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Economics Legislation Committee

COLEMAN, Ms Marie, Chair, Social Policy Committee, National Foundation for Australian Women Ltd

HODGSON, Dr Helen, Member, Social Policy Committee, and Director, National Foundation for Australian Women Ltd

STEWART, Professor Miranda, Private capacity


Evidence from Dr Hodgson was taken via teleconference—

CHAIR: We welcome Professor Miranda Stewart as well as representatives from the National Foundation for Australian Women, one of whom is appearing via teleconference. Is the teleconference all set up and ready to go?

Dr Hodgson : Yes, I am on the telephone.

CHAIR: Thank you, Dr Hodgson. We have Ms Marie Coleman as well and Professor Stewart. Thank you very much. Thank you all for appearing before the committee today. I invite you each to make a brief opening statement, should you wish to do so. Do any of you have anything to add about the capacity in which you appear today?

Prof. Stewart : I'm a professor at the law school at the University of Melbourne and a fellow of the Tax and Transfer Policy Institute, at the ANU.

Dr Hodgson : I'm also an associate professor at Curtin University. It sounds like I might have some feedback, so I'll go off hands-free if that's better for you.

CHAIR: Thank you. Do you have an opening statement, jointly or individually?

Ms Coleman : I'm happy to make a brief statement. Each year since 2014, the NFAW has brought together a number of people to assist us in producing a gender analysis of the federal budget, and we have, in our submission, referred you to that document for this year. We work closely with Professor Stewart, Ms Millane and a number of other distinguished people in doing that. What we have done is prepare a submission for the committee which is drawn essentially from the material in the gender lens, should anybody wish to go back to that in more detail. In simple terms, while we think that the importance of doing an actual gender-sensitive budgeting process is underlined by some of the issues that have arisen in the consideration of this document, what we have done is look at the thing post hoc. So we have worries that this particular bill is not addressing effectively the effective marginal tax rates. We note that women who earn less than $1,800-odd are excluded from any benefit because they do not pay tax, and between $1,800 and $2,100 they will not receive the full entitlement as tax payable is less than $645.

CHAIR: Is that $1,800 or $18,000?

Ms Coleman : Sorry, $18,200. The decision to pay this as an annual lump sum following assessment of income tax, in our view, is not consistent with the needs of low-income families, who would be better off by receiving the benefit on a regular basis through reduced PAYG payments. We note that stages 2 and 3 constitute a structural change, which will affect the progressivity of the tax system and benefit higher-income earners, and we're pleased to see today the PBO analysis, which indicates careful modelling, which we weren't in a position to do. We have, in summary also, a large scale of concern about the implications for the revenue of tax cuts of this size, having regard particularly to the ageing of the population, as well as the need to ensure that there is an adequate investment in social and economic infrastructure, given the growth of the population, which is slightly separate from the ageing of the population. That's all I need to say, Senator. You've got our submission. I'll defer now to Miranda.

CHAIR: Thank you, Ms Coleman. Professor Stewart.

Prof. Stewart : If the committee's agreeable, I'd like to make a short statement on my own behalf. As Marie Coleman said, I have worked with the NFAW and Dr Hodgson, but I also have a separate submission. Thank you for the opportunity. There are two main aspects that I would like to address. The first is a general point about the rate change in the bill, and the second is a little bit more on the gender implications of the changes. In terms of the rate change in the bill, this is the element of the bill that would have effect towards the end of the period of time—2024-25—when we remove the LMITO effect and move to eliminating the 37 per cent marginal rate, thereby flattening our rate structure. I would submit to the committee that that is both inefficient and a retrograde step and that that undermines 100 years of progressive income tax rate structure in Australia. Australia's progressive income tax at the federal level was first introduced in 1915 with bipartisan support and a continually increasing progressive rate. It was considered by all parties that that was fair because it meant that those who had more income paid a larger share of income tax. And Australia has consistently had a system like that, as have many comparable OECD countries.

The removal of the 37 per cent rate might appear to be a minor change. Of course, we still have a 45 per cent rate and we still have a zero bracket, but it does flatten the rate structure more than has ever been done before. It has a permanent fiscal cost and it's a permanent effect. I just want to point out to the committee that I'm not critiquing in this comment the changes in the brackets, which are intended to deal with bracket creep. That's something that Australian governments have done on both sides of the political spectrum over the years. That's done to address the rise in nominal incomes as incomes rise. We do not index our rate thresholds as some other countries do. For example, the US and Canada index their rate thresholds. Australia does not. I'm not critiquing that. One could debate the merits or not of that. But I'm particularly critiquing the change in the rate, the removal of the rate. On the fairness element, I might go to a short quote from one of the fathers of progressive income tax, from the United States, Henry Simons. Henry Simons said in 1938:

The case for … progression in taxation must be rested on the case against inequality—on the ethical judgement that the prevailing distribution of wealth and income reveals a degree … of inequality that is distinctly evil or unlovely.

