The new discrimination and child care

Abstract

Over the last decade a number of countries, notably the USA, the UK and Australia, have introduced new tax and welfare programs, or expanded existing programs, that have the effect of raising tax rates on the income of the second earner in the family. Examples include the earned income tax credit (EITC) program in the USA,1 the child tax credit (CTC) and working tax credit (WTC) programs in the UK, and the Family Tax Benefit (FTB) system in Australia. Since the second earner is typically the female partner, these programs also have the effect of increasing the net-of-tax gender wage gap. Many of the same countries have poorly developed, highcost child care sectors, and so reducing the net wage of the second earner can make child care unaffordable from her net earnings. In a recent paper (Apps 2006a), I referred to this phenomenon as the ‘new discrimination’. Unlike the ‘old discrimination’, which took the form of lower gross wage rates and poorer opportunities for women in the labour market, the new discrimination is located in government policy. This paper investigates the extent to which the second earner in Australian families has become subject to this new discrimination. The analysis compares effective tax rates on primary and second incomes and identifies the changes introduced in the 2006–07 Budget. A key finding of the study is that second earners in families on less than average wages now face the highest average tax rates in the economy. This outcome is identified as a consequence of a series of changes in four key policy instruments used by government to set tax rates on family incomes: the personal income tax schedule, Family Tax Benefits, the Medicare Levy and the low income tax offset.