hard to compare the various households I've covered, particularly the results from Parliament 43 (the current period).  With that in mind I thought I'd update just the Parliament 43 results for all the households I've covered so far, plus a few extras.  That will make comparisons between household types easier and also allow gossip about which ones are in and out of favour.

09 December 2012

Being partnered is not much of a bonus

[Warning: A commenter has suggested this post is boring enough to provoke actual self-harm]

Considering the amount of attention paid to the findings of the recent Senate enquiry into Newstart allowance (and similar) payment rates, it's perhaps surprising that the introduction next year (from 20 March) of an income support bonus has received little coverage.  The bonus provides up to $175 a year to a member of a couple and up to $210 a year to a single person.  This is in addition to the usual CPI based rate increases.

It's not a straightforward increase in rates, however, and the chosen approach seems to me to be particularly unfair to some couples.

28 November 2012

January changes for single parents

Soon it will be 1 January 2013, with its attendant changes to some of the arrangements for single parents.  I've done quite a few posts on this over the last year but I thought it was worth updating the figures using the rates, etc, that will actually apply on that date.

The changes I'll be focusing on are:
  • the removal of the "grandfathering" provisions that have so far prevented single parents who have been on parenting payment (PPS) since before 1 July 2006 from being subject to the so-called age-8 transition; and
  • the relaxation of the Newstart allowance income test for single parents with the principal care of at least one child aged under 16.
Handily, both of these can be looked at in the context of the age-8 transition.

15 November 2012

Good news for some single parents...

As 1 January 2013 approaches, the changes in the eligibility conditions for parenting payment continue to receive attention.  These changes will result in the loss of entitlement to parenting payment for existing recipients whose youngest child is aged 8 or more.  However, there's another change affecting single/sole parents that has so far had very minimal coverage - and this time it's actually a gain.

For so-called "principal carer" single parents in receipt of Newstart allowance, the income test is being relaxed.  The rate at which payment is reduced by income will change from the current 50 (or 60) cents in the dollar to 40 cents in the dollar.  For Newstart recipients whose rate is currently reduced due to their income, these changes will lead to an increase in payment.  It will also allow some sole parents who currently earn too much to get Newstart allowance to receive a part-rate.

Here's a chart that shows the gain (expressed in yearly terms) the income test change produces.

21 October 2012

Single parents with part-care of children

Last week was anti-poverty week, and amid all the stories about reductions in the entitlements of single parents and the paucity of the Newstart allowance rate this one caught my eye. Although it didn't deal directly with the issue, the case seems to involve, among other things, a single parent who has part-care of his children.  The comments that follow the article express various levels of support and/or sympathy mixed with the usual "get a job" sentiments.  There are also some questioning the amount of assistance he received, which appears to be just single Newstart allowance - no payments in respect of his children.

Part-care of children brings with it some complicated rules around how much, if any, family assistance can be paid, with similar provisions around child support entitlements or liabilities.  At the extremes, a parent with no care of their child won't receive any child-related assistance, and will generally have to pay child support, whereas a parent with 100% of the care gets all the child-related assistance and will generally receive child support.  As care increases from zero there is a kind-of graduated sharing of family assistance entitlements.  I say "kind-of" because it's not a smooth transition - the family assistance amounts change in a lumpy way over some percentage ranges, not at all over others, and disproportionately in the rest.

A further complication is that adult income support also undergoes changes related to the level of care of the child.

There are many possible combinations of care and payment types but I'll just focus on three as they will illustrate most of the points.

13 October 2012

Uh-oh, the kids are getting bigger

This week Parliament passed legislation removing the special arrangements ("grandfathering") for parents getting parenting payment since before 1 July 2006.  I've done a few posts on this already so I won't repeat the details (see here and here if you want the earlier raves on this subject).  The gist of it is that the grandfathered group will now have the same payment arrangements applied to them as everyone who has come on to parenting payment since 1 July 2006.  These arrangements are rather less generous for single parents, who will consequently have significant reductions in their incomes when the change takes effect on 1 January 2013.  (It's of less significance for partnered parents because they have always had lower Newstart allowance-linked payment rates.)