As I say, Australian governments of both stripes have always supported that structure.

I'd like to make one more comment on that rate removal in general terms, and that is that the efficiency case for that has not been made out. There really is no empirical evidence to show that, systemically, at that upper middle of the income distribution between $40,000 and $200,000, there are negative work effects, for example, or investment effects at that level of income. To the extent that we might see disincentive effects, they're probably arising either at the very top or at the bottom of the distribution, and I'll say something about effective marginal tax rates. In terms of the gender effects of the tax cut, I notice that previous submissions and evidence and the NFAW point out the gender inequality effect. The PBO modelling, which we've just seen, demonstrates that, simply as a result of there being more men than women at different levels towards the top of the income distribution, in terms of direct effects of that tax cut, men benefit substantially more than women. And I and two co-authors have done a gender analysis of the full ATO tax statistical database at the top end of the distribution. What that demonstrates is that women comprise about 25 per cent of the top 10 per cent of income earners, 22 per cent of the top five per cent, 20 per cent of the top one per cent, and 17 per cent of the top 0.1 per cent of the income distribution. So you can do a direct calculation in terms of the proportionate benefit or lack of benefit from the income tax cut.

There was a question I noticed with the previous submission about at what level we will say someone is at a high income. I can give you some statistics from the ATO database. In 2013-14, the income required to be in the top 10 per cent of the income distribution—what we think of as the top 10 per cent—was $94,000. To be in the top one per cent of the distribution—we talk about the one and the 99—it is $237,000. And the top 0.1 per cent—what you might think of as pretty close—is $698,000. It is much higher, as you can see. Those tax cuts particularly benefit people who are almost into the top one per cent, who'll get maximum benefit from that tax rate cut relative to others in the distribution.

CHAIR: Do you have in that data how much tax is paid in dollar terms by that one per cent and how much the reduction would be in dollar terms?

Prof. Stewart : I can't give you that precisely in dollar terms, but let's assume someone was on $200,000 a year—

CHAIR: No, no—at the one per cent—

Prof. Stewart : The top one per cent, I said was $237,000. The average tax rate that someone on $237,000 is facing is around about 35. They face a marginal rate of 45. That's that top marginal rate plus the Medicare levy. The average tax rate they face, which is the share of income that they pay in tax, is about 35 per cent. So 35 per cent of $237,000 is around $70,000 or $80,000.

CHAIR: Didn't you just say that the top one per cent was around $600,000?

Prof. Stewart : No, 0.1 per cent is around $600,000. They are facing both a marginal and an average rate of around 40 per cent, so about 40 per cent of their income is paid in tax.

Senator KETTER: To follow up on that, did you say that the top 10 per cent cut off at $94,000?

Prof. Stewart : There are some things that are not in the ATO tax statistics; in particular, exempt superannuation streams are not in there—so they're not perfect—and also we're not counting capital gain. But, leaving that aside, the top 10 per cent income threshold was $94,236 in 2014. So that statistic is about three years out of date. Allowing for a little bit of inflation, it's probably something like $95,000 or $98,000 to get into that top 10 per cent now.

The final general remark I would make is that the highest effective marginal tax rates that we see in our distribution are not at the top of the income distribution. The top marginal rate plus Medicare is 47, as you know. The highest effective marginal rates are at the bottom and in the middle, and they are faced primarily by second earners who are losing family benefits and paying net childcare costs—net of means-tested childcare benefit. The best way to illustrate that rate, which is, I would say, a significant deterrent to work participation, is to do it by day. I have an illustration in a sort of bar chart on page 4 my submission, but I'm not sure if it's before the committee.

CHAIR: We have it.

Prof. Stewart : I'm sorry, it's probably not in colour for you, and I realise it's a little hard to follow, perhaps. I might explain a little bit about this chart. What we're demonstrating in the chart is a hypothetical family, where we have one earner earning $50,000.

Senator McALLISTER: It's on page 100 of the briefing pack.

Prof. Stewart : Thank you. Please interrupt me, by the way, if this is not helpful. It's my figure 3. What this chart shows is a hypothetical cameo family. This is a low-earning family. The primary earner, working full time, usually a man in this family, is on $50,000 a year—so not a very high wage. That's just below the median income across the population. The second earner is choosing to go to work one day a week part time, heading towards full time, up to five days a week. They have two children under the age of five. The effective marginal tax rate is on each day of work of that second earner. Let's assume it's a woman; in 85 per cent of cases it will be. She goes to work part time one day a week. She faces an effective marginal tax rate on that day of work of more than 50 per cent. So the household are still better off by her working. They get more income, but they lose some family benefit and they have net childcare costs—net of benefits. On day 2, her effective marginal tax rate is 70 per cent. On day 3 of work, having decided to move towards more days of work a week, her effective marginal tax rate on that day of work is 85 per cent. On day 4 of work, it's 95 per cent. By day 5, we're coming down again. The family is no longer receiving certain benefits. She's facing income tax. This is a combined effect of our tax rate and means testing of these benefits. It's not surprising that the majority of women caring for children are working part time. It's perfectly rational in the structure of our tax and welfare system as it currently stands.

