20 November 2011

The song of the single income couple

This is kind of a continuation of my last post, which looked at a single income couple with children.  Single income couples are interesting in that they are a family type which appears to be falling out of favour, at least from the perspective of their treatment by the tax-transfer system.  This is perhaps most obvious when looking at single income couples without children.

The first chart shows the % change in disposable income since last year's election for single income couples without children, where both partners are in the age range 21 to 40.  As with the earlier posts, the comparison is between similarly constituted households at different points in time, not the change for a particular household.

Here we can clearly see the impact of the removal of the dependent spouse tax offset (DSTO) from  July 2011.  With some exceptions, that change applies in respect of partners born on or after 1 July 1971.  The complete removal of the DSTO for the affected group builds on the earlier introduction of a household income test (the $150,000 upper limit) which removed the DSTO (and Family Tax Benefit Part B) from higher income households.

The message apparently embedded in the tax-transfer system for these households (or the non-working partner at least) echos Paul Keating's famous 1995 jibe "Get a job...".

It's a simple message but, as so often happens with the tax-transfer system, a change in one part has flow-ons to another.  In this case one effect has been a consequential increase in marginal tax rates on the earner in these couples, particularly at lower incomes.  Here's how the effective marginal tax rate for the earner looked at the time of last year's election.

Here's how it looks now

Notice the increase in the EMTR in the income range (very roughly) $20,000 to $40,000.  This is now sitting at 80% or more in a range where the National Minimum Wage resides.  For these households a very large part of any wage case pay increase will be consumed by tax-transfer effects.

On the bright side, it's probable that there aren't an awful lot of single income couples who would have the right mix of circumstances to be affected by this change (eg, no children; young-ish partner who is not obviously precluded from working for one reason or another).  For those who are, just listen to the sweet siren song the system is singing you.  And probably in Paul's voice, no less.

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