Parents in the income support system, partnered or single, face changes in the total assistance package provided to them when their children reach significant birthday milestones.  Sometimes it's up, sometimes it's down, but the final result is down.  By final result, I mean that eventually the parent is no longer considered to have a dependent child, and a significant age for this purpose is 22 years.  A 22 year old child becomes eligible for Newstart allowance in their own right (subject to the usual rules about being unemployed, etc) and a 22 year old student child gets a youth allowance that is no longer affected by parental income.  If the parent is single then, in the usual case, they will get the single rate of Newstart allowance.

So, under the current arrangements a single parent who still needs income support will typically end up on single Newstart allowance, simply as a consequence of the passage of time.  If we compare the assistance package for a single parent with a newborn to that of a single Newstart recipient the size of the eventual transition that must occur is stark.

01 October 2012


A few days ago I put up a somewhat rambling post covering several topics, but mainly focused on the concept of the net income tax threshold.  I had prepared a few charts for it that I didn't end up using as they didn't quite fit the theme of the post, at least not without wandering off in yet another direction  But waste not, as they say, so I thought I'd pop them up separately with only a few words of explanation.

They are of the same type as Charts 1 to 3 in the earlier post, showing the interaction between transfer payments and income tax (and medicare levy) liability.  However, the charts in today's post show this information as at the election of the 40th Parliament (the second-last Howard government) as well as at 20 September this year (part-way through Parliament 43).  This makes visible the change over that period in three numbers of interest: the maximum transfer package (at zero private income); the income at which a liability for income tax starts; and the net income tax threshold.

As before, all the charts are adjusted for changes in the CPI so that the 2001 results can be directly compared to today's figures.  So without further ado...

29 September 2012

Taxing families, or how 1.5 equals 1

Mitt Romney's now infamous comments about how 47% of Americans did or didn't interact with their tax system reminded me of a topic I had intended to cover on this blog - net taxpayers.  That sounds incredibly boring (and I suppose to any sane person it probably should be) but it intrigues me because of what it might be saying about the design of our tax-transfer system.  If you persist to the end of this post you might conclude our system is largely incoherent, or perhaps it's deliberately preferencing some household types, or a heady mix of both.  And you'll find out what I'd like for my birthday.

21 September 2012

4 Parliaments - single age pension

It's time for another 4 Parliaments comparison post, where we take a look at how changes in the tax transfer system over the last 4 Parliaments have affected a particular group.  This time it's single age pensioners.  Previous posts on this theme looked at single Newstart allowance (here), single parents (here) and single income couples on Newstart allowance (here).

As with the earlier posts, I'll start with a chart showing the change for all 4 Parliaments and then look at each Parliamentary term in a bit more detail.  So, first up is the comparison chart, which at first glance looks like a black canvass with strands of coloured spaghetti plastered over it.

10 September 2012

What choice single-parent students?

Under the ordinary rules applying to parenting payment for single people, eligibility is lost when the youngest child turns 8 years old.  At that point the parent must seek another type of income support payment.  Much recent discussion has focused on single parents who take up Newstart allowance and the resulting reduction in disposable income that occurs as a result of that transition.  (I've done a couple of posts related to that subject, here and here.)

However,  depending on the circumstances of the single parent, a transition to Newstart allowance might not be the only choice.  A good example is single parents who are studying.  While the youngest child is under 8 years old they can study and receive parenting payment.  They also receive an additional payment to assist with or encourage their continued education, the pensioner education supplement (PES).  So what happens when that youngest child has the dreaded 8th birthday?