The point that's been made by others—and I will stop here; I realise I've been going on—is that the biggest economic bang for the buck that this government could achieve if it wants to deliver tax cuts would actually be to deliver more universal childcare benefits or change this effective tax rate through means-testing adjustment at the bottom end of the distribution and in the middle to encourage that cohort into work. Thank you for your patience.

CHAIR: Professor Stewart, does that analysis consider the childcare reforms that are implemented from 1 July?

Prof. Stewart : Thanks for the question, Senator. No, it doesn't. This is using 2016 data. You're quite right that the 2018 net childcare subsidy benefits will change this story somewhat. They make the position a little better for lower income earners. There's no doubt about that.

CHAIR: Could you update that chart and give it to us on notice?

Prof. Stewart : We would like to. I'm currently working on it. If I can, I will do that. I will liaise with my chart expert. It's not me who draws the charts, unfortunately.

CHAIR: Dr Hodgson, have you got an opening statement for us?

Dr Hodgson : I think most of the issues that I would have liked to have raised were raised by Ms Coleman's opening statement. Our main concern would be that the way this is structured gives no assistance at all to people who are outside the tax system. I would also like to comment here that, when we are referring to people who are outside the tax system who would need to benefit from this, we're primarily talking about low-income part-time workers or single-income families. Professor Stewart has a research caveat over using the tax data, and that's a very significant caveat. A lot of the data which we're working from excludes a large section of the older community who are receiving payments; that does not show up in the data which we're working from.

When we're talking about average incomes as reported in the tax stats and the quintiles as reported in the tax stats, we do need to remember that we have a very high proportion of zero- and low-income earners, some of whom may or may not be receiving these tax-free superannuation payments. It does create a problem when we're talking about the data and the statistics, because there is this distortion that results from people who are not having to report significant chunks of their income.

The other issues that I would have liked to have raised were raised by Ms Coleman in terms of the best way to get a payment to people who are not yet taxpayers but who are in the group that we're targeting, and that would be by means of a directed transfer payment. I note that this is what has been applied in the past. Back in the 1980s, there was a real push to take family-type payments out of the tax system and pay them directly to the transfer system, because it's a cleaner way of dealing with it.

The other point I would make is that the structure of the two tax offsets—the LITO and the LMITO—is unnecessarily complicated. It creates changes in effective marginal tax rates depending on what point in the structure you are at, whether you are earning between $37,000 and $48,000 or whether you're earning more than $48,000 or the different stages up to $37,000. It's a very complex, very opaque system. I would make the note here that, in the Henry tax review, which is the last major policy based review that we've had, there was a deliberate recommendation to move away from using these sorts of structures because they're opaque and because they pay the benefit at a time that is of less value—that is, at the end of the tax year rather than at the time when families are needing that money to be able to pay the school fees and so on that their children need. So, we generally think that, although the aim of the first stage is good in that it is meant to target low and middle taxpayers—I will make the point here—they're not low-and middle-income earners. That's a good aim, but the way in which it is being done excludes too many people and it is not a practical means of delivering the benefit for a lot of these low- and middle-income taxpayers.

CHAIR: Thank you, Dr Hodgson. I am conscious of time. We have you until 12.40. Is everybody comfortable with breaking for lunch at 12.40? We will divide up the times reasonably evenly. Can I clarify with all three witnesses that no-one is advocating for a two-tier tax system where we have one tax system for men and one tax system for women, are we?

Dr Hodgson : No.

Prof. Stewart : No. The committee might be interested to know that some highly regarded Italian economists have, in the past, written theoretical papers proposing a lower tax rate applicable to women and a higher tax rate applicable to men. Of course, if the committee would like to recommend such a structure, I'd be happy to endorse it! The point being made by that research was precisely the point about workforce supply and secondary earners being more elastic. I'm not advocating that.

CHAIR: Okay. I just wanted to clarify that.

Senator HANSON-YOUNG: Pay parity would be a good start though.

CHAIR: This is really the issue, isn't it? What you're suggesting is that the problem is not necessarily with the tax system; it's with the gender pay gap.

Ms Coleman : And with the taper rate and withdrawal of subsidies through the social services system. It's the interplay of several systems.

Dr Hodgson : I think that it's largely an issue around the work and care responsibilities, which is a part of the gender pay gap, and, of course, that was explored in the very good report that this committee published a couple of years ago. A husband is not a retirement plan. But the issue is this work and care interplay, in the sense that, as was pointed out by Professor Stewart in her chart on effective marginal tax rates, once you start to trade off the additional dollars that you get for a day's work with the additional costs and the number of different things that you are missing out on and juggling, then it's a very rational decision to say, 'We will not work fully.' So it is all around the gender pay gap and the work-care dilemma that many families are facing, and it is usually the woman who bears the responsibility and the costs of the decisions made in that space.

