the family tax benefit system is inefficient, complex and that it acts with the tax system to penalise people who want to work part-time.

Beneficial to finally fix the tax system | Daily Telegraph Sue Dunlevy Blog

MIDDLE income families who get their $1000 per child handout this week should savour it because it might be one of the last bonuses to come their way before a mooted change in the tax system strips them of their family benefits.

The Rudd Government’s tax inquiry has middle class welfare in its sights and it plans to examine whether generous family tax benefit payments should be reduced for families on higher incomes. It can expect strong support from Treasurer Wayne Swan.

Ironing out the complexities of the family tax system has been a passion of Swan’s since he was families spokesman when Labor was in Opposition.

In a discussion paper released this week the Government’s tax inquiry says it has received numerous submissions that argue the family tax benefit system is inefficient, complex and that it acts with the tax system to penalise people who want to work part-time.

The paper shows that families which earn between $30,000 and $45,000 can lose almost 100 per cent of any extra earnings as family tax benefit is withdrawn and tax is paid. Families earning between $45,000 and $75,000 can lose up to half their extra earnings through this same clawback.

For many, these effective marginal tax rates act as a disincentive for the mother to return to work because the Government claws back most of her earnings.

The problems began when the Hawke government introduced the first means test on the benefits in 1990 cutting the richest 10 per cent of families off the payment. In the 18 years since, adjustments to this means test have not kept pace with rising wages or the fact more women are working and now one in four families are excluded from the system.

Families with two children lose Family Tax Benefit A when their income exceeds $100,801 and those with two children miss out once their income hits $111,082.

Another income test that phases out the higher maximum rate of the payments hits families earning more than $42,559.

The paper gets to the heart of a decade long debate about family payments when it asks what their purpose is.

“If the primary purpose of the payment is considered to be part compensation for the direct and indirect costs of having children, it could be argued that they should not be income tested,” the discussion paper says.

“If the payments are directed at reducing child poverty, arguably they could be more tightly targeted.”

Abolishing the means test on the payments and extending them to all families would be a quick and easy way to reduce the problems caused by effective marginal tax rates.

It would quickly provide a much bigger incentive for many mothers to work but it would be very expensive

And Treasurer Wayne Swan signalled in this year’s Budget he didn’t see this as a likely solution when he slapped a means test set at $150,000 on Family Tax Benefit B and the baby bonus.

The tax inquiry paper says another approach could be to give the benefits only to the poorest families. But this could worsen the work incentives for some families if their incomes were pushed just above the new lower means test.

Treasury Secretary Dr Ken Henry who heads the inquiry says wealthier families would not necessarily be losers if they were stripped of their family tax benefits.

The money saved could be spent on delivering them tax cuts instead and the whole process might iron out the high effective marginal tax rates currently penalising some families.

Changes to the family tax benefits system are just one aspect of the tax system being examined by the inquiry which is undertaking a comprehensive look at the way the whole tax system works from business tax to property tax, to the various state tax regimes.

At the same time it is examining the welfare payment system and is considering whether the dole should be raised to the rate of the pension and whether all welfare payments should be benchmarked against wages or a poverty line to simplify the system.

The last major inquiry into the nation’s tax system was held back in 1972.

The Asprey Review called for a capital gains tax to be introduced, a fringe benefits tax on company cars, a system of partial imputation of company tax and a broad-based GST.

Dr Henry noted this week that it took successive governments 25 years to implement these recommendations. It wasn’t until July 2000 when the GST was introduced that the task was completed.

Dr Henry wants his inquiry to be similarly ambitious in its scope and to set a high bar, but he knows the nature of the political process means it might take another 25 years for politicians to summon the will to implement the ideas. Let’s hope a workable solution to the family tax benefit mess does not take that long.