19 August 2012

Calculating new pension rates - step 3 of 3

Pension rates are reset every six months using a 3 step process.  Last week's publication of the Average Weekly Wage figures by the ABS (here) provides the final ingredient for the calculation of the pension rates to apply from 20 September 2012. 
To recap the process so far, the first step was to adjust the rate using the change in the consumer price index (CPI), giving us the CPI rate.  The second was to adjust the rate using the pensioner and beneficiary living cost index (PBLCI), giving us the PBLCI rate.  Each of these steps was discussed in more detail in earlier posts (step one is here and step two is here).

Now we can calculate the rate based on Male Total Average Weekly Earnings (MTAWE).  Whichever of these 3 rates - CPI, PBLCI or MTAWE - is highest becomes the new rate.  The new MTAWE figure is $1285.10 a week, or $2570.20 a fortnight.  The combined couple rate of pension is 41.76% of this, and the single rate of pension is a shade under 2/3 of the combined couple rate.  The rate for single parenting payment (PPS) recipients is 25% of MTAWE.  After the requisite rounding required by the Social Security Act 1991 the resulting MTAWE based rates are as per the table below.

13 August 2012

Something for "The Kouk"?

The economist Stephen Koukoulos has an article in today's Business Spectator on living costs (it's here but might be hiding behind a [free] registration requirement).  Essentially, it says that, on average, living standards have increased over Labor's period in office and so, on average, whinges about increases in the cost of living and falling living standards are misplaced (to say the least).

One of the key elements in his argument is that wage increases (along with tax cuts and interest rate reductions, etc) have helped ensure this upward movement.  Now, if you've read my other posts you'll know that I don't think that over the period of the current government (Parliament 43) the tax-transfer system (tax cuts, welfare changes and the like) have actually done this, except at low incomes.  If you look at the 4 Parliament comparison posts you can see this effect and where it comes from.

05 August 2012

4 Parliaments - single income couple edition

This is the third episode of my 4 Parliaments series, comparing the tax-transfer system changes for different household types across the last 4 governments.  The first looked at single people aged under 55 years, the second, single parents.  This one features single income couples, and while I've already looked at them in a few earlier posts, none covered the 4 Parliaments thing.  So while this post might be single income couple overkill, it will enable comparisons with the other households should you feel so inclined.

In the following charts, both members of the single income couple are aged under 55 and there are no children involved. If this is your first foray into my 4 Parliaments posts, the idea is that you can look at a particular private income and see how the household type's disposable (after tax and transfer payment adjustments) changed from the beginning to the end of the government term of interest.

01 August 2012

Calculating new pension rates - step 2

Today's release by the ABS of the pensioner and beneficiary living cost index (PBLCI) for the June quarter allows for part 2 of the 3 part pension rate indexation process to be completed (Part 1 was covered in this earlier post).

The index number for the quarter was 117.4 and the previous highest June or December quarter figure was 116.7.  As with the earlier CPI result, after the required level of rounding, this is an increase over the period of 0.6%, so the CPI and PBLCI adjustments both produce the same result.  That certainly makes updating the table I started in the last post easy!

This is how the rates stand so far...

Current rate
CPI rate
PBLCI rate
MTAWE rate
Final rate
partnered pension
$ 524.10
$ 527.20
single pension
$ 695.30
$ 699.40
$ 627.50
$ 631.30
single NSA (lower)
$ 489.70
$ 492.60
$ 492.60
$ 2.90
single NSA (higher)
$ 529.80
$ 533.00
$ 533.00
$ 3.20
partnered NSA
$ 442.00
$ 444.70
$ 444.70
 $ 2.70

Now we have to wait until 16 August for the last piece of the puzzle - the release of the Average Weekly Earnings figures.  Given the low CPI/PBLICI results, I suspect it's fairly safe to assume that it will be the benchmarking of pension rates against the MTAWE figure that will drive the pension increase this time round.

Interestingly, if wages have grown enough it looks like either this time round, or maybe next time (March 2013) the base partnered rate of pension (as shown above) will exceed the higher single rate of Newstart allowance, not just the lower one (which it passed quite a while back).