Prof. Stewart : May I just comment on that? The gender pay gap, as it is researched and recorded by WGEA, the statistical institute that's collecting that evidence from workplaces, is what I would call a 'market pay gap', and there is evidence that, across professions and industries and so on, it's around about 15 per cent and sometimes higher. The gap I'm talking about is post taxes and transfers. It's a combination of the effect of the social welfare system, the childcare system and the tax system operating on existing substantive inequalities in the workforce.

CHAIR: So, really, the panel, and I hate speaking of you as a collective, because I know that you all have individual positions—

Prof. Stewart : We'll comment if there's a difference.

CHAIR: The panel is not necessarily suggesting that they have a problem with tax cuts ideologically or per se. It is more that they are advocating for a different transfer system or a different welfare system or a different compensatory system for women. Is that correct?

Ms Coleman : I think it's a bit of both.

CHAIR: Do you have an ideological opposition to tax cuts?

Ms Coleman : I don't have an ideological opposition to tax cuts. I do have a profound professional concern about inadequate revenue to support essential public services.

CHAIR: Like childcare, for instance?

Ms Coleman : Like childcare, like aged care, like the National Disability Insurance Scheme, like affordable housing, like a national response to domestic violence, like appropriate responses to Indigenous health disadvantage. I could go on, Senator.

CHAIR: Do you think that, until all of those problems are solved, we should not touch the tax system?

Ms Coleman : I think we have to be extremely careful about the kinds of tax cuts we make and the quantum of money involved.

CHAIR: That's not very specific. I'm just wondering whether you think we should not touch the tax system at all until all of those other problems are addressed?

Ms Coleman : No—

CHAIR: Right, thank you.

Ms Coleman : but that's a different question. I have a great deal of interest in simplifying aspects of the tax system. We've made comment about the low-income tax offsets and so forth. There's a great deal of work to be done in terms of improving the tax system. We were very interested to submit to the Henry review, for example. There's lots of work that can be done.

Prof. Stewart : Can I respond to that?

CHAIR: Yes, and I should ask Dr Hodgson too.

Prof. Stewart : For myself, the total overall level of taxation is a political choice and, Senators, you're part of that political decision-making process, as are voters. I might just point out that Australia's tax level overall is considerably lower than the tax level of many countries with which we would like to compare ourselves, in terms of wealth, standard of living, equality of opportunity and so on. We have a lower tax level than Canada, Germany, New Zealand, the UK, France, Sweden and Japan. We have a higher tax level than the United States, but they have an enormous amount of government debt. As you know, they finance government with debt. So the question is not so much ideological but, given the public goods and services that the Australian population wants, how much revenue is needed to be raised. In that context, given that the personal income tax is really one of our most important and effective taxes, I would not support tax rate cuts in the personal income tax.

CHAIR: Right.

Prof. Stewart : However, I am open to considering bracket creep adjustments to the thresholds in the income tax to adjust that over time.

CHAIR: Can I be clear, then? Obviously, the Labor Party have proposed an alternative tax regime. Are you not supporting their tax regime either?

Prof. Stewart : I'm sorry, Senator, I have not had the opportunity to analyse the Labor Party's proposal in detail. I'm happy to consider it.

CHAIR: It just sounds like, from what you just said, you would oppose that in theory too. Because of the position that you're advocating on behalf of women, I'm interested to know whether any of you, either individually or on behalf of your groups, have done any analysis on Labor's measures to remove the refunds for dividend imputation, given their impact, particularly on older and low-income women.

Prof. Stewart : I haven't done detailed analysis of the gender implications of that. The largest number of people who will suffer from that are those who do not have substantial amounts of taxable income; they lose the refund of the imputation credits. They tend to be people who are receiving fairly large superannuation income streams and lump sums.

CHAIR: No, the cash refund actually tends to go more towards lower and middle-income earners and, particularly, women.

Senator McALLISTER: Chair, we do have limited time, and this is not in any way material to the bill that we're considering.

CHAIR: I'm just interested in the position that the witnesses are coming from.

Ms Coleman : The NFAW hasn't taken a position on this.

CHAIR: Dr Hodgson, I've missed you in that process. I just wanted to find out whether you particularly have a problem with tax cuts per se. You've all advocated for increased government spending, but you haven't actually given me an idea as to whether it's a tax cut generally that you're opposed to.

Dr Hodgson : I wouldn't say I'm opposed to tax cuts per se, but what I would like to see is that the tax cuts are properly targeted to support the lowest income earners that we have. I could, here, divert into a different issue and refer to the very low levels of Newstart payments, for example. So I think it's about supporting people who need assistance. It's about having a properly redistributive system and, at the same time, making sure that there is adequate income to support the various public services that we offer. Now these public services are also used by people across the whole income spectrum, but they become particularly important to low-income people, so we do have to have enough money collected through the tax system in order to fund that.

