Should we subsidise stay-at-home spouses?

Misha Schubert has a piece in the Age today looking at the dependent spouse rebate, a payment akin to Family Tax Benefit Part B, but for people without children. I confess to not having given this particular tax rebate a great deal of consideration, but when she called me yesterday for a quote, I couldn’t think of many strong economic reasons for maintaining it. Moreover, since dependent spouses are more likely to be women, and since women have higher labour supply elasticities than men, it also seems that abolishing the dependent spouse rebate could help boost labour supply.

Does anyone feel like making the case for keeping the rebate?

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33 Responses to Should we subsidise stay-at-home spouses?

  1. David says:

    There’s probably a fairness argument for keeping it isn’t there? Why should a couple earning $100K where only one spouse works pay substantially more tax than a couple earning $100K where both work and earn about $50K each?

  2. derrida derider says:

    Its DSTO, not DSR – the ATO calls them Offsets, not Rebates these days. God knows why because every other country in the world calls them Credits (as in EITC).

    The origin is exactly the same as that for FTB Part B (which was once a pure tax credit – that’s why there is a “T” in the name of the payment). If you were supporting a spouse, or if you were single and raising kids (that credit was called the Sole Parent Rebate) you had less capacity to pay tax on an equivalent income than someone not so placed. It was (and like FTB B is) argued for on horizontal equity grounds.

    The counterargument is that if you choose to buy yourself a Porsche we don’t give you a credit to compensate for your now-reduced capacity to pay tax, so why should we if you choose to have a dependent spouse or to have kids? It’s the same set of arguments about cash payments for families generally – “need” just being the flip side to “capacity to pay”. Conservatives (not me) counter by claiming that the state has an interest in promoting marriage but none in Porsches.

    The really bizarre credit is the “dependent daughter/housekeeper” one – an archaic hangover from the days when spinster daughters were expected to live at home and look after their elderly parents. Like a lot of these hidden perks (eg the exemption of the blind from all means tests for welfare), the savings from abolition are too small to politically justify the pain of “Today Tonight” finding some single instance somewhere of some apparently worthy person losing out.

  3. derrida derider says:

    As a postscript, Andrew, the DSTO was a 1976 Fraser, not Howard, government initiative and replaced a tax deduction for dependent spouses. A deduction is perhaps more logical given the “capacity to pay” argument, but was, perhaps justifiably, seen as vertically inequitable because the deduction was worth little to those on a low marginal rate but lots to those on a high marginal rate.

  4. Patrick says:

    I admit I am fond of payments that encourage largely full-time parental carers but I can’t see much reason for this one either.

  5. backroom girl says:

    While I do confess to having a knee-jerk reaction against anything that promotes the financial dependence of women (whether on men or the state), you probably shouldn’t get rid of the DSTO, while keeping FTBB (whether for partnered or single carers). Since we now support the chidren of low to middle income families much more generously than we did in the past, I suspect the ‘reduced capacity to pay tax’ rationale is somewhat less persuasive than it might have been, and for me only really applies to children anyway, not to work-capable adults.

    If, on the other hand, you regard DSTO/FTBB as some kind of recompense for the stay-at-home parent or partner in recognition of the value of their activity, then I would turn it into some kind of minimum income support payment, that anyone might be eligible for without regard to their partner’s income. So, if you meet the criteria for Parenting Payment, you might get a smaller basic rate of that payment (equal to FTBB, perhaps), but under the same conditions that low-income parents receive Parenting Payment.

    Similarly, if the stay-at-home spouse without children wanted an income of her own, rather than reducing her husband’s tax, let her go along to Centrelink and claim Newstart Allowance along with everyone else. If she doesn’t want to get a job or looking for work would interfere with her tennis mornings, that would be money saved.

    You might be interested to know that this is more or less what FTBB was, immediately before July 2000. We also used to do something similar for unemployed kids from middle income households – if they wanted access to employment services, for example, and didn’t mind filling in forms every fortnight, they could go along to Centrelink and sign up for a small amount of money regardless of their parent’s income. Don’t think that one ever had a terribly high take-up though, which is what I expect would happen if you turned the DSTO into minimum-rate Newstart Allowance.