27 July 2012

DSP - to tax or not to tax; that is the question.

A couple of weeks ago, Don Arthur (a regular ClubTroppo blogger) mentioned via Twitter this CIS article about the way blind people are treated for the purposes of disability support pension (DSP) and age pension.  Blind recipients of those payments are not subject to the same means testing arrangements as non-blind folk - for the most part the payments are made free of any means test at all, something the article's author saw as somewhat inequitable. 

It reminded me of another difference between some DSP recipients and the rest of the pensioner population - DSP paid to people under age-pension age is not assessable income for income tax purposes - it's a tax free payment.  This has been the rule for as long as I can remember (I'm too slack to chase up the detailed dates). 

It's a rule that is intended to advantage DSP recipients.  After all, getting a swag of money, tax-free, must be a plus.  Indeed, it used to be.  But not anymore.

26 July 2012

Low CPI means low Newstart increase

Yesterday's CPI release prompted quite a bit of commentary about its possible implications for broader economic issues - for example, does it give the Reserve Bank sufficient impetus for another interest rate cut?  But the CPI is used for a whole lot more and in the tax-transfer system it's often used to reset things like rates and thresholds.  Income support rates are among those affected, and this (June quarter) CPI release is particularly important in that context because it's used to set the rates that will apply from 20 September.
In the light of the ongoing controversy over the rates of Newstart allowance and similar payments I thought it would be interesting to look at how the rates will be affected by this low CPI figure.

14 July 2012

4 Parliaments - single parent edition

In my last post I looked at how single people had fared under the tax-transfer system changes that have occurred over the lives of 4 successive Parliaments, ending with the current Gillard goverment  in Parliament 43.  This time I thought I'd take the same approach, but for single parents.

I can't think of a way to show what's happened to all the possible single parent household types, so instead this post will focus on a single parent with 2 children, aged 8 and 10.  I've picked this family because having the youngest child as an 8 year old brings to attention the significant change to single parent income support eligibility that occurred in Parliament 41 (the last Howard government).  That change involved lowering the age of the youngest "qualifying child" that could attract entitlement to parenting payment for a single parent (PPS) from 15 to 7.  Prior to the change, when the youngest child turned 16 the parent's entitlement to PPS was lost and some other income support - usually Newstart allowance (NSA) - had to be claimed if required.  Since July 2006 this change now occurs when the youngest child turns 8.

I'll use the same format as I did with the single person, and start with a "spaghetti" chart which compares the results for all 4 Parliaments at once.  And here it is:

05 July 2012

Different strokes for different...Parliaments

I started this blog in November last year with a post looking at how the disposable income results provided by the tax-transfer system for a single person had deteriorated over the term of the current Government.  This was largely a result of the lack of any tax cuts up to that time.  Now we are in the new financial year (2012-13) and it comes with the first tax cuts of the current Goverment.  It made me think it was worth updating that first post to see to what extent the fall in disposable incomes had been offset by the new settings.

I also thought I'd retain the comparison with earlier governments, and add in an extra one for good measure.  So, in this post I'll include the results for the last 4 governments - Parliaments 40 to 43 inclusive - being the last 2 Howard governments, the Rudd-Gillard goverment, and the still-in-train Gillard government.

As before, this is for a single person who has not taken out private health cover (I want to be able to show the effect of the medicare levy surcharge).

The first chart is a spaghetti effort.  It shows all 4 governments and the percentage change in disposable income over the term of each.  This is measured in current dollar terms (ie, it's CPI adjusted).

(click to enlarge)

It's a bit hard to make out really, but the last Howard government really stands out at both ends of the income range I've covered here.  In contrast his preceding period was quite lackluster.  Let's have a closer look at that one (Parliament 40). 

