Plan for tax-deductible childcare ought to be on the table

The cost of childcare has been something of a barbecue stopper for a long time, with good reason.

Between 2011 to 2017, the average weekly out-of-pocket costs of formal childcare increased by 48.7 per cent in inflation-adjusted terms, without a substantial increase in the hours of formal childcare attended. At the same time, the cost of childcare to the government has grown exponentially.

Childcare subsidies were predicted in 2018 to reach an annual cost to the federal budget of $9.5 billion within four years.

That makes a new University of NSW report, (Un)taxing Child-care, most welcome.

The idea of making childcare tax deductible is not new. It has been debated for decades and is always shelved because of the fact it delivers the greatest financial benefit to the highest earners.

The UNSW proposal doesn’t dispute those facts but suggests giving working parents the option of either receiving the subsidies currently provided or pursuing tax deductibility.

We calculated that about 220,000 households would be better off with this option

Professor Rosalind Dixon

“What’s critical is that our proposal is an 'either/or',” co-author of the report Professor Rosalind Dixon says. “The proposal is to keep the entire existing system but to give people an additional option to deduct the cost of childcare up to $30,000 per working parent if there’s two parents or $60,000 in a single household.”

Under the proposal, families could decide which option is better for their bottom line. That would depend on a number of factors but the research indicates even with an annual household income of $55,000, a family could be better off by $600 a year with tax deductibility.

“We calculated that about 220,000 households would be better off with this option,” Professor Dixon says. And no household would be worse off because, if that were the case, they would remain within the current system."

It’s a neat possible solution to a messy problem.

The existing system of childcare subsidies works for a whole range of lower and middle-income families in a way tax-deductibility alone does not. However, equally, there are plenty of middle and high-income families for whom the subsidies are not delivering.

“The current system works pretty well but it’s creating something that holds back additional days and hours for a bunch of families,” Professor Dixon says.

The report estimates that there are about 65,000 parents who would like to work, or work more, but are not able to do so due to difficulties affording and accessing suitable childcare.

“When a family exceeds the childcare cap for a year, the effective tax rate, or the economics of someone working a fourth or fifth day just isn’t worthwhile,” Professor Dixon says. "That’s bad for them, their household budget and the economy."

This is because, in addition to childcare costs, the tax and transfer system also creates a strong disincentive for some parents to enter the workforce or increase their hours of work.

For some second-income earners, most often mothers, they can end up with an effective marginal tax rate approaching 100 per cent once they work more than three days per week.

Professor Dixon says this proposal isn’t geared at forcing anyone to work more or less than they want, but is about giving families the flexibility to make a choice that works for them.

If even half the people who could benefit from this proposal took up the deduction, the economy could grow by $3.9 billion, just from the increased participation of women in the workforce.

And best of all, it would almost pay for itself. Without any behaviour change, the additional cost of the policy is estimated to be $608 million a year, which represents 7.4 per cent of the cost of the current child-care subsidies.

The report concludes it would be revenue positive for the federal government even if it only triggers a relatively modest increase in female labour supply.

The Productivity Commission has long advised the government to focus on the affordability of childcare, and particularly how the tax and benefits systems interact with family income.

This proposal is well worth some serious consideration.


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