One of the issues that has only come up indirectly is the question of whether the tax should properly be collected through company taxes, through personal taxes or through GST. The whole tax mix question is a very big question, and I know that the data shows that, in Australia, we have quite a high reliance on personal income tax, but you also have to be careful with those comparisons, because we don't have the same range of taxes that some of the other countries that are commonly cited in these comparisons actually have and we have a much lower reliance on the GST. I'm not advocating an increase in the GST; I'm just saying we need to look at the whole thing holistically. We need to have a certain amount of tax revenue collected throughout our whole tax system in order to support the public services that our community has come to need and to rely on.

In relation to the dividend imputation question, I think what needs to go hand in hand with that is revisiting the question of whether or not the full superannuation withdrawals should be free of tax when we have some people who have very high disposable income through the superannuation exemption who are not actually paying any tax on that disposable income.

CHAIR: I think we're wading into an entirely different policy area again.

Dr Hodgson : Exactly, yes.

CHAIR: I do realise this is a very broad subject. I will finish off my questions here. Professor Stewart, you asserted before that Australia has a much lower tax regime or it charges lower taxes than many other countries, and you named a series of countries. I'm wondering whether you can provide us some evidence of that, because my understanding is that Australia's top marginal tax rate is much higher than any other countries' and cuts in at a much lower multiple of earnings. The New Zealand top tax rate is much lower. The US and UK have a top rate and the threshold kicks in at much higher multiples of earnings. If you could provide us with some evidence of that data you asserted, it would be terrific. You can take it on notice.

Prof. Stewart : I can point to some material already in the package. In a summary blog article I did as part of our Austaxpolicy blog, which is one of the attachments to my submission, there's a figure which has what we call the tax level. It's not the rate. I realise all these terms are both boring and mindlessly interchangeable. The tax level is the amount of tax collected as a share of the economy—a share of GDP. Australia, overall, has a lower level of tax collected as a share of GDP.

CHAIR: Personal income tax?

Prof. Stewart : All taxes together.

CHAIR: So 23.9 per cent is our speed limit. Do you have a problem with setting a speed limit on the tax?

Prof. Stewart : I do have a problem with that. I'm happy to address that now if you want. Just to respond to your other question first, the attachment—I can't remember if it's attachment 4—is the short blog article, 'Budget forum 2018: tax caps and tax cuts: good for Australia?' There's a figure in there that summarises the tax levels of various comparable countries, including Australia.

In terms of the top tax rate and your second question, it does depend, of course. There are different rates across many different countries, so any comparison looks somewhat selective. As an attachment to my submission to this committee, I included the examples of the tax rate structures of England, Scotland, Germany and Canada, just as examples. In all of those countries—

CHAIR: That's all in your submission, is it?

Prof. Stewart : Yes, it's the appendix to my submission. The submission appears as a letter to Mr Fitt. At the back of that, there are these examples. These are recent examples. They're correct, but they are just by country. In England, the top marginal rate is 45 per cent—the same as ours, but of course we have the Medicare Levy—over 150,000 pounds. Someone can do me a comparison. It is a higher threshold than our current threshold.

CHAIR: Again, it doesn't show the interplay between the transfer system and the tax system.

Prof. Stewart : At the top end, there would be no interplay, but I might point out that in England and Scotland—Scotland has a top rate of 46 per cent—high-income earners do not get the benefit of the tax-free threshold. The tax-free threshold—our zero bracket—is removed for high-income earners in those countries.

CHAIR: The top marginal tax rate in the UK, I think, kicks in at about four times average earnings.

Prof. Stewart : At 150,000 pounds. I'm sorry, Senator, I'm not sure what the conversion is. Our average earnings are a little higher than in the UK. It's about three times our current threshold. The top marginal rate in Germany is actually 45 per cent plus a surtax of five per cent. The top marginal rate in Canada is 33 per cent—

CHAIR: Sorry, I know you can refer us to your document and I know that the Labor Party have some questions they want to ask you.

Senator KETTER: I have one question and then I'll defer to Senator McAllister for the rest of our time. Professor Stewart, in the first part of today, we had a couple of witnesses who suggested that the overall tax plan at the end only has a slight impact on the progressivity of the system, whereas your contention appears to be that at the end of this tax plan we will actually have the least progressive income tax structure we've ever had. I'm seeking to reconcile that and give you the opportunity to explain.

Prof. Stewart : I think they are potentially consistent. We could have not that much of an impact but still have become less progressive than we've seen in the past. So I don't dispute the data. I certainly wouldn't contest the analysis, for example, by the CSRM at ANU, including Associate Professor Ben Phillips. They've crunched those numbers.

Again, I would like to reiterate the point about the rate—losing that third rate in the tier, if you like. It doesn't look like a big thing. In some ways, it just flattens the structure in the middle a bit, and then we still have the 45 per cent rate at the top, as you know. I guess I see it a little bit as the thin end of the wedge. It worries me that we do not any longer appear to support progression across the upper middle of earners in Australia. It does seem to me that someone on $190,000 is considerably better off than someone on the median income, $55,000, and should be paying a greater share of their income in tax and that we should recognise that in a progressive rate structure.