(click to enlarge)

This chart shows the contribution of the individual tax-transfer elements that go to make up the total change - tax, medicare and (at low incomes) Newstart allowance (NSA).  At the low income end we can see that NSA declined in value where it was combined with some level of private income.  This reflects that fact that the NSA income test parameters were not changed during this government and so declined in value in real terms.  There are some tax changes and a bit of medicare movement (the dip at around $60,000 is, like the NSA decline, due to a lack of indexation of the surcharge threshold).  Overall though, the whole thing is easily contained within a 2% up or down band.

In the following term, the brakes seem to have come off...

(click to enlarge)

In this period there were a succession of tax cuts (those on 1 July 2006 were particularly large).  These favoured the higher income end, but there were equally generous (in proportional terms) cuts at around the $35,000 mark.  Interestingly, NSA recipients who had some private income had a significant boost to their incomes as a result of a relaxation of the NSA income test tapers.

The election campaign at the end of this Parliament had the intriguing spectacle of both Labor and the LNP coalition offering very similar tax cuts if elected (Labor's were quite explicitly designed to almost exactly match the LNP proposal).  In the event, Labor was elected and the promised tax cuts were duly delivered.

(click to enlarge)

A couple of things to note here.  The decline in the NSA rate even at zero income is actually a product of the timing of CPI increases to the NSA rate relative to the election dates.  NSA is CPI indexed and so in theory it's maximum value (at zero private income) shouldn't change in this type of chart.  However, the actual date of the increases in rates lags a little and so the rate wobbles around the no-change position rather than nailing it every time.  This is only true of the maximum rates though - the declines where there is also some low private income reflects the lack of any indexation or other changes to the NSA income test.  The other item is the medicare levy surcharge - in this period there was a significant increase in the threshold at which the surcharge applied, with the resultant (green) boost to incomes in the affected income range.

So now to the current government.  After 8 years of quite noticeable increases in incomes in real terms just from the tax-transfer system (ie, ignoring any wages growth or other factors that contribute to household prosperity) we have this:

(click to enlarge)

It's a bit like Howard in Parliament 40, except that it's the higher incomes that have gone backwards rather than the low income end.  There has been a noticeable increase for low income singles due to the combination of clean energy payments and tax cuts, but this has disappeared by $40,000 - the cuts don't make up for the effect of inflation.

On the subject of inflation, it's worth noting that the effects of carbon pricing have yet to appear.  Without other changes to the tax-transfer system, when they do flow through the results above will be pulled down even further.

To me the results to date for Parliament 43 (remembering there's still over a year to go) go some way to explaining the perceptions of a decline in incomes that keeps bubbling away in the media.  Sure, wages growth will override this, and declining interest rates will too.  But not for everyone - those on fixed incomes, and those relying on interest income are not helped.  And even for those who do benefit, they are having to come off a lower - and negative - base compared to the two preceding Parliamentary terms.

I like these forays into comparative Parliaments, so  I may do some more down the track with other household types.  If there's one that interests you let me know in the comments.


30 June 2012

Austudy payment gets a boost

Amidst all the excitement about 1 July and the carbon tax, new tax rates and household compensation one major change seems to have been overlooked.  From tomorrow, students getting Austudy payment (and some getting youth allowance) are going to have a more generous income test, courtesty of a significant increase in the income test free area.  This is the amount of income a person can have before their payment begins to reduce and it will increase from $236 a fortnight to $400 a fortnight.

Students with private income(typically earnings) of $236 a fortnight or less won't benefit from this (although they have had the clean energy advance payment).  Students with income above $236 should notice a change, and in some cases quite a significant one.

The chart below shows the theoretical variation in disposable income caused by the various 1 July 2012 tax-transfer system changes.  It's a vanilla case - a single person without children and without including accomodation cost related charges and entitlements (eg, rent assistance).

(click to enlarge)

The total change in disposable income is represented by the black line.  The coloured bits are there to show the components that make it up.  The increase in Austudy is entirely due to change in the income test free area and provides an increase of up to $2558 a year.  You can see that the tax cuts add a bit more to this. 

