Family tax benefits are fair and efficient

Adam Creighton in the Australian today calls our family tax benefit system unfair: 

Why should a single person on a low income, perhaps who has never had the chance to marry and have children, be forced to pay tax to help pay for other people’s good fortune? These are the country’s forgotten people today.

Children are not a “social good”, and their supposed “costs” are routinely exaggerated. The benefits of children accrue overwhelmingly to the parents. That is why people have had children — many more than they have today — for thousands of years without needing government handouts.

Unfairness cuts both ways though. When we tax corporations we allow them to “joint file”. If one part of the business makes a loss then that can offset the profits of other parts of the business. 

Effectively, within a family, kids are cost centres. Why shouldn’t the body corporate of a family be able to offset these costs against the income earned elsewhere? 

The family tax benefit is our crude way at attempting to recognise these costs within a progressive tax system. It’s not perfect but the general principle that kids should be a tax deduction of some kind is a good one. 

If we did not would it be right for corporations to have more generous tax treatment than a family?  

I would also argue it is good economics as well. Our tax system should seek to tax those with the lowest marginal utility of income first, or as a French politician once said “the art of taxation is to pluck the goose to obtain the largest amount of feathers with the least possible amount of hissing.”

Most economists argue that the marginal utility of income diminishes as income rises. Getting food in your belly is more important than buying a BMW M3 Coupe. For that reason, a progressive income tax system is not necessarily inefficient. 

Likewise, I would argue families tend to have a higher marginal utility for a given level of income. A single person household can live well on $100k but a family household with three kids won’t have a lot of spare cash to spend on the movies and a night out.

It makes sense then to recognise this in our tax system.  

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3 Responses to Family tax benefits are fair and efficient

  1. Rajat says:

    Children are not ‘cost centres’. As Ceighton said, they provide non-pecuniary benefits to their parents (immeasureable according to most) which are untaxed. It’s fine to make their expenses tax deductible if the private benefits of children are taxed for the sake of those who fund their tax breaks.

    • drpage says:

      I tell you what, my kids feel like cost centres!

      Look kids are great but they cost a lot of money. The basic unit of taxation should be the household because the size of a household has a material impact on a household’s ability to pay tax.

      A basic premise of our tax system is that people should taxed in accord with their ability to pay, hence, the size of a household should be recognised in the tax system.

  2. Andrew L says:

    Both principles here are good, and I’d never thought of the corporations analogy. Peter Diamond makes a similar point about very large taxes at the peak of the income distribution in this book (http://www.amazon.com/The-Occupy-Handbook-Janet-Byrne/dp/0316220213). Good company to be in.

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