I guess the other thing—of course, all of these are permanent only insofar as there isn't another piece of legislation that changes them—is that a change to the rate structure does appear to have a permanence in our system that is different from a change to the brackets—that increase in the brackets that both sides of government have done over time. So what concerns me is the permanent flattening of the rate structure. That's why I say that that's a more significant effect than it appears, I guess.

Senator KETTER: Okay. In terms of the international comparisons that you were talking about, is the better measure to look at the effective tax rate, which takes into account the impact of the fact that we have a relatively high zero-tax threshold? Are you aware of any analysis that looks at the impact of those sorts of things?

Prof. Stewart : There are lots of combinations of these words 'effective' and 'average' and so on, and it is confusing. When we're talking about taxes and transfers—and Dr Hodgson can comment as well—that tends to operate, of course, at the bottom of the distribution, where most social transfers are made, or across the middle. Our family payments and childcare payments go to people sort of in the middle of the distribution, and so does the age pension. Talking about effective marginal tax rates, we're discussing the effects of the system at the bottom and the middle. At that top marginal rate, of course, those people are no longer receiving cash transfers, because they're at the top of the distribution and they have too much income. The average tax rate still matters for them, because that takes account of the fact that they get the tax-free threshold, the lower rates. So someone on $239,000, the top one per cent, faces a marginal rate of 45 plus two but an average rate of 35. It depends on what you're trying to understand. If you're trying to understand the tax on their next dollar of income, the marginal rate is the important number. If you want to understand how much tax they pay overall, the average tax rate is the important number.

Senator KETTER: Okay, thank you. I will defer to Senator McAllister.

Dr Hodgson : If I could make a comment here in that context, because transfers are most relevant for people at the lower to middle income levels, it's at that point that you find that the effective marginal tax rate is most useful as an examination of the disincentive effect in terms of whether or not somebody is going to take on extra work, work the extra day or move from part-time to full-time work. Once you get to the higher levels, where people are generally pretty much fully employed—either that or they have a very significant investment portfolio—the average rate becomes more significant because it's less about how you choose to use your time and more about the overall amount of tax that you're likely to pay.

Prof. Stewart : I'd endorse Dr Hodgson's views.

Senator McALLISTER: The Grattan Institute has indicated that the tax cuts proposed in the personal income tax plan are the largest ever proposed in a federal budget. At $143 billion over the life of the package, it is a very substantial amount of money. The analysis from the PBO this morning indicates that, of that $143 billion, $91 billion will flow to men and $52 billion will flow to women. Nearly twice as much flows to men as flows to women. Do you think that that is fair?

Ms Coleman : No—in a word. I think we go back to the importance, when budgets are being developed, of a gender analysis taking place at that time in order to avoid unintended consequences. We have a set of policy guidelines in this country where we're trying to encourage women to participate in the workforce. We have commitments to gender equality. But we have a situation here where the actual effect of the tax cuts proposed disproportionately benefits higher income men than women. I just think it's unfair—and probably extremely inefficient in terms of the other agendas that we have.

Senator McALLISTER: I will come back to the efficiency of it but, to this question about gender budgeting, it's really just about taking a look, isn't it? You might have a look, see that men are disproportionately benefitted but decide to proceed anyway. It's not about a mandate for gender equality in every case, is it?

Ms Coleman : No, it's not about a mandate, but at least you have a better picture of the hole you're digging for yourself.

Senator McALLISTER: Right. I asked the Treasury secretary why gender analysis was not undertaken on this initiative and his response was, 'Because the tax cuts are gender neutral.' Is he correct?

Ms Coleman : He had a smile on his face when he said that? That's just a nonsense. The intention was gender-blind, I would say, rather than gender-neutral. The statistics that are there clearly indicate that these tax cuts are a long, long way from being gender neutral. It's just a nonsense.

Senator McALLISTER: You spoke about the efficiency issue, and it intersects, I think, with these aspirations that we increase workforce participation. These are aspirations that the Treasurer set out when he introduced this initiative and, in particular, he talked about individuals taking on additional work, seeking advancement, putting in the extra hours. Will this do anything to support women in taking on additional work, seeking advancement and putting in extra hours?

Ms Coleman : Having regard to the fact that there are changes coming up in child care which may moderate some of the problems, I think the short answer to your question is: no, they won't advance that.

Senator McALLISTER: If you were going to spend $143 billion of public money on something, are there things that you could do that would support an increased level of women's participation in the workforce?

Ms Coleman : Well, absolutely, and one of them, certainly, would be looking at the withdrawal rates of various of the social services payments. The taper rate is extremely important. That's a significant factor for many women of modest to low income in what decisions they take. We might well decide that we want to get as generous as the Scandinavians with paid parental leave and child care. We might make a number of alternative decisions about how to spend—I can't even begin to speculate how I would recommend $144 billion be spent—but there would be things which I think would make a much better impact on women's capacity to participate in the workforce.

