Enriched by kids, tax-wise

PEOPLE without dependent children lose out.

THOSE without dependent children probably realise the tax-transfer system in Australia is skewed towards those with children. Were they actually aware of the precise and increasing extent to which they are discriminated against, they might be shocked.

An obvious retort is people without children do not incur the expenses associated with children, so it is only fair the tax system and family benefits provide some offset for these costs. But accepting this (reasonable) proposition does not explain why the tax-transfer system has become so much more favourable to those with dependent children and so much more hostile to those without them.

A single person without dependent children earning $50,000 a year had a weekly net income that was just 7 per cent higher in 2008-09 than it would have been in 2003-04. This is because tax cuts for this group tended to be of the milkshake and sandwich variety; they could not benefit from the increased generosity of family payments.

By contrast, the net weekly household income of a sole parent with one child under five and earning the same $50,000 rose by 12.8 per cent, while for a sole parent with one child under five and another aged between five and 14, the figure was 20.7 per cent.

Similar calculations are possible for working couples. Assuming the combined gross annual earnings of both partners are $50,000 and splitting the earnings between the couple on the basis of $40,000-$10,000, the increase in net weekly household income was 17.9 per cent for those with one young child. For a couple with two children, the figure was close to 28.8 per cent.

What the figures show clearly is that taxpayers with dependent children did very well out of the changes to the tax-transfer system, while those with no dependent children did very badly. In effect, the system was being manipulated to provide a de facto tax cut to some, via the family payments mechanism, while denying this benefit to the majority. The question is whether the extent of implicit sacrifice made by those without dependent children is now being stretched beyond a reasonable limit.

In this context, it is interesting to look at the number of households in the tax-transfer system that have dependent children and those that do not.

In 2008-09, a little more than one-quarter of households had dependent children, and of those nearly three-quarters, or about two million families, received family payments. Those without dependent children - the sum of single men, single women and couples with no children - made up the other three-quarters of all households. In other words, the vast majority of those in the tax-transfer system do not have dependent children and do not receive family payments.

The preferential treatment of children was also a central feature of the federal government's economic stimulus measures for households: the cash handouts.

In December 2008, under the Economic Security Strategy Payment, $1000 a child was paid to parents. Last year there was a further single income family bonus of $900 and a back-to-school bonus of $950 a child. These payments were in addition to the $900 tax bonus for working Australians.

Such numbers add up. Our sole parent earning $50,000 would have received $5700 all up, compared with $900 for someone with no dependent children earning the same amount.

By any measure, the gap in the size of the handouts given to those with children relative to those without them was substantial, especially considering the bonuses were all tax-free.

Arguably, these measures have added to a sense of grievance on the part of those without dependent children. If anything, the grumblings may get louder with the introduction of the paid parental scheme and the call "to do something" for stay-at-home mothers. Of course, because people do not have dependent children now does not mean they do not have grown-up children. These people are likely to go along with a system that favours their grandchildren, even though they may not gain personally.

Moreover, just under half of those without dependent children do receive some form of government pension or allowance.

Even so, there are nearly four million taxpayers who do not have dependent children and do not receive any government allowance. It is possible that a number of them are now saying enough is enough.

Is it possible there could be a political backlash against the bias towards children in the tax-transfer system?

Judith Sloane and Hielke Buddelmeyer are from the Melbourne Institute of Applied Economic and Social Research.