How the tax system stops mums working more than three days a week
Mums are effectively working for nothing and in some cases are losing money when they work extra hours because of the complex way the tax system interacts with family tax and childcare.
Some mums who increase their hours of work are actually losing $4000 a year in income as they face effective tax rates of 120 per cent.
And the bad news is that the tax policies of both major parties this election won’t fix the problem and could make it a whole lot worse.
The massive gender inequity in the tax and welfare system is boxing women into working just three days per week because if they work extra days the family income can actually go backwards.
The disincentive to work is making our economy less productive and denying families billions of dollars in extra income.
And it means Australia now has one of the lowest employment rates for mothers among developed nations, ranking 23 out of 33 countries — even Slovenia does better.
The problem occurs when increased childcare costs from the extra days worked interact with the income tax rates and the withdrawal of family payments.
Consultancy group KPMG calls the effect the Workforce Disincentive Rate (WDR) and says it is why 10 per cent fewer working age women participate in the workforce than men and why they are more likely to work part-time.
It estimates more than 500,000 families are caught out by the problem and says more than 125,000 Australian mums are actually financially worse off by increasing their working days above three days a week.
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In a family where the father earns $100,000 and the mother $80,000 the family budget is actually reduced by $4000 a year if the mother increases her weekly working days from four to five.
The mother loses $85 every extra day she works KPMG found.
In another scenario KPMG found in a couple where both parents earn the minimum wage with two children in daycare and the woman increased her days from three to four she would be working for just $2.50 an hour on the fourth day.
In a family where the father earns $80,000 per annum and the mother earns $24,000, if she works an extra day a week she would add $8000 a year to the household budget in gross terms, but only $294 a year after income tax paid, loss of family payments and extra childcare expenses.
She would be working for less than $1.00 an hour on her fourth working day each week.
ANU analysis has found the tax cuts being offered by both sides of politics at this election will exacerbate the problem of effective marginal tax rates for women earning over $90,000.
For every extra dollar they earn between $90,000 and $126,000 they will pay an effective tax rate of 40 per cent (instead of the marginal rate 37 cents) or up to $750 a year as the government’s low income and middle income tax offset is withdrawn.
Separate work by Associate Professor Ben Phillips from the ANU said working mums with children in childcare will see their effective marginal tax rates rise from 55.9 per cent to 58.2 per cent under ALP’s policies and from 55.9 per cent to 57.1 per cent under the Coalition.
Sydney University tax expert Patricia Apps said changes in tax policy and the introduction of the low and middle income tax offset has concealed a “significant shift in the tax burden from the top to the middle during a period of increasing inequality”.
The biggest losers are working mothers with partners, she said.
KPMG tax expert Grant Wardell-Johnson said the government needs to increase childcare subsidies and reduce the taper rate for family payments to make it worthwhile for women to increase their hours of work.
The policy change would cost $250 million but estimates it would boost Australia’s GDP by $495 to $773 million per annum as women increased their working hours.
It is also time for senior business and government leaders to encourage a major cultural change and provide more flexibility for fathers in the workforce, Mr Wardell-Johnson said.
“They need to say to young fathers we think it would be beneficial if you took some time off to look after your child, work three days a week or take six months off,” he said.
Originally published as How the tax system stops mums working more than three days a week
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