The increase in the income test free area means that there's a corresponding increase in the income that can be had before the payment cuts out completely.  People with incomes in this newly extended range can come onto Austudy payment so pick up the clean energy advance, and for many of them, acquire eligibility for the student startup scholarship.  The scholarship (for qualifying tertiary students) gives over $2,000 extra over the course of a year.

Partnered students might get some joy from this change too, provided they are working.  Their situation is complicated by the not-quite-right nature of the partnered income test, as I discussed in this earlier post

So, provided you're a student who has, or can get some work, the Austudy payment changes combined with the carbon tax related measures look like they will provide a welcome boost to incomes!

23 June 2012

Sole parents, public housing and that budget cut

Just before the Federal budget was released I wrote a post discussing one of the many leaks at the time - that some sole parents were going to lose their special parenting payment "grandfathered" status and would have to take up some other entitlement, typically Newstart Allowance.  The main point of the post was that the most substantial losses in disposable income would be experienced by those sole parents who are already working.  As it turns out this was indeed the case, and my calculations of the losses involved seem to have been backed up by DEEWR (I would link to the first article I read that had this, by Patricia Karvelas in The Australian on 2 June - Budget crackdown will penalise single working mums - but it's behind a paywall).

Since then there has been a pretty continuous series of media articles and press releases about the issue as the various lobby groups and concerned individuals agitate for a change.  One that caught my eye last week was by Stephanie Peatling.  It referred to findings that sole parents in public housing would be particularly badly affected.  So, let's look at that proposition.

For those who don't like reading more than a few paras, I'll cut to the chase:
  • Sole parents in public housing will typically not have as large a loss in disposable income as other sole parents
  • The grandfathering arrangement that some sole parents have, and for which there is pressure to retain, actually causes them to pay higher public housing rentals.
  • The return on working for these sole parents in public housing is worse than it will be for those on Newstart allowance in public housing over large income ranges (but better over others).
  • Sole parents in public housing who suffer an income loss as a result of the change will find it harder to make up that loss than those who are in private rental or are home-owners.
That is indeed a mixed bag of results!  So now I'll try and explain how this happens (or at least, my understanding of it).

First, the reduction in disposable income - why is it not as high in public housing?  The answer to this is actually buried in the Stephanie Peatling article.  Public housing rents are based on how much income a person has.  The more income you have, the higher the rent (up to the point where the rent equals the market rental for the property).  The opposite is also true: the less income you have, the less rent you pay.  So, if the change to the sole parent rules means that those affected have less income (and it certainly does), the rent they pay will fall.  That rent adjustment is not something that's going to happen to sole parents in private rental, or other accomodation.

Here's a picture of the difference in incomes between a sole parent on parenting payment and one on Newstart allowance in private rental (assumes $300 a week rent)

Chart 1

(click to enlarge)

Note: CEA means Clean Energy Advance; IS means income support.

You can see the reduction maxing out at about $6,000 a year where private income is around $22K.  Contrast this with the same family type in NSW public housing.

Chart 2

(click to enlarge)

Notice that although the amounts showing as reductions are the same in both charts, the public housing case has an extra item - the housing rebate - which is partially offsetting those reductions.  In fact, at the point where losses were greatest in Chart 1, the reduction in rent caused by the larger housing rebate has pared the reduction back to a little under $5,000 a year.  This is still a big reduction, but is substantially less than the $6,000 experienced by private renters.

The second issue I'll look at is the financial return sole parents in public housing get from working.  This is determined by a few things, but substantially by the effective tax rates in play when a person increases their private income.  We can broaden the concept of effective tax rates a little to include the change in public housing rental, and the result is shown in the following charts.  These represent the effective tax rate on a marginal change in income (the concept is typically expressed as the impact on the next dollar of income) and are EMTR charts.