  6. Anthony says:

    “Why should a couple earning $100K where only one spouse works pay substantially more tax than a couple earning $100K where both work and earn about $50K each?”

    Isn’t the first household probably enjoying a better standard of living? I mean, would you really want to say that a household where each spouse works full time to earn $50K enjoys the same standard of living as a household where one spouse earns $100K and the other specialises in domestic work, especially where such households contain dependent children?

  7. spog says:

    These are all old fashioned justifications, although I admit they still do have some resonance for me. I do think we should retain it (and a version of FTB B) but for a completely different reason. I think it is unfair (as opposed to arguments about efficiency) that the state prevents a person getting income support in their own right because of the income of a partner, but then turns around and refuses to accept that it should take less tax from the that partner because they have to maintain an extra person.

    I would replace both DSTO and FTB B with a rebate (or deduction) that exempted from tax the amount of income that the state has used to reduce someone else’s (in this case, their partner’s) entitlements. It would be a horizontal equity measure.

    But I fear that there will be no joy here. Labor does not do/understand horizontal equity.

  8. spog says:

    Anthony,

    That’s a common argument, but I think it is a little off target. It is correct to say (as people like Patricia Apps keep pointing out) that the household can (and usually does) gain from the input of the “at-home” partner. On that basis, as you point out, simply comparing the income, without regard to that other input, is wrong.

    However, there is another comparison that I think is better, because it reduces the number of variables. Compare the income of a single income couple earning $100K, with a two income PART-TIME couple, both working 50% of the time, and both earning $100K. Here the two households both have the same $$ income, and the same hours of domestic input, but they are treated differently, tax-wise. I reckon arguments that are based on comparison of outcomes should use this type of household. And they exist – I’m in one.

    However, I still don’t like FTB B because of it’s poor design, and the DSTO, while much better, is still not properly linked to anything parameter-wise in the tax system. My suggestion in my post above is for one that relates the rebate/offset/deduction to income support and tax systems.

  9. spog says:

    …and my example above has an error in it. I meant to say that the 50-50 income couple earns 100K between them, not each!

  10. Anthony says:

    “I do think we should retain it (and a version of FTB B) but for a completely different reason. I think it is unfair (as opposed to arguments about efficiency) that the state prevents a person getting income support in their own right because of the income of a partner, but then turns around and refuses to accept that it should take less tax from the that partner because they have to maintain an extra person.”

    I’d be careful about using an argument about individualised means testing to support the dependent spouse rebate. A single person sitting at home without dependent children doesn’t get an income from ths state despite not being partnered to a spouse who brings home the bacon. They will only get an income if they engage in certain activities: looking after dependent children, looking for work, undertaking education or training and so on.

    The arguable unjustness of household as opposed to individualised means testing means that a single person engaged in these activities gets a social security payment, but an individual engaged in similar activities who happens to be partnered to a wage earner often will not. There’s no suggestion I’ve seen that the dependent spouse rebate goes to remedying this, as it is not linked to any approved activity.

    I take your point that taking a couple of part-time workers earning $50K each offers a different and interesting comparator for the purposes of Apps’ argument

  11. spog says:

    “..I’d be careful about using an argument about individualised means testing to support the dependent spouse rebate. A single person sitting at home without dependent children doesn’t get an income from ths state despite not being partnered to a spouse who brings home the bacon. They will only get an income if they engage in certain activities: looking after dependent children, looking for work, undertaking education or training and so on…”

    The key difference is that even if they do these things, they still don’t get paid, or more importantly, their partner doesn’t get any recognition that they are supporting them, if the DSTO/FTB B is removed. For example, a single person can choose to study, and can get Austudy. A partnered person can’t, but must negotiate with their partner for support. If we refuse to have a system that treats people as individuals for income support purposes, then we should recognise that two people can’t reasonably have the same tax liability as one with the same income.

    The argument you are using is a justification for an activity test on the DSTO, not its abolition. On that subject, I’ve come to the conclusion that it’s the partner who should set the activity requirements, not the state, if we are making one dependent on the other.

