Family Taxation: An Unfair and Inefficient System

This paper presents an analysis of the 2005-06 family tax system comprising the personal income tax, the Medicare Levy, Family Tax Benefits Parts A and B and tax offsets. The results show that most families are now taxed, in effect, on the basis of joint income. Through a succession of reforms the Howard Government has shifted the tax burden to two-earner families to such an extent that many now pay close to the same amount of tax as a family in which only one parent need work to earn the same income while the other works full time at home. This is a defining feature of joint taxation. The study also finds that families face a marginal rate schedule that is no longer progressive but tends to have an inverted U-shaped profile – working families in the middle of the distribution face the highest marginal rates. As a consequence, the incomes of second earners in low and average wage families are taxed effectively at the highest average rates in the economy. The study explains why the system is unfair and seriously damaging for the economy in its effects on female labour supply in an ageing population. On the basis of the results, the paper argues for a return to a progressive individual income tax system, to improve support for families and to raise female participation and productivity.