First, the EMTR faced by a NSA recipient in NSW public housing (note that the NSA income test is the one that will apply to sole parents when the grandfathering arrangements for parenting payment are abolished).

Chart 3

You can see from the above that the increase in rent as private income rises is a significant addition to the EMTR othewise applying.  The substantial kick up at around $34K marks the point at which the NSW system begins to transition a person from paying (broadly) 25% of their income in rent, to 30%.  Those arrangements have the EMTR exceeding 90% from roughly $42K to $44K of private income.

However, things look worse still for parenting payment sole parents...

Chart 4

(click to enlarge)

Notable here is that the income range over which an EMTR of greater than 90% applies is much longer for the PP recipient than for NSA.  Overall, it appears that the EMTRs are worse for NSA at incomes below about $22,000, but worse for PP above that, at least in the NSW housing situation.

Both the NSA and PP results have higher EMTRs as a result of the public housing impacts than private renters or homeowners.  This is particularly significant in the context of the apparent purpose of the policy change - to increase workforce participation.   My earlier post on this subject had a chart which showed how much extra income a sole parent affected by the changed rules would have to earn in order to return to the same level of disposable income they had pre-change.  For those already working it was a substantial increase in working hours.  The higher EMTRs in public housing make this difficult undertaking even more problematic.  My final chart has the extra earnings required to return to the pre-change position for our NSW public housing sole parent.

Chart 5

(click to enlarge)

This is a stunning result, particularly if you consider that the people affected by this change are already required to be working at least 15 hours a week.  So, if we assume that a person is doing that (and I understand that many, if not most, are) and is getting the minimum wage they will be earning around $12,500 a year.  They will need to pretty much double their working hours to stay in the same place, financially.  But worse by a long way is the person earning around $25K (at the minimum wage, around 30 hours a week).  They need to earn another $21K to make up for the (slightly under) $5,000 they have lost.  That's another 25 to 26 hours a week - a total working week of around 55 hours is needed just to tread water!

To sum up, for sole parents in public housing, the budget change is not as bad as it is for those in private rental, unless they want to claw back their financial loss.  Then it's much tougher.

09 June 2012

Taking it out of neutral

There's an OECD report I peek at occasionally that concerns itself with the neutrality of the tax transfer systems across the various OECD countries (it's here if you want to look at it).   The neutrality they are referring to relates to the way the tax-transfer system treats couples, or more specifically, the difference in financial outcomes between couples with the same household income but different distributions of that income across the couple (eg, single earner (100:0) versus joint income (50:50) couples).  I must confess, even after reading it quite a few times I'm not really sure what they think is a neutral system.

In earlier posts I've referred to a noticeable shift in the Australian tax-transfer system toward preferencing two-earner couples.  I've illustrated this via charts showing the change in disposable income over the course of the current Government (ie, since the August 2010 elections) for 100:0 and 50:50 couples.  Anyway, the OECD article makes me want to do it again, but using a different charting approach.

Obviously, couples can have rather different distributions of income than just 100:0 and 50:50 which made me think it was worth trying to cover all possible combinations rather than some of the traditional splits.  So, the charts that follow show outcomes in August 2010, March 2012, and the change over this period.

Before getting into them, however, I should mention an assumption that I'm using.  There's a common, and in some ways quite justified, criticism of comparisons between 100:0 couples and 50:50 couples (or other combinations).  In essence it says that these households are not really comparable because of "hidden" or uncounted income that exists in the 100:0 situation.  The 100:0 household has a full-time at home partner who, it's assumed, does the housework and other forms of domestic production, and when not doing that has some hours of leisure time.  In contrast, the 50:50 household has no-one at home and housework, etc, has to be done in out-of-work-hours time (with less leisure).