    Ideally, the state should just butt-out of the relationship game altogether, but that ain’t going to happen. So the state should recognise the increased costs of two people for tax purposes. At present it’s trying to have the best of both worlds: treat people as individuals (or nearly so) for tax purposes, and maximise tax revenue; treat people as couples for transfer purposes and minimise outlays. It has a kind of logic, but it isn’t fair or equitable.

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  13. backroom girl says:

    Spog and Anthony

    Don’t you think that my suggestion (for a minimum rate of income support payable without regard to partner income, but otherwise under the same provisions as ‘maximum’ income support) would address both of your concerns? I just think (wish?) we have got past the stage in our society where grownups who are quite capable of supporting themselves need to be recognised as a financial burden on their partners. On the other hand, if an adult decides that he or she is happy to support a non-employed partner that should be entirely a matter for negotiation between the parties and the state has no need to be involved.

  14. backroom girl says:

    Spog – I also take your point about it sometimes being more appropriate to compare a single-earner household on $100k with one in which both partners work part-time for $50K. But of course, your situation is a pretty rare one – in most cases, two-income households on $100k would be working substantially more hours (if not twice as many) as the single earner.

  15. Glenn says:

    Because low tax rates on the first income can be converted to a quantified cash amount. Standard tax rate: 31.5%, tax payable @ standard rate on $20,000: $7,300, tax actually paid on $20,000: ~ $2,000, advantage given to all people with > $20,000 income: ~ $5,000.
    It makes the $1,800 DSP look insignificant – I’d suggest it should be raised to closer to the $5,000 mark.

  16. ChrisPer says:

    All this abstract thought about equity is nice; but this attacks me in my self-respect more than my pocket.

    Like the welfare system, the FTB Part B communicates contempt for a breadwinner’s partnership in the welfare of his own family. It is designed to take control of money that the breadwinner earned, but society deems is ABOVE a fair level of tax.

    That money is then paid by the Government to the female partner absolutely, implying that it is the Government giving it, and that the male whose work actually earned it would not have used it for his family’s benefit.

    A side benefit is that even well-off families are made subject to the imperious welfare system. Want to experience financial panic? Try being a contract employee and not estimating your future income correctly when your ass belongs to that system. (Oh HELL! I just realised my overtime might be doing it again!)

    Like a lot of fathers, I give my pay into the control of my partner and my family before I see a dollar of it. That tax sends the message that society expects me to take my pay for grog, smokes and gambling (I assume not for prostitutes, they are not very specific) and the instigators of this ‘benefit’ are willing to pay public servants to ensure I receive that message.

    There is no other benefit, for my partner spends the money for the kids and herself exactly as she would have anyway. This is true for a huge majority of families.

    They have garnished my wages as though I were a non-supporting waster, a runaway father, just because I and my wife prefer her to look after the kids full-time.

    At least, thats what that tax does for me!

  17. wmmbb says:

    As a new convert to the principle of quantification, where practical, would it not follow for a first step to find out how much money is involved, who are affected, and then consider the likely implications for the people involved in terms of social principles?

  18. spog says:

    ChrisPer, that’s one of the things I don’t like about FTB B – the condescending wallet to purse transfer underpinnings. However, this is supposed to be about the DSTO, which actually goes to the higher income partner. I presume that is preferable to you?

  19. spog says:

    Hello there BG. I just knew you’d be back in this.

    I don’t agree about the minimum payment, unless it just a stepping stone to an end point of complete individual entitlement. As an end in itself it’s pointless, and smacks of tokenism. I remember arguing about this with someone (not you) who suggested minimum payments were useful because women could get personal items like tampons without degrading themselves by having to ask their partner for money. Laugh? I nearly did.

    A small payment cannot be used to live on, so the implication that a person is still required to be supported by their partner is untouched. And I don’t swallow the capable grownups line either. That’s actually a rationale not to pay income support to anyone, period. If you think there are reasons why some people do need income support (eg, age, infirmity, care of young children, unemployed but genuinely looking for work), then those reasons go equally to members of a couple.