Senator McALLISTER: The total amount to be spent, for example, in just phase 3 of the plan, in its final year, is $10 billion a year. So it's an annual cost of $10 billion to the budget. There are quite a lot of things that people might like to do in the Australian tax and transfer system that you could do with $10 billion.

Ms Coleman : People might like to raise Newstart. We have probably the highest level of child poverty in this country than I can recall since the Henderson inquiry in the 1960s. I think it's a scandal that, in a country as rich as Australia, we are prepared to continue to leave children living in abject poverty and, frequently, in absolutely unstable housing. I think it's a scandal.

Senator McALLISTER: Professor Stewart, earlier you talked us through the detail of the effect of marginal tax rates on a cameo low-income family. I think you indicated that as that second income earner, probably a woman, choses to engage in each additional day of work the financial penalty for doing so—the take out of their income relative to the amount of additional income that the job provides—increases. It's 90 per cent at day 4. What does that, practically, mean about low-income families deciding about their workforce participation?

Prof. Stewart : It's interesting that you talk about families. I did want to make a point, which is relevant to your previous comment about what government might spend money on. If government wants to support low- and middle-income families, they are very often male-female families making decisions together about work, saving and raising children. The decision about whether or not the second earner, usually the mother, goes back to work full-time is more often than not a decision that the family makes. They are making it together. Another way to think about that effective marginal tax rate chart—figure 3 in my submission—is that the take-home dollars from that extra $100 earned on day 4 are only $5, and it's just not worth it. This EMTR chart doesn't take account of other costs—commuting costs, clothing costs and other time costs of trying to go to work. So, if the government is interested in investment in children and supporting families and in supporting women's workforce participation, I suppose the gender disaggregated data that the PBO provided, that very blunt disaggregation of who benefits, combined with the evidence about work incentives and our current settings, might just suggest a better mix of policies to achieve a win-win. That win-win could deliver lower taxes, or, to put it a different way, more disposable income for low and moderate families, more workforce participation and better investment in Australian children.

Senator McALLISTER: We have a goal to increase workforce participation for women already, in the context of the G20.

Prof. Stewart : The government has a commitment to that. I'm sure that the government is considering that. I'm very pleased to see the Treasury, in its submission, acknowledging EMTR effects. I don't think it goes far enough. The example in the Treasury submission to this committee doesn't discuss child care and the effects of child care. So, a win-win policy, potentially, would be to deliver more universal child care and to expand family benefit in a more universal way—remove or limit the means testing of family benefits to go to those families with younger children. That would actually benefit even those women who are unable to go to work—if you have a child who needs extra care, and part-time work is not available. Some households may make the decision that the second earner does not go to work full-time, but it still may be appropriate to invest money in the children in that family, with higher child payments more universally provided. If I were advocating a policy mix that would be a gender equality win and potentially a kind of government investment win—and, essentially, a tax cut for families—it would be delivering it that way: through family payments and childcare provision.

Senator McALLISTER: And it would have—

CHAIR: Can I just confirm, Professor Stewart, that in that analysis you haven't included the impact of the childcare reforms that are starting in two weeks' time—the coalition's childcare reforms that are specifically aimed at women who earn less than $85,000 a year.

Prof. Stewart : That's correct. However, I would like to comment on that. Those childcare changes do expand payments for some lower earners, and they push the withdrawal rate up the income distribution. So, households with dual earners with higher income will still lose those childcare benefits. The effect of that is going to be to push the effective tax burden to the middle. In fact, that's a consequence of the current proposed tax cuts—that is, they lower tax the most for higher income households and earners, thereby effectively shifting the burden to the middle of the distribution rather than having it borne more heavily by the top of the distribution.

Senator McALLISTER: My last question goes to the economic impact of this. We've discussed quite a lot the fairness of organising the tax system in a way that applies very high effective marginal tax rates to second income earners in those lower tax brackets, but in terms of the economy the Grattan Institute has previously said that removing disincentives for women to enter the paid workforce would increase the size of the Australian economy by about $25 billion per year. There are substantial economic gains to be made if we can increase women's workforce participation, aren't there?

Prof. Stewart : Yes, I would support that, even just on the basis of the ability to push households which are currently, as a matter of standard practice, 1½-earner households or one-earner households with children in them to be more what you might call two-earner or two-job households. Those households have more ability to consume in the economy, to save for a house and buy houses, to save more generally, to build retirement savings—superannuation savings—for both people in the household, as this committee has identified before, and to also pay taxes. Dual-earner households, economically, give quite a lot of bang for the buck.

