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Taxing the family

By Lucy Sullivan - posted Saturday, 15 September 2001

It cannot be disputed that families require more income than individuals in order to maintain a basic, and any given, standard of living. What is not necessarily obvious is that herein may reside an inherent problem for income distribution in industrial societies. The interactions of wage control, taxation and family welfare payments in the history of 20th century Australia indicate a continued need for family income protection and support.

For more than half of the 20th Century, adequate family income was ensured by means of the adult male Basic Wage, which was assessed as sufficient for a family consisting of a couple with three children. For most of this period, average earnings were not subject to income tax.

By the 1950s, the income tax threshold had been substantially lowered, and average adult male earnings were now reduced by taxation. In order to protect family income and ensure its adequacy, Child Endowment was paid on a per-child basis, and tax deductions per child and for family-related expenses were introduced.


As a result, throughout the 1950s, 1960s and part of the 1970s families well above Average Weekly Earnings (AWE) still paid no net tax. The major part of income tax revenue came from individuals without dependents and from very high-income family earners, an appropriate outcome in terms of the principle of ability to pay.

In the 1970s, equal pay was introduced and wages were no longer geared to family requirements. At mid-decade, Child Endowment and family tax deductions were replaced by the Family Allowance, which was set at a much higher rate than the former Child Endowment to compensate for the loss of tax deductions.

To maintain parity of living standards, a couple with three children requires more than two and a half times the income of a child-free individual. The Family Allowance was not indexed in a period of rapid inflation, and by 1985 a family with three children on AWE retained after tax only 14 per cent more income than a child-free individual.

Neglect of family income protection meant that families earning below AWE retained effectively less income after tax than the income provided for families of equivalent size by social security benefits and pensions. Additional Family Payments were introduced to raise the incomes of earning families to the effective level (that is, with the value of indirect benefits included) of families receiving the Unemployment Benefit.

Throughout the 1990s and into the 21st century, the system of targeting and tapering of Family Payments has meant that a large percentage of working families, earning up to as much as 120 per cent of AWE, are living on incomes little different from equivalent families who are entirely dependent on welfare. Tapering of Family Payments as earned income rises results in effective marginal tax rates (EMTRs) as high as 100 per cent. By contrast, even low-income child-free earners have incomes after tax well above single welfare benefit levels.

Family income protection for families with moderate incomes, in the 150 to 200 per cent AWE range, fell to as little as four per cent above equivalent child-free earners during the 1990s and is now about 10 per cent above, far short of the 250 per cent representing complete horizontal equity.


Primary effects of withdrawal of family income protection are a falling birth rate and mothers working beyond their preference. Secondary effects are reduced quantity and quality of parenting, and movement of families from financial independence to welfare dependency.

De-universalisation is the origin of the problems that have arisen around family income protection. They will only be resolved by a return to the successful approach of universal family income protection of the first 80 years of the 20th century. Universal eligibility for tax rebates on a per-child basis, set at the level of social security child payments, would provide adequate family income protection for families. As well as providing good horizontal equity at lower income levels, it would eliminate the problem of high EMTRs. Working families would no longer struggle along at welfare levels of income.

With the expensive trappings of pseudo-welfare administration removed and a more equitable distribution of family support, child free earners need not pay more, families can pay much less, and government revenue can break close to even. The greatest imperative in the current welfare crisis is to interrupt the welfare-created situation of income levels being unaffected by personal work effort – of 100 per cent EMTRs. Reinstating rational motivations for earning an income will prevent further lapses of families into welfare dependency and, over time, will return more families to adequate workforce participation.

Over the past two decades, social security expenditure on welfare dependency has risen while that on family income protection has fallen. Universal child rebates could replace the current complexity of family-related welfare payments directed at lower income levels and also the generous childcare payments and subsidies available only to mothers who work, at a modest additional cost to revenue. If, as it should, this reverses the drift of families into welfare dependence, the ultimate outcome will be one of savings.

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This is an edited extract from "Taxing the Family: Australia’s forgotten people in the income spectrum", a Policy monograph published by the Centre for Independent Studies.

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About the Author

Dr Lucy Sullivan is a research fellow at The Centre for Independent Studies. She is the author of the "Behavioural Poverty" monograph.

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