    If think if we have to have forced dependency because of the income support system, and if we don’t plan to move away from that, then there should be a properly designed recognition of this on the tax-take side. DSTO is a little closer to that than FTB B.

  20. ChrisPer says:

    spog:”DSTO … actually goes to the higher income partner. I presume that is preferable to you?”

    In the case of the DSTO, Parliament and people want to agree that you pay less tax if you have more dependants and I agree with that. They don’t get into judgements on why they are dependant.

    But it doesn’t ‘go to the higher income partner’, it is merely not taken as tax. The state does not meddle with how those people manage their income. No redistribution bureaucracy, no dole officer in your face, just a tax scale applied by the employer. Compare that simplicity with the FTB parts A and B.

    Compare that, now, with the implications of the ideas above… people become ‘independent’ so they can go on welfare in the present structure of incentives. I remember in one place I have lived, kids wanting to turn 16 so they could go on the dole and leave home. I remember uni students breaking their butts to prove they were independent so they got independent student allowances.

    Now it seems some are implying that the Centrelink system should start sending case officers to demand jobseeker diaries from the uni lecturer who can’t get a new contract, though his wife is supporting him! The equity police can’t bear the idea that she pays $50 a month less tax, though he wan’t take the dole?

    Doesn’t it make you want to go spank them for unnnecessary busybodying?

  21. ChrisPer says:

    unnnecessary – if anything is unnecessary, its three nnns in that word!

  22. spog says:

    Well, a good spanking does have a certain charm I guess….

    On your example, she would pay up to $175 a month less tax (the DSTO is currently $2100 a year), and not because he won’t take the dole, but because he is unable even if he wanted to. The state takes her earnings and requires two people to live on it. Getting rid of the DSTO would mean that the state would then also want to tax her as if her obligation did not exist.

  23. derrida derider says:

    On the “wallet to purse” issue, you should be aware that there was very solid empiric evidence (most of it from the 70s, though there is a little from the 90s in the UK) that paying cash to the mother results, on average, in more of the money being spent on the kids. IOW the minority of fathers that would pour it down their throat, into the pokies, or on boys toys is bigger than the equivalent minority of mothers.

    The earlier research was very influential in the design of family assistance in many countries, including Oz. But then society has changed a lot since then so it is worth revisiting – maybe it’s a project for you Andrew. The right data already exists in the form of successive Household Expenditure Survey CURFs.

  24. derrida derider says:

    ChrisPer, I presume you are aware that, at with your wife’s agreement, FTB can be done via reduction in your income tax (including your PAYE withholdings) rather than through Centrelink payments to her? IOW its up to her to decide the wallet-to-purse and churning issues. Have a read of the last two pages of this.

    As I’ve said elsewhere, the intent when FTB was created was that a majority of people would indeed take it as reduced tax, but it hasn’t worked out that way.

  25. ChrisPer says:

    dd, I wasn’t aware of that option – it was never offered to me thats for sure. However, I doubt it would make any difference because my wife likes that ‘separate income from the government'; and its remarkable how when a big-ticket project comes up, she has saved up her pocket money for it, while mine is gone. Maybe I’m a wastrel, buying lunch at the deli, or maybe there is some other reason for that. It doesn’t pay to enquire too closely.

    Looks like the public service have co-opted a whole class of voluntary welfare clients for their maintenance!

    I had heard of that research, and wonder if another factor is assymmetric possible outcomes. Wasted expenditure is potentially much bigger than just the increment they are testing, and spending an increment responsibly is more of an attempt at optimising benefit. You know that frustration of trying to meet a budget, the week the family car brakes have to be reconditioned; does that count as males failing to spend an increment on the family?

  26. christine says:

    Empirical work on the effect of a wallet to purse transfer on the distribution of household purchases is really really not easy. You pretty much need a major policy change to do it properly, as per the UK case. Otherwise, too many endogeneity problems. Perhaps, though, it would be possible these days to look at spending patterns of single male and single female hh with kids? That might reduce some concerns.