Senator HANSON-YOUNG: It sounds like there's a double whammy here. You've got, on the one hand, the bulk of the benefit of these tax cuts going to men, primarily in the higher income brackets, and then the compounding impact is that we're going to have less revenue to spend on services that women disproportionately use and have access to in order to kind of compensate for lack of pay equity—the issues in relation to child care and workforce participation, caring responsibilities, not just for children but for ageing parents. So, really, this is a tax package for men, and it's a double whammy for women. Is that what you're saying?

Ms Coleman : That's one way of putting it, Senator, but it's hard to disagree with you.

Prof. Stewart : I wouldn't have put it that way, Senator. It is formally gender neutral, of course, on its face. I guess, when you take account of substantive inequalities in work and household care, we end up with that gender-unequal outcome. It would seem to me that it's entirely a political decision whether the government wants to deliver a tax cut to households. There are more efficient and equitable ways to do that in my submission.

Senator HANSON-YOUNG: When it comes to the economic benefits of this tax package—and the government is spruiking them a lot—we heard from previous witnesses that actually they're a bit of a furphy; there's no suggestion that the bulk of this money is really going to go into the economy and churn the way it would if you were perhaps investing in the transfer system. Have you put a gender analysis over that as well? For example, is it that women, who traditionally run the household budgets more than men, are more likely to spend extra money that they have, thereby helping to grow the economy, as opposed to men, who may perhaps put it into savings or pay off the mortgage or buy shares?

Dr Hodgson : I might jump in here, if I may, because this is something that came out in the research I did for my PhD. It's very clear that women will tend to consume on behalf of the children and the family. So, if there is any disposable income in the household, if it's received by the woman it tends to be consumed, whereas the men are more likely to be investors and just save it. We see this, for example, in the superannuation statistics. Even when you have dual-worker families, you still find that the additional contributions are made in the male's superannuation account. It's cultural; it's the way that we work; and it's one of the reasons that, back in the eighties, a lot of transfer payments were switched to be paid directly to the primary caregiver. It's because their focus tends to be on family consumption—what's needed for the family to remain healthy, safe, well fed, well clothed, and so on. So, yes, there is definitely a gender perspective in terms of the consumption versus the investment trajectories. That also affects the way that the different forms of tax affect men and women differently.

Senator HANSON-YOUNG: So if you want to get bang for your buck in terms of economic growth, finding a way to give more relief or support to primary caregivers, which overwhelmingly are women, would see more results faster?

Dr Hodgson : Yes.

Senator HANSON-YOUNG: You say specifically that you'd prefer to see this amount of money converted into transfer payments. You've mentioned child care. Is there anything specifically beyond childcare payments that you think would deliver a bigger benefit?

Prof. Stewart : There is one government policy that I'm glad to see the government did support again this year, and that is early childhood education for four-year-olds.

Senator HANSON-YOUNG: The preschool universal access?

Prof. Stewart : That's right. It was great to see that extended. We're somewhat off topic. I'm not an early childhood expert—I should make that clear—but it does seem from the literature that I have read that that would be a sensible investment in the next generation of young Australians. There is no doubt that that has a fiscal cost. If it were done properly and were well designed, essentially expanding primary education downwards one year fully to four-year-olds could also support women's workforce participation, which would also provide that bang for the buck.

On your first point: empirical studies over the years have shown that income is not shared equally within families and households necessarily on a gender basis. Of course, many households fully share their income, but not all do. The advantage of an individual tax cut is that, if you've got individual income and you're paying tax, the man or woman earning the income benefits from it. However, in our most common households, where we still have men earning more than women or working more than women, they will get the lion's share of that tax cut and will not necessarily share that disposable income that they have within the household or for the benefit of the household.

Senator HANSON-YOUNG: Do you have a position on the need to lift the rate of Newstart?

Ms Coleman : NFAW certainly does. We regard that as unconscionable, as we have great concerns about the number of people who have been transferred to Newstart by successive governments over the past decade or so. It was never designed as something on which people would live for any length of time. It was intended to be a short-term benefit. It's entirely inappropriate in a modern wealthy country to have people expected to live for quite some length of time on those payments, notwithstanding any supplements that might be available to parents.

Senator HANSON-YOUNG: And it's not just individuals; families are living on Newstart.

Ms Coleman : Mothers are supporting children with the basic payment being Newstart plus various other family payments. It's a very low level of subsistence.

Prof. Stewart : I'm conscious of the time. I would say as well that, for low-income individuals and households who are on Newstart, rent assistance is too low in the major cities to cover the cost of living.

Senator HANSON-YOUNG: Thank you.

CHAIR: Ms Coleman, I want to just clarify something. Did your group lobby against Labor when it moved single mothers from parenting payments onto Newstart in 2012?

Ms Coleman : We have opposed that from when it was—

CHAIR: From day one.

Ms Coleman : We have opposed it.

CHAIR: All right. Thank you very much for appearing before the committee today.

Prof. Stewart : Thanks for the opportunity.

Ms Coleman : Thank you.

Dr Hodgson : Thank you.

Proceedings suspended from 12:44 to 13:21