There's an assumption in this though that's not stated.  It assumes the 50:50 household has two full-time workers.  That isn't necessarily so.  Personally, I find the assumption irritating simply because my own experience when I had young children was, most of the time, for my wife and I to both work part-time at 50% hours.  Our domestic production was the same then as in some other periods where one or the other worked full-time with one of us at home full-time.  At the time we did do some comparisons of the difference in tax-transfer outcomes between our 50:50 and 100:0 arrangements, made a little easier because the only variable that changed was the distribution of hours worked.

So, I'm assuming in the stuff that follows that the members of my couple are equally interchangeable in terms of wage rates, their capabilities around domestic production, and their enjoyment of leisure time.  After all, I'm trying to focus solely on changes in the tax-transfer system - I only want to alter one variable (income distribution).  At 100:0 the couple is one full-time worker and one full-time at home; at 50:50 both are working half time.

With that out of the way, here's how the system looked at the start of the current Government.  It's a childless couple, both aged, say, 30.  The chart will probably perplex all those who look at it, but I'll explain how it works after you've had your initial shock...

Chart 1: Percentage difference in disposable incomes for different allocations of gross income at various levels of household income - August 2010

(click for larger view)

So, how do you read this...thing?  First, the household income (the combined income of the couple) is found along the right hand side.  The distribution of that income is chosen from the bottom axis, which shows what % of the income is in the hands of Partner 1 (or P1).  Where the household income and the percentage allocation intersect there will be a colour.  The scale on the right gives a value for the colour, which is the % by which the income of the couple of your choice varies from the income of a 100:0 couple at that same household income.

For example, at a household income of $70,000, we find that a 50:50 couple is in the light green zone.  Light green tells us that this distribution of income gives 10% to 11% more disposable income(ie, after tax and transfer imposts) than a 100:0 couple would get from $70,000 income.

Where the income is low enough, income support payments (in this case Newstart allowance) have been included.

The picture is symmetrical around the 50:50 vertical line simply because both partners are the same.  It wouldn't be quite so symmetrical at low incomes if, for example, I had made one partner an age pensioner and the other a Newstart recipient.  Maybe later!

We can see from this that households where both have some level of income do better than 100:0 couples.  No surprise there really; the fact that our system favours two income households in this way has long been used by accountants for small business couples to split income in the most favourable way.

So, now for March 2012...

Chart 2: Percentage difference in disposable incomes for different allocations of gross income at various levels of household income - March 2012

(click for larger view)

Here we see that two income couples have hit a purple patch, quite literally.  For example, at combined household incomes from roughly $55,000 to $85,000, a 50:50 couple is 14% to 16% better off in net disposable income terms than their single income equivalents.  This is quite a noticeable shift in the extent to which the tax-transfer system is favouring two income couples.

The last chart simply shows the difference between the two sets of results.  For example, if the gain in 2010 was 5% and is now 8%, the 3 percentage points difference is shown on the chart.  Doing this highlights which income ranges and distribution combinations have done best over the period since 2010.

Chart 3:  Change in percentage points from August 2010 to March 2011

(click for larger view)

From this it seems the biggest winners, at least in percentage terms, are in the middle of my plotted data, from about $35,000 to $55,000, and cover splits from 50:50 out to about 80:20.  I use winners advisedly - much of this gain actually comes from reductions in the incomes of single income couples as a consequence of the removal of the dependent spouse tax offset for this group.

(Incidentally, does anyone else see a brooding creature in the dark red?  A bat perhaps?  I'm reasonably sure that despite what some people say about the blood-sucking tax system, it's not really there!)

These changes are, of course, consistent with the aim of increasing workforce participation of potential second earners.  It will be interesting to see how much further, if at all, this biasing toward two earner households can be pushed in the design of the tax-transfer system.  What is missing in this analysis though, is households with children.  The picture there is likely to be quite different because of the way Family Tax Benefit Part B works.  Perhaps I'll tackle them another time.


I forgot to mention that in calculating the change from 2010 to 2012 I converted the 2010 results to current $ values.  And all calculations are my own, which is perhaps a shame as I can't blame anyone else for any errors.