    From memory, the work that was done looked at how much spending changed on ‘adult good’ purchases – cigarettes and tobacco, principally – or compared spending on children’s clothing rather than adult male or female clothing. So it wouldn’t have counted spending on the car as a failure to spend on the family. I do seem to recall bizarre discussions about whether spending on female clothing should be considered as a gender-specific good, because men might want to spend $ on women’s clothing because that gave them higher status or something weird.

    And as dd points out, there’s no implication that every man is an untrustworthy boozer, any more than studies pointing out that there are costs to long daycare for children necessarily mean all mothers putting their kids in daycare are harming their kids. Can’t take studies of averages too personally.

  27. Damien Eldridge says:

    The problem with single parent households is that, when they arise from separation rather than death, the determinatio of which parent gets custody is not entirely exogenous. So there would be potential selection bias problems.

    I seem to recall that there were studies done on this in one or more developing countries in the context of the intra-household allocation literature. However, I may be wrong here.

  28. Damien Eldridge says:

    Clarification: The studies that I think I seem to recall were on the issue of whether payments were made to husbabds or wives, rather than looking at single person households.

  29. ChrisPer says:

    Christine said:”And as dd points out, there’s no implication that every man is an untrustworthy boozer, … . Can’t take studies of averages too personally.”

    SO TRUE that studies of averages shouldn’t be taken too personally. My experience was of seeing the transfer payment imposed on myself, not reading some study.

    “There is no implication… ”

    Well, lets see. It appears it is worth the Government coming to my house to take away some of my money, (more than my own personal share of it), so they can give it to my partner who ON AVERAGE will spend it some low percentage more optimally than I would have by giving it to her myself.

    Why is that? Well, a small subset of my category were found in studies to have spent measurably more than a comparable sample of my partner’s category on grog and smokes if you gave them each a handout.

    OBVIOUSLY I shouldn’t see it as personal.

  30. ChrisPer says:

    Politics of resentment, its pathetic really. I should have been Jeremiah Wright.

  31. derrida derider says:

    “You pretty much need a major policy change to do [studies of wallet to purse transfer] properly ….” – christine

    But we have one – the 2000 restructurung of tax and family benefits. That’s why I pointed to succesive HES’s (ie pre and post changes).

  32. Thinking in old ways says:

    Bruce Bradbury looked at the ‘wallet/purse’ issue a few years ago the paper is at http://www.sprc.unsw.edu.au/dp/DP126.pdf.

    He concludes:

    “During the 1990s, income support for unemployed married couples was changed from being paid almost entirely to husbands, to being paid primarily to wives. The impact of this change is examined using data from household expenditure surveys conducted before, during and after these policy changes.

    It is found that, although the changes in the within-household income distribution were large, the changes in expenditure patterns were small and not in the expected direction. The data do not, therefore, provide support for the hypothesis that women’s control over household expenditures increased.”

    On the more general question of the DSTO doesn’t the name say it all as regards the policy intent: If make sure you have a “dependent spouse” we will reward you with money – if she (as it is in most cases) is “independent” you miss out. It is simple – barefoot pregnant and in the kitchen is where spouses belong.

  33. christine says:

    ChrisPer: wasn’t meaning to upset you, really I wasn’t. Quite the opposite. But you said it’s just government taking away on one side and giving on another and doesn’t have any effect on your household’s allocations, though it does make you feel as though your role as a provider is being downplayed (a legit cost, I’m not saying it’s not). On the other side, some families/individuals and esp kids may be significantly better off as a result. Low costs on one side, potentially high benefits on another, admin costs that probably aren’t huge (extra line on tax form, mailing cheques, whatever) … from a government perspective, this seems like a pretty reasonable thing to do. Only in the event of expenditure switching by some subset of households, though.

    Damien: point, but would need a reason why the men who got to be single parents are different to the women – I guess the idea that the presumption that women should get the kids might mean that men who end up as single parents have to be super good to their kids? Might be something interesting there anyway, then?

    DD: Cool, I’m obviously too out of tax policy changes in Oz to have picked up on your point, even though in retrospect it seems obvious. Sorry about that. Does the Bruce Bradbury paper referred to above use what you were thinking of? Probably not given it’s 2003?

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