Child care in Crikey

I have a piece in Crikey today on Labor’s child care rebate policy [over the fold].

Who pockets the child care rebate?

Crikey, 23rd October, 2007

Labor have announced that they will increase the child care rebate to 50 percent from its existing 30 percent. What this means is that working families will be able to claim 50 percent (up to a total of $7,500 per child) as a tax deduction. What is more, it will come quarterly.

This is a very significant change over existing arrangements. Actually, it is only this year that I, with an economics PhD, have been able to work those arrangements out and get a rebate. Previously, you had to have receipts and acknowledgements from many years before, that were claimed years later but only if you had filled in Form B of requisition C-182 and got your child to stand on their head for 90 minutes without complaint; or the equivalent thereof. So more transparency and immediacy is a good thing.

But will parents ultimately pocket the rebate? Well, yes and no. Yes, in the sense that it is in effect a subsidy to the industry and so parents, especially those about to have children, will likely see benefits from increased supply of child care centres.

But, there is also a no. The problem is that a rebate such as this has different impacts on families with different incomes. If you have a very high income, you will probably pocket your $7,500 per child. If you have a moderate income, you’ll also do relatively well. But if you have a low income, you may not pay enough in tax for this to matter as much.

Consider a family with two children in child care and both parents working. Then, even if you have no other deductions, under current tax rates, you will need a combined family income of $86,000 before being able to claim the maximum deduction. Under the proposed tax cuts by both parties, that figure will be even higher.

What this means is that high income families are getting a larger subsidy for child care than lower income ones. So if you were a child care provider, where would you set up shop? The investment equation is pretty clear.

Personally, I am all for thinking about interventions in child care as there are a number of distortions that make the work-home choice biased (especially with regard to tax implications). However, any rebate through the tax system will reflect the fact that richer folk pay more taxes and so get a larger benefit. It would be better to subsidise child care places themselves. While there are plans for such things within Labor’s overall policy, it is important to remember that the rebate, on its own, doesn’t really do the job of targeting working families in need.

Joshua Gans is a professor of economics at Melbourne Business School, University of Melbourne and maintains a blog on these issues at economics.com.au.

7 thoughts on “Child care in Crikey”

  1. Fair enough, but one day it’d be good if you clarify precisely what these ‘work-home choice biases’ are and, in particular, how they affect ‘working families in need.’

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  2. There may be an important distinction here. If these are “rebates” instead of “refunds” or deductions then I’m less concerned as a 50% “rebate” is 50% regarldess of taxable income. Thi smay result in some people being net beneficiaries of the tax system rather than net contributors.
    The impact of taxable income on the equation is indirect as a family on low income will simply not have the cash flow to afford the higher child care fees.

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  3. My first thought is that the tax system is a delivery mechanism, but then there is the issue if quarterly rebates. How will that work?

    Maybe ALP should consider handing this to the family assistance office?

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  4. “What this means is that high income families are getting a larger subsidy for child care than lower income ones.”

    I think when people make these statements they’re conveniently forgetting one very important factor. Lower income families *already* get a substantial childcare subsidy via the CCB already in place, which can be up to a maximum of 104.5%, whereas higher income families will more than likely be getting the exact minimum of 16.74% if they’re registered at centrelink, or they’re paying full fees. In my possibly over-simplified scenario, the lower income family has far less out-of-pocket expenses compared to a higher income family who are paying close to or are paying full fees. So in my mind, there should be no squabbling over who is benefitting the most out of the 30% Child Care Tax Rebate, which I believe was designed to cover these out-of-pocket expenses anyway.

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  5. I was told rebates would occur from 20ththis month. HAs anyone actually got their rebate yet? No one I have spoken to has as yet and my childcare centre director (who has kids in care herself)said she heard from someone finaly payments may not be made until January 09 which is when the next installment is due.

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  6. ABC Learning has gone broke because of cooking the books not because of the financial crises – it was already going bust several months ago. It has been widely reported how shareholder’s funds were twisted around to look like income to make the company look profitable – now it is all coming out with a $600 million loss from past years accounts. So how did Fast Eddie get away with it? He set up several private companies in his name and his brother-in-law’s name. These companies then charged ABC (the shareholder’s company) exorbitant prices for just about every expense; buying new centres at silly prices from the brother-in-law, all the centres maintenance only done by the brother-in-law, using contract agency staff provided by the brother-in-law. Even the toys were bought only from a company owed by Eddie. There’s more but it becomes a very long list. So the shareholders money goes out the door to Eddie and the brother-in-law, while the profits are buffed up so that it can go on for a few more years until eventually the pyramid finally collapses and the shareholders money is all gone.

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