Pay to work: Australian mums taxed out of full-time work

SYDNEY, 2 November 2020: An examination of our tax and transfer systems as part of The Tax Summit: Project Reform has revealed “structural disincentives” for mothers returning to work full-time after having children, with a gain of just $48.25 per day for the average family.

Cameo modelling from presenter Prof Miranda Stewart, CTA, ANU & UniMelb, showed the impact of our tax system on secondary earners (adults choosing to go to work, in a household where another adult is already employed) in an average family with children. Australia has a relatively low level of female workforce participation (72.5%), ranking in the bottom 1/3rd of OECD countries, suggesting these secondary earners are primarily working mothers.

As secondary earners increase their days at work and therefore their income, they not only incur more childcare costs, but also lose access to low income childcare subsidies and other family tax benefits. This ultimately means that having both parents work fulltime makes very little financial sense for most Australian families.

Looking at the modelling data, Miranda said, “What is striking, is that the effective tax rate of days 4 and 5 of work is 75% or 85%. You can see why that might be a bit of a disincentive to go to work.”

Effective marginal tax rate: graph showing percentage of income lost to taxes Source: Miranda Stewart and David Plunkett cameo modelling (October 2020)

According to the modelling, a secondary earner on the average female salary of approximately $70,000, would earn $293.82 per day. Taking into account additional factors such as Family Tax Benefits A and B, income tax, Medicare, the cost of childcare and childcare subsidies, this person would make a net gain of $148.41 working 1 day per week, or just $48.25 per day when working 5 days a week.

“Income tax is actually not the biggest issue here. The issue is the net childcare cost,” Miranda said.

Co-presenter, Dr Ann Kayis-Kumar, UNSW, said “If you bake in the costs of childcare, the increase in income tax liability and the loss of family benefits, there can be quite perverse, unintended consequences of disincentivising a return to work.”

Graph revealing workforce disincentives for secondary earners Source: Miranda Stewart and David Plunkett cameo modelling (October 2020)

The Tax Institute’s President, Peter Godber, CTA, said “Our tax and transfer system should never be a reason why people don’t return to work when they want to. It certainly should not be a barrier to the economic independence and financial stability of Australian women.”

“This is not about actively pushing parents back into the labour force. Rather, it’s about ensuring that our broader tax system is not making it harder for families to improve their financial situation.”

Two of the options to address these disincentives for working parents are free, universal childcare and a childcare subsidy boost, which the Grattan Institute has previously estimated would cost the government $5 billion, while boosting the economy by $11 billion.